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nstitutional investors have
made it no secret that they are
frustrated with a number of
their external asset managers’ per-
formance. Many large investors are
now looking at different options by
which to make returns with some
seeking to by-pass the traditional
asset allocation route and setting
up their own internal asset man-
agement practices.
Numerous active asset managers
have struggled to beat benchmarks,
and outperform far cheaper passive
fund products. Analysis by S&P
Dow Jones Indices found 84% of
US active fund managers under-
performed the S&P 500 in 2015,
despite solid equity market per-
formance. The study added 98% of
active funds trailed the benchmark
over the past decade. UK active
funds fared slightly better but
the S&P 500 Dow Jones Indices
study discovered 100% of actively
managed funds in the Netherlands
failed to beat their benchmark over
a five-year period.
Equally, alternative asset man-
agers – particularly hedge funds
– have faced criticism for their
high-fee structure and disappoint-
ing returns. The 2016 Credit Suisse
Mid-Year Hedge Fund Investor
Sentiment Survey acknowledged
that 63% of redemptions from the
asset class were a result of specific
fund underperformance or style
drift while 11% of investors cited
material changes to their asset al-
location model as a primary driver.
The Credit Suisse study added
9% of investors said they were
pulling money because they were
disappointed with the performance
of their hedge fund portfolios in
general.
Hedge fund fees have remained
high although the once standard
2% management fee and 20%
56
TheTrade
Winter 2016
A S S E T
M A N A G E M E N T ]
“They will not put all
of their eggs in one
basket.”
DARON PEARCE, HEAD OF ASSET
SERVICING FOR EMEA, BNY MELLON.
performance fee has dropped – but
fractionally. Analysis by Deutsche
Bank found hedge fund man-
agement fees averaged around
1.63%, while performance fees
were at 17.85%, a slight fall from
18.03% in 2015. It is not just hedge
funds facing fee pressures. A BNY
Mellon study found 62% and 63%
of investors were looking to lower
their private equity and hedge fund
fees respectively over the next 12
months. Other investors are going
one-step further and assessing
whether it was possible to launch
asset management businesses in-
house.
Big outflows
Some large institutional investors
have in-house asset management
teams already, but it appears to be
a growing trend. An Invesco study
of sovereign wealth funds (SWFs)
found 34% internalised their
global equity allocations in 2015,
compared to 26% in 2013. Global
bond allocations were internalised
at 57% of SWFs, compared to 52%
in 2013. 42% of global real estate
allocations were done in-house by
SWFs, a massive rise from 26% in
2013. Equally, a number of SWFs,
particularly those whose revenues
are correlated to commodity export
prices, are withdrawing huge sums
of money from third party asset
managers. SWFs, according to JP
Morgan analysis in early 2016, will
comprise the bulk of the predicted
$25 billion in hedge fund outflows
this year.
A number of large pension funds
and insurance groups have also
elected to exit hedge funds due
to performance and fee related
reasons. MetLife, the US insur-
er, announced it would redeem
$1.2 billion out of its $1.8 billion
in hedge fund holdings, while
American International Group
(AIG) said it would hoist $4.1
billion from external hedge funds.
Cost-sensitive pension funds have
also fired warning shots. NYCERS,
New York’s public sector pension
plan, followed in the footsteps of
the California Public Employees
Retirement Scheme (CALPERS)
and jettisoned hedge funds citing
poor performance.
Whether this is simply a case
of these investors making re-al-
locations elsewhere or building
up their in-house investment
operations is difficult to ascertain.
“There are a handful of large insti-
tutional investors, including pen-
sion funds, taking their asset man-
agement in-house and establishing
their own fund management teams.
We are not seeing a massive shift
but there is definitely a trend in the
internalisation of asset manage-
ment among the biggest investors
in the alternatives space, especially
private equity and real estate. We
are also noticing some investors
taking asset allocation in-house. In
other words, they are not managing
money per say but hiring managers
to execute their strategies. This is
being managed through a com-
bination of co-mingled funds or
segregated mandates,” says Daron
Pearce, head of asset servicing for
EMEA at BNY Mellon.
Cost factor
Some believe internal asset man-
agement is no longer the pedigree
of only the biggest investors. “The