Why Investors Go Lockstep

Chidem Kurdas

In the past several weeks I looked at six investors’ hedge fund portfolios. Five of them are relatively large, long-time investors. One gets a feeling of déjà vu scanning these five portfolios because so many of the underlying managers are the same.

The five investors are separate entities with no obvious connections. They’re not even all based in the same city. Yet they’ve  created somewhat similar, though not identical, portfolios.

The sixth portfolio I saw belonged to a new, small investor in hedge funds. Interestingly, it contained none of the managers to be found in the other five. This could be because a new investor does not have access to the managers that have already attracted a lot of capital.

In any event, established investors tend to pick from a limited pool of managers, so that one repeatedly encounters the same names. In credit, for instance, you see  King Street, Silver Point and Cerberus. In global macro, Brevan Howard is often on the list. Only 40 managers have most of the industry’s assets as a result.

Investors go largely to the managers that in recent years made good returns. But often those managers are not able to repeat their past performance.  Paulson & Co. is a remarkable example of this—money flowed to John Paulson after he made big profits betting against the housing bubble and now it is flowing back out in response to his large losses.

There have been numerous warnings against chasing recent returns, which investors seemed to take to heart after the crisis. But now many like the same managers that made money in the past few years, though they’ve don’t like Mr. Paulson as much anymore.

Of course you can say the managers getting the assets are simply the best managers and that is why so many investors go to them. That’s the case sometimes—but not always. Recall that Long-Term Capital Management was regarded as the crème de la crème fixed income manager.

When LTCM returned some capital, investors were bitterly disappointed. Everybody wanted to be there, even as the 1998 disaster loomed.


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