Agecroft's Steinbrugge on Finding Worthwhile Hedge Funds(Audio)

concerns about the impact of lackluster of global growth. SMP five hundred, indecks down three a drop of two tenths of one percent to one fifteen down. Industrials down nineteen points, a drop of point one percent. As stacked down three tenths of one percent. Ten year up seven thirty seconds, had yield one point six seven percent, Gold up seven tenths of one percent, up ninety to twelve seventy one. Crewde down one and a half percent. Fifty's forty five

cents for a barrel of West Texas Intermediate Crude. I'm Charlie Pelton. That's a Bloomberg Business flash. You're listening to taking stock with Kathleen's and pin Box on Bloomberg Radio. The hedge fund industry, large head funds, small hedge funds, multi strategy hedge funds, how do they all compete and how do they gain the attention of potential investors. Don Steinbruger,

managing partner Agecroft Partners, joins us now. He's based in Richmond, Virginia, and you can follow him on Twitter at don Steinbruger. Don thanks very much for being here. It's great to be here, all right, So tell me about gaining the edge. This was a conference that you recently spoke at and you talked about the competition that exists in the hedge fund industry. But I gotta think this's always but this

always competition for every industry. What makes this time unique, Well, you know, there's a lot of people that would like to be a hedge fund because there's all sorts of stories of hedge funds with big houses in the Hamptons and flying around private debt jets and getting invited to you know, uh, parties that have movie stars at them. But the reality is it's a very very competitive business ers.

I estimate fifteen thousand hedge funds. And what makes things even worse is most of the money is going to the largest managers. Six of managers have less than a hundred million. Only five percent of assets are going to managers with less than a hundred million. So nine thousand hedge funds are competing for five percent of flows. And to make matters worse, you know, if you're a professional hedge fund investor, you use a funnel approach to select

hedge funds. You're contacted by thousands a year. You meet with three to four hundred a year, you do follow up meetings with fifty, and you hire two. So if you have any flaws in your product or how you present your your your your process, you're just eliminated from competition. What about the We can certainly understand the enthusis has them in the desire, you know, so you get a little money into your bell, you start the hedge funds.

But it's not just about desire. It's also about skill experience. How does that shake out right now? Since there's been such a proliferation of hedge funds and then the last couple of years, a lot of them are doing so well. So out of the fifteen thousand I think only ten to fift are worth the value that uh they charge. You know, they typically charge two and twenty, but a lot of them are now discounting fees. And in order to evaluate a hedge fund, what's important is don't just

look at their performance. You know, most professional hedge fund investors use performances as screen and if you think about it, if you fall in the top ten percent performing hedge funds, you're among the top one thousand, five hundred. So professional hedge fund investors will also look at the organization to

look at depth and breadth of the investment team. You know, what is ther bios, what's their work experience, the look at the investment process and try to identify what inefficiency in the market this hedge funds going after what their differential with vantages to capture that inefficiency. Risk controls are really important. Obviously, performance is important. Service providers, you know,

who's auditing the fund, who's their lawyer. All of those things are important, and to get hired, you gotta rank well across each of those. If you have a weakness, you're just gonna get eliminated from competition. But if you're already in the business, then you kind of know all this, don't you. I mean, you know who the standard or the accepted legal advisor is, who the accountants are, what are some of the answers. Where do we go for answers if you're trying to evaluate where to invest your

money using these vehicles, these these funds. Well, first of all, there's a lot of hedge funds that don't know how people evaluate them. Um. But you know, if if you're evaluating the hedge fund, uh, there's a lot of consultants

that can help you. You really shouldn't allocate to a hedge fund and unless you completely understand what their investment processes and what their edges, and you should take those things I just told you and create a spreadsheet and make sure that you ask the questions and evaluate in each in each of those metrics. And if you aren't able to do that, rely on someone who can who can help you pick hedge funds. But is anybody worth

the the what is it two percentage points? That? I mean the hedge funds came in at the top of their cycle, right, and they've charged really big fees. That means they have to really outperform for people to do more than break even at this point in time. Done, do you think it would be incumbent on most of them to to pare that down a bit make them

more affordable in their form, more in line with realistic expectations. Well, first of all, I said, I thought ten to fiftcent of hedge funds added value above the fees they charge. If I look at the mutual fund industry, I think it's a lower percent. I think maybe five percent of mutual funds are actually worth the fees they charge. Now, hedge funds do charge a higher fee, which means a better generate higher return to generate higher net return of expenses.

But you know that there are certain strategies you just can't replicate with E T f s or index funds. So a hedge fund is a structure, it is not a strategy. Within the hedge fund industry, there are a lot of different strategies that add diversification for to a portfolio. You know, one strategy that's uh in demand right now is direct lending. You know, you have all these banks

that have stopped lending too small and midsized companies. So the yields you can get on direct loans or you know, high single digits, which is well above marketable fixed income securities. You know, another strategy that's kind of interesting is UM UH C tas or commodity trading advisors that focus on trends. Why are they interesting because when the market sells off,

you know, go back to two thousand and eight. You know, if you're a pension fund and you had all your money in UH with various equity managers, both in the US overseas emerging market, you had bond managers. When the markets sold off, correlations between all those managers went up and they lost a lot of money. So are looking for strategies that will help diversify C t A s

do that matter of factor correlation? If they're trend following tends to be moving the opposite direction, they tend to get negatively correlated if you have a long UH prolonged sell off in the marketplace. Reinsurance is an interesting strategy UM basically focusing on catastrophe. These are funds that basically are collecting premiums. And let's say they're collecting fourteen to sixteen percent premium and they subtract out their payments. They're

typically focusing on a seven to eight percent return. Don't steinberga thank you so very much for taking time out for us today. Managing partner at Agecroft Partners saying better choose carefully, Not at all hedge funds are worth the fees. This is taking stock on Bloomberg Radio. Coming up Bloomberg

Laws brought to you by Deutsch Atkins PC. If you feel you've been on lawfully terminated, you over to yourself to call the law firm of Deutsch Atkins now for a free phone consultation called eight hundred four eight