Hedgies have built a sector on an aura of exclusivity

Last updated: November 12, 2013 10:19 pm

Hedgies have built a sector on an aura of exclusivity

By Jonathan Guthrie

You are a discerning member of the elite. So please read on. We have to be selective, obviously. Just as Goldman Sachs will doubtless be in inviting investors to participate in Petershill II, a private equity fund that will buy stakes in hedge fund partnerships. One can’t give any old Tom, Dick or Harriet access to such an exclusive investment. Or the go-ahead to peruse this incredibly classy column.An aura of privileged access has been a key marketing tool for hedge funds, privately owned asset management businesses that took off in earnest in the UK over a decade ago. These rebranded such venerable investment strategies as shorting and leverage. A “two and twenty” fee structure applied (the first percentage for management, the second for performance over a benchmark). Sceptics say this asymmetric allocation of risk has made hedge fund managers wealthier than their clients.

At first blush, Petershill II looks like an opportunity to afford a yacht as big as that belonging to the private equity guy at Goldmans. It is a sequel to a fund set up by Jonathan Sorrell, son of WPP boss Sir Martin and now finance director of quoted hedgie Man Group. Petershill I took stakes in hedge fund businesses such as Winton, receiving a share of fees rather than pure investment returns.

The snag? Investors in Petershill II will pay fees at “two and twenty” too. But at least they do not face the double charging to which investors in “hedge fund of hedge funds” are exposed. Compensatory discounts are generally available here. But this has not forestalled a decline in these gatekeeper vehicles, reflecting a loss of mystique during market routs when alpha was conspicuously absent.

Other hedge funds are doing well, despite shedding 19 per cent of their value in 2008 and a lacklustre recent performance. Investors pumped $23bn into the sector during the third quarter, according to data company HFR, taking the total to a record $2.51tn.

Critics kvetch that the industry is a triumph of marketing over substance. But you can only sell someone a message they want to believe. Such as their predestination to beat the average. Or their special eligibility to read Lombard.

Star manager

Robert Noel, chief executive of Land Securities, greets a new shareholder
RN: Welcome. I confess I’m not familiar with Evil Empire Investments.
Darth Vader: We come from far, far away.
RN: Basingstoke? OK. Here’s the half-year results announcement.
DV: The force is strong in you, Robert.
RN: Thanks, but it was a team effort. We think a 3.8 per cent increase in adjusted net asset value shows we’re delivering.
DV: As does your “Walkie Scorchie” death ray project. I hear it vaporises the wing mirrors of landspeeders.
RN: Um, 20 Fenchurch Street? We’re a bit embarrassed by that.
DV: Don’t be. Embrace the dark side.
RN: We’re installing an awning. Does that count?
DV: Tell me about scalability.
RN: Land Securities is a UK-focused property business specialising in retail and the London market. But we’re expanding into the leisure sector.
DV: You misunderstand. Could you make the Walkie Scorchie 100 times bigger and use it to annihilate rebel planets?
RN: I’d have to check with the architect. But it’s frustrating that all anyone asks about is a minor design flaw in one City development. What about the 8.4 per cent valuation uptick in central London retail? What about the 4 per cent share price premium or the 203 per cent jump in PBT?
DV: Meh. Land Secs has been so stable since the 2009 rights issue that no one’s paying attention. Investors like the yield but they don’t expect huge growth.
RN: I find your lack of faith disturbing.
DV: Hey! That’s my line!

Just disappointing

Shares in newly-floated companies are supposed to pop 5 per cent not drop 5 per cent. But that was the fate of annuity group Just Retirement on its first day of conditional trading. Owner Permira had reduced the price and size of the offer in anticipation of subdued demand. Not enough, though.

Financiers have warned about the dangers of “me too” offerings. You could not get much more “me too” than the second initial public offering by an impaired-life annuities group in six months.

It did not help that shares in pathfinding Partnership Assurance have performed poorly after the group became the subject of an investigation by financial watchdogs

No wonder value retailer Poundland is reputedly keen to get to market before its rival B&M.