What's up with Mercer blaming 'political pressure,' bad press and even investor bad timing for hedge fund ills

Looks like Wall St just moved the ole active management shell game into the shadows. Does anybody who understands stats and isn’t conflicted still believe in the active manager unicorn?

I don’t understand the premise for the article, nor whether it is intended as news or an opinion piece. How is it odd for an institutional investment consultant to be supportive of the thoughtful usage of hedge funds in (institutional) client portfolios? It’s their business to take a longer term view and be experts at manager selection, diligence, monitoring and allocation recommendations (hiring AND firing when necessary), as it is for many other firms in the space, including Cliffwater. Should they suddenly decide to exit that business, fire associated staff and cease recommending any allocation to strategies that can help better the risk-return profile of an institutional portfolio with a very long / infinite investment horizon? The larger the universe of managers, the more relevant such firms, who have done quite well taking market share from Hedge Fund of Funds (until recently). Correlations of broad hedge fund benchmarks — that are exposed to the bloating of the industry at times and survivorship bias at others — to equities don’t tell the story of individual investors’ experiences. If hedge funds were the disaster that they are, the asset retreat would be a lot more rapid than it has been. Maybe that is coming, but even as bloated as the industry is, and as undeserving of a rich comp structure that many managers are (which is no longer 2/20 btw), I doubt global assets will dip below $2 trillion anytime soon. Big institutional managers with increasingly diversified businesses – like AQR, Bridgewater and Citadel – and deserving emerging managers should continue to win flows while less talented funds that expose investors to unwelcome volatility and/or losses see outflows. Investing in a 60/40 portfolio, even as good as both asset indexes have done post-Crisis, won’t leave you without potentially deep losses in certain environments, especially considering market distortions with central bank liquidity (which, yes, has made fools of many an active manager); it’s just not that easy. That’s where allocating some percentage (e.g. 5-20% perhaps, depending on objectives & risk tolerance) to risk dampening strategies can provide value. I’d advise more balance and consideration in your reporting on alternatives, which seems to be lacking of late. My thinking goes back to the Blackstone Fidelity article, which featured performance figures for BXMMX that didn’t exactly check out and failed to mention that fund is/was actually a category leader in the Morningstar multialternatives category (the actual category the fund belonged to wasn’t mentioned in the piece, just lumped in with all of liquid alternatives, a swiftly growing pool of varying strategies…). It also failed to mention that the Blackstone registered (40Act) fund platform has 2 products, with “identical” objectives (Blackstone’s words from their press release), and fees. The other fund, Blackstone Alternative Multi-Strategy (BXMIX), launched 10 months after the soon to be liquidated Fidelity-seeded BXMMX (giving it ~1/3 less time, or about 22 months then, to gather assets), managed to accumulate $4.3B in assets (as of the article’s publishing), multiples of the $1.2B in BXMMX prior to the redemptions started in February reported by Bloomberg. Impressive but, after all, this is the world’s largest discretionary investor in hedge funds, so I guess we shouldn’t be too surprised of this pull to the registered offering. Maybe the decision on Fidelity’s part wasn’t just on performance, and if it was, it was shortsighted, which should’ve been pointed out. I see the note at the end of this article that the mis-categorization of Mercer as a talent consultant, and perhaps misconceptions behind the intentions of the business of the unit that released this report, are being amended, so maybe the story will change. Further, politics is always a consideration with public pensions and can influence decisions. That’s part of the process of transparency and disclosure that goes along with the public plan space. It can push fees down and force accountability as well as it can unfortunately lead to exiting investments at the wrong time, locking in losses on top of high fees. But what about the case of SFERS, who through public protests decided to allocate 5% of their then $20B portfolio to HFs in Feb 2015 after a protracted debate where critics drew from CalPERS’ decision (which was more about challenges achieving scale frankly)? Or what about CalSTRS recent 9% “risk mitigation strategies” allocation to alternatives, including hedge funds and hedge fund-like strategies? Are those instances not worth mentioning alongside the paring? And what about comment from the voices in the more retail space — like CAIS, Dynasty, etc — that could provide commentary more focused on the wealth management challenges of alts usage and client education rather than institutional space? None of the firms mentioned here are my clients nor do I represent any industry trade bodies currently.

Your longtime reader,
Paul Damon

This article has several inaccuracies. Mercer’s Talent group does not do recruiting or headhunting and its Investment group is very open about its investment due diligence process. Brooke, have you stopped editing bc I would bet there are several people looking to speak with you about the mis-information published here.

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