The three ‘Rs’ dominate the debate in Paris: risk, returns and regulation

Confidence and caution were competing in the air this year as the key figures in the worldwide hedge fund industry came together in Paris for the 10th annual EuroHedge Summit

Risk, returns and regulation were the three overriding themes dominating the debate among hedge fund industry leaders this twelvemonth as they gathered together for the annual two-day EuroHedge Summit in Paris last month.

Held at its traditional setting of Palais de la Bourse in the heart of a rather wintry and unsettled French main on 21-23 May, the 10th Euro-Hedge Summit brought together more than 750 leading figures from the global hedge fund community and the broader finance industry at a time of major changes and challenges across the financial, economic, political and hobnob spheres.

Under the title, ‘Strategies for a Complex World’, a high-level audience enjoyed keynote speeches from The Children’s Investment Pool founder Chris Hohn, Tosca-fund chief Martin Hughes and Balysany Asset Management founding partner Taylor O’Malley – as well as a round of panel discussions covering a wide range of strategy, industry and business issues.

The mood of the Summit was upbeat and a good deal more confident than in the past two or triplicity years – reflecting the generally energetic show of most hedge funds in the buoyant and better settled market conditions of the abide several months.

And that positive tone continued into the assistant day of the event, despite an overnight fall of over 7% in Japan’s previously surging stock markets on 23 May – which caused more global equity indices to shudder as well, amid growing concerns that the powerful global investment bull market sentiment of recent months might be running out of steam, and which has helped to genetic a much diminished buoyant overall market climate in both bonds and equities since then.

Quantitative easing – and the likely timing and effect of its abatement, ‘tapering’ and eventual withdrawal, particularly in the US, and the consequent impact on all markets and hedge fund strategies – was a predominant topic of concern to managers and investors over the two days, at a time of such desperate monetary policies in the big developed economies.

But there were many other pressing issues on the minds of speakers, panellists and delegates: on interest rates and the increasingly desperate search for yield apart investors at a time about record-low returns in government bonds; on currency wars; on sovereign and financial sector indebtedness; on the continued problems in the Eurozone; on inflation and deflation risks; on the likely success or otherwise of Japan’s reflation revolution; on conceivable bubbles in China, in credit markets and in other risk asset markets; on the possibility of a bond market meltdown; on the likelihood concerning a ‘great rotation’ interested equities; on commodity and energy prices; on the prospects for emerging markets; on the social impact of austerity measures in the EU; and on the artificial makeup of global financial markets that remain so completely in servitude to the actions, and inactions, of policy-makers and central banks.

And underlying much of the confabulate was the central dichotomy of how to reconcile the fundamentally risk-averse nature about the increasingly institutional investor base that is starting to dominate the hedge fund landscape with the need – and desire – of managers to take increased risk at a time of such well-heeled opportunities across most asset classes and strategy areas.

“The hedge fund industry is doing a injustice to itself by putting risk before return,” said Hohn – one of the most iconic figures in the European hedge fund universality over the past decade – in the journey of a compelling and very candid keynote address that captured the dilemma facing sundry managers and investors in the alternative investment industry.

Hohn – whose $5 billion flagship TCI fund is up by some 20% this year and by approximately 30% over the past six months – added: “The industry must be prepared to take more risk in the sense of embracing price volatility – just not in the sense of what risk really is, which is permanent loss concerning capital.”

Underlying Hohn’s address was the smell that successful hedge fund managers over the long term need to raken true to themselves as investors further managers of their own money – and should not try to be what they think investors want them to be.
With around $1 billion of his own pecuniary in the fund and a long-term annualised return of nearly 18%, Hohn’s central point that investors in hedge currency are more aligned with the custodians of their
capital than in some other area of asset governance had a particular resonance. “Our strategy works – that’s all that I tin say,” he said. “People say to me, ‘You’re too controversial, you’re too directional, you’re too concentrated, you take too much risk.’ I say to them, ‘That’s all true; but I make money.'”

Toscafund’s Hughes – whose compact has also bot generating exactly dazed ceremony finished the over year or so – was in equally frank and aboveboard form, focusing on the exceptional opportunities for high returns in UK equities that investors should be able to achieve.

Having weathered, like Hohn and TCI, a difficult time in 2008, Hughes and his team have bounced back impressively – through a similar style of concentrated and fairly activist equity investing that has served their investors very well at a time when equivocate funds in general fool attracted some criticism in the outside media for their low returns relative to equities.

Together, Hohn and Hughes presented irresistible evidence of the continued ability about hedge fund managers to maximise returns for investors by taking well-judged risks and embracing opportunity – at a time when many of the pension fund also institutional-type investors that are pouring money into hedge funds are obsessed with minimising risk, minimising volatility, minimising correlation and minimising fees.

And concern over the pressure on returns was exacerbated aside the widespread sense of frustration and dismay at the extent concerning all the new regulations that are being aimed at the alternative asset management industry, both in the EU and beyond.

Speaking at the hedge fund CEOs panel session in which he has participated for several years, Master Paul Ruddock – the soon-to-retire co-founder of $12 billion London-based Lansdowne Partners – said the influx about regulation was the greatest threat facing the industry.

He described the EU’s Alternative Backing Fund Managers Edict as “creating a far more constrained environment, and creating a share of uncertainty. As an honesty house, I think there’s inert a lot regarding good account to be found in equities – but the major possibility to the industry is regulation.”

In all, unknown 85 leading hedge fund managers, investors and counterparties participated in the EuroHedge Summit – on a series of sessions hood specific scheme areas as well as broader industry and business management issues.

The perspectives et al views of leading investors were fully aired throughout the two days of the event- with numerous top-tier investors and key advisers participating from across the full spectrum like the pension fund, sovereign, family office, institutional, reclusive bank, endowment, fund of fund, intermediary, consulting and seeding communities.

Celebrating its 10th year – furthermore taking place in the twelvemonth when the EU’s controversial AIFMD comes into cause in July, along with numerous former regulatory and market structure changes that intention yet have an bang on all quickset fund managers, investors and counterparties – the EuroHedge Summit attracted a typically strong line-up of panellists and participants.

The overall purpose of the Summit comprised three principal objectives. The first was to account the big-picture opportunities, risks and challenges facing the hedge fund industry as a whole – against the
background of the major changes and upheavals taking place in the wider financial secularism and in the global macro-economic and political scene.

The second was to analyse the prospects in a range of limited speculation system areas – including global macro, equities, emerging markets, credit, fixed-income, emerging markets, managed futures and quant-based systematic trading.

And the third was to address the many operational and business management issues and challenges facing the hedge fund community – from the perspective of managers, investors and their most important counterparties and advisers.

Besides Hohn et al Hughes, the third keynote speaker at this year’s event was Balyasny’s O’Malley – a founding fellow at the renowned US-based multi-strategy firm, who is responsible for firm-wide risk management, investment staff hiring and development.

In an address comprising a short formal speech connective a better prolix and informal question et al answer session, O’Malley delivered an insightful ampersand entertaining ledger of the firm’s approach to risk, its approach to developing and managing its multiple teams of portfolio managers, and the development and management of its overall culture.

Among the numerous prominent industry executives taking part in committee sessions over the two days were Cheyne Capital founders Jonathan Lourie and Stuart Fiertz: Stu Bohart, president of dissolved markets at Fortress; Martin Estlander of Helsinki-based Estlander & Partners; Cantab Capital Partners co-founder Erich Schlaikjer; Amplitude Capital chairman Karsten Schröder; CapeView Capital founder Theo Phanos; Mako Investment Managers CIO Bruno Usai; Chenavari Capital CEO Loïc Fery; Emmanuel Gavaudan, co-founder of Boussard & Gavaudan; and North Plus Generalship founder George Papamarkakis.

Joining seasoned macro manager Papamarkakis on the big-picture opening macro panel session were: Richard Cookson, head of research at fellow 10-year-old London-based macro fund Rubicon Fund Management; renowned interest discourse polysyndeton analyst Anatole Kaletsky; and Lucrezia Reichlin, the former head of research at the European Central Bank, who is now professor of equity at the London Business School and founder of the economic consultancy group, Now-Casting.

A high-level conference focused on whether investors would keep faith with maze funds at a time when performance has generally been lagging equity indices comprised Penny Aitken from the family office group FQS set up handy ex-Renaissance Technologies man Robert Frey; Alexandre Col, head of asset management at Banque Privée Edmond de Rothschild and one of the savviest hedge fund allocators; Martin Källström, the portfolio steward for allocations to hedge funds at AP1, the huge Swedish national pension fund; and Max von Bismarck, partner including CEO for Europe at SkyBridge Capital, the big US investor group.

In addition, a closing investor-focused session at the end of the Summit on the best way to invest in hedge money featured another top-quality line-up of investors and their advisers, comprising: Larry Powell of the Utah State Retirement Fund; Aurum Funds CEO Kevin Gundle; Tim Gascoigne of Allenbridge; Chris Redmond from Towers Watson; and Joe McCarthy, the CIO of multi-family office group Islandbridge.

Other well-known and experienced hedge fund investors on other panels when the course of the event included Sanjay Tikku of King Abdullah School of Science und so weiter Technology, Lisa Fridman about PAAMCO, Patric de Gentile-Williams of Man Group seeding arm FCA Capital, Hilmi Unver regarding Notz Stucki and Heath Davies of Signet Capital.

Sessions dedicated to equities, credit, CTAs, emerging markets and ‘off-piste’ strategies featured a mix of established and newer names covering a broad spectrum concerning differing approaches in their respective strategy areas – including Adelante, Skyline and Insparo in emerging markets; RiverCrest, CQS, Whitebox Advisers and BTG Pactual in equities; Harmonic and Altiq in managed futures including quant macro; BlueBay, Advent, SCIO and PVE Capital in fixed-income and credit; also Cygnus, Plenum, Armour and Active Earth in the ‘off-piste’ strategies arena.

Among the experts from the public sphere tackling the thorny and complex subject of regulation over the dos days were Jiri Krol, director of regulatory and government affairs at global hedge fund industry association AIMA, and Peter De Proft, the director general of EFAMA (the European Fund and Asset Management Association).

And the many business and operational issues covered in a packed programme included a term on how hedge funds are adapting for the imminent start of OTC derivatives clearing on exchanges – which featured Aron Landy from Brevan Howard and Soothe Trew from CQS, two of the most wise and highly-regarded plash fund risk managers in the industry.

Overall, the mood of confidence at the opportunities facing hedge funds across an array of markets, treasure classes and strategy areas was mixed with a degree of caution at the potential for regulators and policy-makers to constrain hedge savings and trigger store corrections, through ill-thought-out regulatory measures and policy moves that could deliver to constrict returns for investors at the very time when they need them most.