In the U.S., the SEC has finally allowed hedge funds to advertise – but not to the great unwashed. Decades after lawyers were allowed to advertise their rates to consumers. And decades more since the big bang, which deregulated commissions white-shoe stockbrokers charged to all alike.
Some might consider this progress, albeit proceeding at a mule’s pace. And changes to alternative investment fund regulation are under discussion among Canada’s securities regulators.
Which makes AIMA Canada’s tenth annual debate apropos. Ira Gluskin, who founded Gluskin Sheff + Associates in 1984, thinks everyone should own hedge funds. He noted that he has managed and invested in hedge funds for the past 15 years.
“I have had the odd clunker but on balance they have been very good.” However, he has a perverse way of making an argument. While “fads and trends and products” come and go, “investors like hedge funds.” So much so they bellied up with millions for convicted fraudster (and former Nasdaq chair) Bernie Madoff.
Noting that Madoff was “in the fabricating business,” he pointed out that “Bernie understood what people want. People want low volatility. … People tend to take it personally when their assets go down.”
Investors want low volatility, and hedge funds are only way to provide it, he said. “I’ve watched people go into a high dividend strategy, and it’s not a bad strategy, except when interest rates go up and the damn things go down. Good hedge fund managers can protect you.”
His debate partner, Don Raymond, chief investment strategist and senior vice-president at the CPP Investment Board, cautioned that he wasn’t against hedge funds. Indeed, CPPIB has over $14 billion invested with external managers and a good portion of that is in hedge funds.
So it turns out, Canadians do already own hedge funds – $800 apiece. Just not directly.
As for direct investments, many hedge funds don’t hedge, returns are probably overstated, given self -selection, and the risks are almost definitely biased downwards thanks to the complexities involved in valuing illiquid assets.
So, in the end, “investors have a hard time determining what is true alpha rather than exotic beta,” and thus may be being overcharged for what they could get cheaper elsewhere, such as in an ETF that is more precisely targeted.
Gluskin’s riposte: “If you’re an investor, you want to invest with smart people. The smartest people are in the hedge fund business.”
But Raymond had already delivered the telling blow. When a U.S. hedge fund manager came out with an initial public offering in 2007, one critic told the Globe and Mail that the offering document was hard to read and opaque – an exercise in obfuscation. The critic was Ira Gluskin.
Raymond won the debate.