A couple of weeks ago I went down to Key Biscayne, Florida for the Managed Funds Association (MFA) conference. To be more precise, I went down to Florida to meet with and interview several commodity trading advisors who managed to earn positive returns in a difficult year.
The reason for this is that the MFA officially disinvited the media to their event. It was an odd decision given the pressure the industry is under. The MFA often talks about the need to educate Congress and the general business media about the nature of the managed funds industry. I didn’t understand — nor did anyone who I talked to including several longtime members of the group — how keeping the media away from an event will help MFA in their goal of creating awareness about what hedge funds are and what they aren’t. They have suffered a great deal public relations wise from their secretive nature, which has more to do with the regulatory structure they are under than the nature of what they do. They also got blamed by a lot of folks for the Bernie Madoff scandal even though Madoff did not operate a hedge fund.
For me, being barred from the conference events was a blessing in disguise as I needed to meet with managers and talk to them about how they performed in 2009. I was freed up from attending what sometimes can be tedious panel discussions focused on “inside baseball” type elements of the hedge fund industry like creating “side pockets” and private letters and valuations.
For the first time I saw the industry from the managers’ perspective. They were in the lobby of the hotel and by the pool — anywhere you could get two chairs together — so they could explain what they do to a potential allocator.
I do not doubt that the political element of what the MFA does is important but I can’t help but think that it would have served the MFA leadership well if they spent more time walking through the lobby of the Ritz to see what was going on. Hundreds of various managers explaining to potential customers what they do and what their edge is. Perhaps MFA needs to approach their job similarly. Sit down with the media and the heads of Congressional committees and explain what their members do; what service they provide and what their edge is.
The alternative investment industry will never be big enough to outspend the mutual fund industry that often benefits from the misinformation and negative reputation of hedge funds, so the focus of the industry group representing hedge funds needs to be educational in nature.
For a long time MFA has depended on the institutional nature of the business to keep it free from overly burdensome regulation. The argument has always been, we only serve highly sophisticated clients who have the intelligence and resources to do their own due diligence. With this argument they often abandoned efforts to reduce regulation for retail alternative investment products and efforts to explain exactly what absolute return managers do.
In a sense this may have backfired as there is evidence that many highly sophisticated institutional investors did not do proper due diligence and what they tried to avoid, hedge fund registration, may happen anyway.
The term hedge fund really refers to a structure not a strategy. Too often the strategies have been kept opaque to match the regulatory structure. It would have been better to say: here are the strategies our member offer; here are what we think are the proper structures for institutional investors to access these strategies and here are the proper structures for high net worth and retail investor to access these strategies.
Perhaps then there would be less demand for restrictions and more of a demand for creating structures for ordinary investors to access alternatives because in the end, through pension plan and various other structures, they do.