'Look the manager straight in the eye,' say selectors

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Despite staging a comeback in many portfolios, as low yields elsewhere fuel the need for returns, hedge funds still face demands for trust, transparency and track records.

Most of the investors at Feri's conference were also sure about another aspect of hedge fund investing: diversification. Ewan Kirk agreed strongly. The CIO and CEO of Cantab Capital Partners, a systematic global macro hedge fund, is sure the growing segment of systematic hedge fund strategies offers value for investors: "CTAs are not a put option, they are not a hedge. The strategy is a diversifier," he said.

The assets in this hedge fund segment have grown from $300m in 1980 to over $270bn in 2011, but Kirk insists that this is not "a crowded trade". Indeed, as trend following has worked for 30 years, he believes it will in future."

However, investors have been more alert than ever about the issue of herding in certain strategies. A selector at a German family office remarked that in some strategies "too many are doing too similar things", so killing alpha opportunities.

The summer months of 2007 spring to mind. During one week in August, a couple of quantitative long-short hedge funds in the US experienced huge losses in tandem even as the stock market itself did not suffer that much. The reason for the moves, according to scholars and practitioners alike, was a liquidity issue that quickly affected hedge funds that were holding similar portfolios due to their akin strategies.

"Multi-strategy is the way to survive," according to King. "One strategy alone leaves you imbalanced and prone to extreme beta."

Paul Glazer, founding partner at Glazer Capital, a hedge fund running a merger arbitrage strategy, tries to make money on already announced mergers or acquisitions by evaluating whether a merger goes through or stumbles over regulatory hurdles. "Because of the Volcker rule, there are fewer merger arbitrage managers out there," he said.

For Robert Rauch, a Partner at Gramercy, a fund focused on emerging markets and within that, mainly distressed debt investing, the opportunity set lies elsewhere. "European bank deleveraging creates more possible deals. Ten years ago distressed debt investing was about knowing the debtor's willingness to pay; now it is about the ability to pay," he said.

But why would investors seek these strategies? The reason is diversification.

"This was the prime reason for us to look into the industry," Löwenthal said. He noted the importance that investors should not be over-ambitious about return targets, but to make sure that the hedge funds act their part in portfolios: "It is short-sighted to look at hedge funds on a standalone basis. Every asset class needs to be assessed in terms of their role within your portfolio."

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