Ditch the label… and look for cheese

April 05, 2013  

It is clear that at least half of the FoHF industry is behaving like Hem and Haw, who refused to take action until the cheese was gone

By Niki Natarajan

'Labels for less’: a slogan for the discount retailer TJ/TK Maxx, or for the new generation of hedge fund advisers/consultants? Just looking at this issue of InvestHedge, it is crystal-clear that there is no going back to the vintage era of FoHFs.

Someone has definitely 'moved the cheese’. By its very nature, change – whether in work, love or life in general – is a challenge, made worse if individuals are not equipped to handle it. Spencer Johnson’s parable, Who Moved My Cheese? is a surprisingly simple one on how different types of people handle change.

Applying the principles learned by the book’s four characters looking for cheese in a maze to the global FoHF industry, it is interesting to see which groups are operating like Sniff and Scurry: the two mice who foresaw the pile of cheese diminishing and set off to look for new supplies before it ran out.

FoHFs such as Blackstone Alternative Asset Management have definitely sniffed out new opportunities well ahead of change happening, while others like Rock Creek or K2 Advisors have scurried to make sure they are not left behind by either merging with a partner or adding 40 Act funds, emerging-manager extensions and managed account platforms to their 'investment solutions’ armoury.

By looking at the FoHFs that have raised assets versus those that have not in 2012, it is clear that at least half of the industry is behaving like Hem and Haw: the two little people that refused to take action until the cheese – a metaphor for what one wants in life – was gone.

The Haws of the industry – groups like Financial Risk Management – are those that adapt only when they can see that changing can lead to something better. Yet, thankfully, there seem to be fewer FoHFs left that behave like Hem and deny and resist change altogether, fearing it will lead to something worse.

The truth is plain for all to see. Even if the current trend to invest directly in hedge fund brands, or to squeeze the life out of fees until the services are almost offered for free, results in nothing more than a sticky, molten mess: it is the state of the world as it is now. Denial, as Hem found out to his detriment, is futile.

Johnson’s parable shows how to anticipate change, adapt quickly, enjoy change, and be ready to change quickly, again and again. Its sounds like a utopia that the remaining hemming and hawing FoHFs cannot even begin to visualise. But the ability to adapt to change, as Darwin concluded, is the only way not only to survive but ultimately to thrive.

FoHFs can learn from hedge funds. Some of them have been adapting for a while now. Even before investors got over their fear of global macro they were happy to invest in global tactical asset allocation. Teachers’ Retirement System of the State of Illinois, for example, has AQR, Bridgewater, PIMCO and Standard Life Investments in a global macro/GTAA bucket, so which is which, and does it matter if they are all seen as one anyway?

Perhaps it is time to ditch the labels. Srikumar Rao, former professor of marketing at Columbia University and author of Are You Ready to Succeed?, highlighted the perils of labels – suggesting that it is the label that often prevents us from seeing situations or events from a new and potentially more fulfilling perspective. He was talking about how a 'positive-thinking’ label implied a 'negative-thinking’ label, and a good day implied a bad day.

Similarly, the 'funds of hedge funds’ label implies investing only in hedge funds. But the manager-selection skills, intuition, due diligence, investment process and relationships can be applied to many more asset manager universes.

There is already a move to lose the FoHF moniker. But replacing it with multi-manager or investment solutions will only increase the field of potential if the core values are kept intact. Until recently, daily liquidity FoHFs for retail investors seemed like heresy. And yet, with a successful proven 25-year institutional track record, Aurora’s foray into new, more retail, horizons proves that without a label one might just be able to enjoy a slice of both businesses.

Sniff and Scurry may not have applied the most sophisticated thinking to their problem. But their trial-and-error approach won in the end.

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