Lawrence Berrigan is Executive Vice President of Man Investments and has represented Man in Canada since 2004. He has 20 years of experience in the investment industry having formerly been a Vice President for Invesco Trimark Investments, the Canadian arm of UK-based Invesco plc from 1997 to 2004. Larry began his career in 1990 at Dean Witter (later acquired by Midland Walwyn) and was a Technology Research Analyst with Midland Walwyn from 1992 to 1996. Larry also served as a Director of Net Nanny Software from 1996 to 2001 and is the past President and a Director for the CFA Okanagan Society.
Larry has a BBA in Finance & Economics from Bishop’s University and in addition to being both a CFA and CAIA charterholder, has achieved his CIM (Certified Investment Manager) and FCSI (Fellow of the Canadian Securities Institute) designations.
Faced with the prospect of stricter regulation and a huge shift in investor sentiment post financial crisis, hedge funds have realized, in true Darwinian style, that sustainability is predicated upon their ability to adapt and evolve.
Today, the investment landscape is changing as hedge funds are repackaged, repurposed and sold in a format accessible to Canadian retail investors. As part of this shift, hedge funds are becoming subject to the same stringent regulations required of mainstream products, such as mutual funds.
The New Investor Agenda
Investors, traditionally focused on performance and less on risk and security, have had a dramatic wake up call after the recent financial crisis. Asset classes that had previously been perceived as uncorrelated took a synchronized nose-dive. Baby-boomers starting to retire may look back on a decade of fairly flat equity performance as the S&P/TSX Composite Index moved above the 10,000 mark for the third time in July 2009 ¹.
These factors left investors reappraising their asset allocation options and reprioritizing their investment objectives, placing diversification firmly at the top of their list.
The demand for true portfolio diversification and transparency from investors is driving hedge fund heavyweights into trusted onshore formats that offer a seal of regulatory approval.
In Europe, for example, the buzzword for the last 12 months among the large alternative asset managers has been UCITS III. This EU directive has allowed certain hedge fund styles to be structured in a highly regulated format and effectively brought onshore. Similarly, in Canada we are starting to see the launch of alternative mutual fund products.
The process of ‘onshoring’ for alternative asset managers has meant engaging with regulators and working closely to overcome regulatory barriers, which have previously proved prohibitive in allowing alternatives to enter the mainstream. In particular, boosting liquidity, transparency and employing robust risk controls are central to alternative asset managers successfully registering products in local markets.
This march towards the mainstream means retail investors who were previously deterred or constrained by high minimum investments or unregulated offshore structures are being offered a real choice for the first time – a trend with the potential to further the ‘institutionalization’ of the retail investment space.
Collaborating To Meet Client Needs
An interesting trend we are seeing in Canada is more collaboration between alternative and traditional asset managers. Mainstream players are looking for real sources of diversification, outside of traditional asset classes and geographies, to offer their clients post 2008.
Having witnessed asset classes which they had previously believed to be uncorrelated plummeting in unison, the pressure is on to develop investment solutions that offer clients true diversification.
Man Investments Canada Corp., for example, was recently appointed as one of the underlying managers with the Canadian subsidiary of a large, investment management organization to offer high net worth investors access to customized investment portfolios with an approximate 15-25% weighting to alternatives. This is in response to a very real demand for more tailored investment solutions with the ability to help smooth the overall risk return profile of their portfolios.
Lifting The Lid On Hedge Funds
One of the most significant developments over the next five years is likely to be a shift in the level of understanding surrounding alternative investments. As we start to see alternative asset managers move into the mainstream either by entering the mutual fund market or through approved investment dealers, retail investors will have a new range of investment styles and strategies become better acquainted with.
This will necessitate a determined education effort from alternative asset managers to ensure that investors fully understand what they are buying, which is particularly important given that not all alternative investment styles are suited or even able to fit the constraints imposed by a regulated onshore structure. Typically it is the more liquid hedge fund strategies such as trend followers, long-short equity and global macro which have the potential to be offered in a mutual fund format.
At a more basic level, these alternative investment strategies all have different performance characteristics, which are crucial for investors to understand if they want to derive the diversification benefits that an asset allocation can yield. For instance, thinking back to 2008, trend following strategies were a prime example of a strategy that acted as a major diversifier for investors, continuing to perform exceptionally as other investment styles were plummeting.
A Look Ahead
Ultimately the pace at which alternative investment products come to market will depend largely on the strength and sustainability of investor demand for diversifying their investment solutions.
In this coming of age, the ability to cope with increased regulatory scrutiny when it comes to onshore, regulated markets will be a key competitive advantage moving forward. It therefore follows that hedge funds with robust internal infrastructures and highly liquid investment strategies are best positioned to offer investors the security, liquidity and transparency they are demanding today.
¹ Source: Bloomberg. Date range: January 1, 1999 to December 31, 2009
Disclaimer
Potential investors should note that alternative investments can involve significant risks and the value may go down as well as up. Returns may increase or decrease as a result of currency fluctuations.
Some statements contained in these materials concerning goals, strategies, outlook or other non-historical matters may be “forward-looking statements” and are based on current indicators and expectations. These forward-looking statements speak only as of the date on which they are made, and Man Investments undertakes no obligation to update or revise any forward-looking statements. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those contained in the statements.
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