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NEW YORK Hedge fund critics are becoming increasingly vocal about the $3 trillion industry, arguing that it produces mediocre returns for clients while enriching managers with exorbitant fees.
Some large investors have withdrawn tens of billions of dollars, prompting a string of high-profile firms to restructure or close.
But despite some image problems the industry is actually healthy, according to Simon Lorne, vice chairman and chief legal officer of Millennium Management LLC and chairman since September of global hedge fund lobbying group Alternative Investment Management Association (AIMA).
The following are lightly edited excerpts from Lorne's comments on Monday in an interview with Reuters at Millennium's Fifth Avenue headquarters.
Reuters: Do hedge funds have a PR problem?
Lorne: Yes. Hedge funds are not the favored children of the investment community.
Some number of hedge fund managers are quite successful. If the fund is successful, the compensation structure is such that the individual manager can be quite successful, and so you can get the headline incomes. That makes people resentful in ways they aren’t resentful about star athletes or Bill Gates at Microsoft (MSFT.O) or Facebook (FB.O) or whatever.
What would you say to the firefighter who sits on his retirement system’s board and is frustrated with hedge fund performance?
Lorne: I’d say look at 10 years, not five years. What hedge funds are about is performing well relative to the risk undertaken. Go back to the meaning of hedge funds – if you are taking risk out of the equation, you should expect to do a little less well on the upside, but do less poorly on the downside.
Dan Loeb said a year ago that "we are in the first innings of a washout in hedge funds." Is that true?
Lorne: We haven’t seen the evidence of it yet. We have seen some number of closures, certainly - that happens all the time.
The industry is in fact growing. The numbers bear it out from every possible perspective. We continue to have more funds. We continue to have more of the smart, well informed investors putting money in hedge funds. The institutional investors are increasing their allocation to hedge funds, we see it constantly.
Have there been some healthy changes with fee structures?
Lorne: I think people are paying more attention to fee structures and to alignment of interests. If you can align incentives better with returns to investors, the industry is better off and the investors are better off.
What does President Donald Trump means for hedge funds?
Lorne: Except macro funds, we tend not to be riding the big economic waves. We tend to be more arbitraging inefficiencies in the system, taking risk out of the investment process, and I think we do that wherever the administration is.
There’s been a popular view that the Trump administration is going to be pro business and therefore hedge funds will do better, and Jay Clayton as the SEC chairman will be less interested in protecting investors. I think that’s silly. All indications are that Jay Clayton will be a strong chairman who will care about the public interest and who will regulate sensibly. AIMA has always supported sensible regulation for the industry. At a high level, I don’t think the Trump administration particularly means well or ill for the industry.
Should parts of Dodd-Frank be tweaked?
Lorne: Some of the clearing requirements and the potential limitations on global transactions that lead to potentially inconsistent regulation between the United States and Europe and Asia, in what is in fact a global industry, are potentially troublesome and will impact the global economy and local economies in untoward ways. The regulators can handle that appropriately, but they need to be talking to each other. I worry that as the United States perhaps moves toward measures that would be called protectionist - and who knows what’s going to come out of the French elections, and Brexit and Europe? - but there is some element of balkanization of regulatory structures, where we need to look at more uniform, global structures.
What are some Brexit pitfalls for hedge funds?
Lorne: A lot of people employed by the industry in London are people who came from other countries and they are worried about whether they are going to be able to stay in London and under what circumstances.
On the larger scale, the ability to trade across borders I think won’t change very much but it’s important to us. I think London will remain one of the two or three major financial capitals of the world, but there are questions around that.
What's your take on hedge funds in popular culture such as the hit TV series "Billions," the fictionalized tale of a New York hedge-fund billionaire, played by actor Damian Lewis, and the U.S. attorney portrayed by Paul Giamatti who is determined to bring him down?
Lorne: I fear people watch "Billions" and think in their minds ‘that’s what hedge funds are all about.’ It’s not. It’s not what we do or would want to do. We don’t behave that way. We don’t go through life that way. Some hedge fund managers do dress quite casually, I will go that far.
(Reporting by Lawrence Delevingne, Editing by Carmel Crimmins and Tom Brown)