“I think there are definitely more hedge fund closures after a year like 2016,” Mullane, based in London, told FSA on a recent trip to Hong Kong.
“What it means is that we are able negotiate improved terms with the managers. And when we are the early stage of investors [as a fund of hedge funds] we can be more aggressive on fees.”
Mullane is the co-portfolio manager of the Luxembourg-domiciled Goldman Sachs Global Multi-Manager Alternatives Portfolio, incepted in December 2015.
This fund-of-hedge funds aims to keep 5-12 external managers as sub-advisors, with different strategies including global macro, equity long/short, event-driven and credit relative value.
A typical unconstrained hedge fund structure used to charge 2% of management fees and 20% of any profit, or “2 and 20”. But recent poor hedge fund performance caused investors to withdraw money and put pressure on fees.
Now the weighted average is about 1.7 and 17, he said.
“For new managers, what we are typically looking for is “1 and 10”.
Underweight alts
“I heard many Asian investors are underweight alternatives. The concern that people have is that equity markets have had a strong run. There could be more room to go but valuations are high on historical basis.
“From an fixed income allocation perspective, we see a number of question marks about whether we will see global reflation and higher interest rates certainly in the US, but maybe more globally as well,” Mullane said.
The firm believe the the fund’s multi-manager approach, single layer of fees, with daily liquidity and UCITs complied structure, should suit investors who are allocating alternatives assets for the first time.
Ongoing charges over a year (OCF) are 2.45% as of February 10, according to data from FE Analytics. The fund has a 10% performance fee on outperformance over 3-month Libor in US dollars.
The one-layer of fees is paid to GSAM and sub-advisors, Mullane said.
“We pay some of our sub-advisors performance fees as well. If no performance fee is earned [by the overall fund], while some of the sub-advisors have generated positive performance, you have two options: either make the fund pay and increase the total expense ratio to the end-client, or what we have done is it will come out of the management fee of the product.
“In certain situations, we’ve taken capital away from managers because we can’t take fees to the level [that is appropiate to us].”
Screening hedge fund managers
A factor-based approach is used to screen the external managers (sub-advisors), including quality of the investment team, performance track record, stability of culture of the organization.
“We score each manager on each individual factor, and to make the final decision, we bring all the factors together and look at the combination. What we wary or doing is making a gut decision based on the interaction with the manager.”
The team also sees some factors “more predictive for future performance” such as motivation or drive as an individual, or how the manager hires people.
“When we look for hedge fund managers, we ask, What is the best source of alpha generation?”
Some managers might not have existing products that offer daily liquidity, but they create one under the GSAM fund, he noted. “We may work with a manager who has a very high-frequency trading strategy, and develop something that is more slow moving,” and lower the fees.
The firm does not state the number of external managers that go through the screnning process, although Mullane said the team looks at all kinds of strategies and managers across different regions.
Performance of the GSAM fund since inception versus its sector in Singapore, structured/hedge products, according to FE data:
Source: FE
All fund NAVs have been converted to US dollars. Note that funds in this chart may be denominated in currencies other than the US dollar.
