The private bank's experts spoke about the contrasting fortunes - in some respects - of private equity and hedge funds, and the approach they take towards alternative investments in client portfolios.

The world’s private equity industry seems to have made a better job of protecting and enhancing its image than is the case with the world’s hedge funds, resisting the kind of fee compression seen among the latter sector, according to senior executives at Pictet, the Swiss private bank.

While hedge funds remain an important source of return and diversification in client portfolios, they have seen more downward pressure on their fees than is the case among private equity operations, Nicolas Campiche, chief executive of Pictet Alternative Advisors, told a briefing for journalists in London last week.

“Obviously it [fees] is a hot topic. Private equity has been managing its image much better than hedge funds in general,” he said. “That may be the reason why there is less pressure on fees,” he said. One possible explanation is that a relatively small but large number of private equity firms have been effective in explaining what they do to investors, he said. A period of relatively tepid performance figures for hedge funds is also a factor.

According to data provided to this publication by Preqin, the research firm, hedge fund fees and performance haircuts are, on average, lower than for their private equity counterparts. For example, in 2016, according to latest available figures, the average management fee from a hedge fund was 1.53 per cent, and performance fee was 19.11 per cent. For private equity, the figures were 1.78 per cent and 2.0 per cent, respectively. Back in 2007, private equity funds’ mean annual management fees were 1.99 per cent, and performance fees were 2.0 per cent. For hedge funds, the split was 1.59 per cent and 19.55 per cent.

As recently as yesterday, Preqin issued data showing that only 35 per cent of hedge funds charge the 2 & 20 “industry standard”, but the majority of investors say further change is needed.

In recent years, hedge funds have struggled at times in terms of returns. The unexpected surge in volatility in periods such as 2008-09 and the eurozone crisis year of 2011 hit returns, although more recent figures show that the sector is on course to make money this year. (See this article here.) Private equity funds have had their struggles also – the pace of fund-raising in Asia, for example, and the wider world, has decelerated this year. 

High-profile pension plan CalPERS in the US, for example, caused a stir in 2014 by deciding to liquidate its hedge fund exposure. On the other hand, US endowments slightly increased exposures to the sector in 2015 (source: Financial Times, 24 May); sovereign wealth funds have also pushed up some allocations. This point was also noted at a recent conference in New York, organised by the publisher of this news service.
 

Generally positive about alternatives
Such considerations aside, Campiche and his colleague, Maurizio Arrigo, who is head of private equity at Pictet Alternative Advisors, gave a generally upbeat view on altenative investments as a whole, stating that in a world of low, or even negative real-interest rates and yields, they offered important benefits. Pictet’s oldest hedge fund mandate has, since 1995 and through to 30 June this year, annualised returns of 7.5 per cent; private equity internal rates of return have been 19.9 per cent since 1990 (net of managers’ fees). This part of the Pictet Group, run as a discrete unit, oversees around $20.1 billion of alternative assets.

A large source of new assets into the alternatives business at Pictet is coming from high net worth individuals, Campiche said. Talking about family offices and endowment organisations, he continued: “Over the last five years alternative investment at Pictet has been definitely one way to attract new prospects.”

With certain clients such as family offices, allocations to alternatives can be from 20 per cent of total AuM to more than 50 per cent, he said. Campiche said that in general, Europe-based investors have been more “timid” in their approach to alternative assets than is the case with North American counterparts because of a desire to hold liquid assets. “The liquidity hurdle remains a hurdle and allocation is lower than the `Anglo-Saxons’ general and for Asian families,” he said. He said possible reason for greater caution in Europe is that there isn’t the same structure of multi-general private inheritance of wealth as is the case in North America and UK. 

CTAs are hot
Commodity trading advisors – typically defined as hedge funds using futures to achieve returns – have been popular, Campiche said. Their relatively high liquidity and ability to reduce overall volatility and drawdowns in a portfolio has been an attraction, he said. 

On average, about 16 per cent of clients’ assets are allocated to hedge funds, a share that hasn’t changed a great deal in recent years, he said. There are regulatory limits on how much of a portfolio can be placed into hedge funds; clients must give consent to a higher position if this happens, he said.

Asked about so-called “liquid alternatives”, such as UCITS vehicles holding hedge fund-type strategies, he said there is demand from certain types of clients; Japanese investors are particularly keen on the high-liquidity option.

“We implement most of our hedge funds strategies with offshore underlying investments,” he said.

Much more than leverage
Arrigo, discussing the private equity component of the Pictet business, rejected the charge that is sometimes made that private equity is normally just conventional equity investing + leverage. While debt/EBITDA multiples are currently at 5.5 times (2016 year-to-date), and up from 4.7 in 2010, but down from 6.2 times in the pre-crisis year of 2007, this doesn’t necessarily show that debt levels are stretched. Debt is currently relatively cheap, putting less pressure on companies’ cashflows. There has, he said, been a falling off in private equity fund-raising and value of exits so far this year, coming after strong fund-raising and exit figures for 2015.