Interview: Dion Friedland, Hedge Funds Association - 09/25/01
Dion Friedland made his name in the hedge funds business as the founder of the Magnum group. Now, this big gun in the fund management industry talks to Stuart Fieldhouse about his latest project, the Hedge Funds Association.
MIAMI (FUNDXCHANGE) -- Dion Friedland has come a long way since selling discounted clothing whilst studying psychology at the University of Johannesburg in the 1960s. He is best known in the hedge funds business as the founder and chairman of the Magnum Group, which servers as adviser to 20 funds of funds. In March 1996 the flagship Magnum Fund was named the world?s top performing hedge fund in 1995-96 by the Wall Street Journal, and in 1998 was recognised as Best Hedge Fund Manager by Standard & Poor?s Micropal.
However, these days he has also been spending time creating an industry association for hedge fund managers. Mr Friedland formed the Hedge Funds Association in 1996. It was originally named the Funds of Funds Association, but in March 1998 the name was changed in order to include not only funds of funds but also hedge fund managers, service providers and professionals in the hedge fund industry. FundXchange spoke to Mr Friedland about his plans for the HFA and his views on the current state of the hedge funds business.
FX: What was the prime factor motivating you to help found the
Hedge Fund Association?
DF: Hedge funds have for a number of years been misportrayed by the media, primarily due to lack of education and understanding of the vast variety of different hedge fund strategies available to an investor. The primary role of the HFA was to educate investors, media and the public as to what hedge funds are, and why they should form an integral part of almost any investment portfolio. Other objectives are to: set industry standards for fund administrators and other service providers who collect, collate, and analyse information related to hedge funds; provide a forum for the exchange of ideas to improve the effectiveness of association; lobby at government levels in different countries to ensure that a wider universe of investors have access to hedge funds; and direct public relations for the hedge fund industry.
FX: Do you agree with Barton Biggs' comments, made last month, that the hedge fund industry is over-heating? Are there really too many inexperienced managers out there?
DF: Certainly there has been an enormous amount of money flowing into the industry over the past few years. In addition, there has been exponential growth in the number of hedge fund managers who have absorbed this new capital. Many of these managers are talented managers who will prove to be extremely successful. Some of these managers close to new capital after a short period of time, recognising that there is a limit as to how much capital they can invest successfully. Money is also invested with newer and less-experienced managers, some of whom will not do well. These managers will generally not attract a large amount of capital. In addition, some of the strategies may enjoy less stellar performance going forward, depending on market conditions - a good example is merger arbitrage which has attracted an enormous amount of capital over the past 18 months. However, the deal flow is not as great today as it was last year, which will lead to an overall reduction in returns, or force funds to invest in riskier deals they previously would not have invested in, or increase leverage to meet the performance demands of their clients. This will undoubtedly lead to underperformance in certain sectors, and poor performance experienced by investors who were forced to invest in lower tier managers. All of these factors may ultimately lead to a retraction of some the "new" capital that has flowed into the industry, which will then result in greater investment opportunities and results for those investors who are patient.
FX: Do you think Europe's hedge funds industry is going to expand radically in the next couple of years?
DF: Absolutely! We just need to look at the names of the banks who have created funds of funds and raised capital from their client base - Deutsche
Bank, Dresdner, Commerzbank, Credit Suisse, et cetera. With all this money flowing into the industry in Europe, fund managers will undoubtedly continue to start up new hedge funds to tap some of this new capital. Europe is still several years behind the US in terms of strategy specialisation, but as more capital flows into hedge funds in Europe, strategies will become more focused.
FX: What is the biggest challenge facing the US hedge funds industry at the moment?
DF: Dealing with the huge inflow of assets, which are diluting returns, or causing the most talented managers to close to new capital in very short periods of time. The larger hedge funds continue to lose key people who leave to start their own funds
FX: Do you think giving retail investors access to hedge fund
strategies - e.g. through fund of funds structures - is a good idea?
DF: Absolutely! Hedge fund strategies are ideal for almost any investment portfolio, particularly for investors seeking to preserve capital. Most retail investors fall into this category and would be a lot better off investing in a diversified pool of hedge funds than in a selection of long only mutual funds.
FX: Is there anything hedge fund managers could be doing to improve the image of the business in the eyes of the mainstream press?
DF: Education. I think industry associations like the HFA have tried to educate the media - with some success. Certainly hedge funds are no longer portrayed exclusively as small private investment clubs for the wealthy. The introduction of big name institutions to the hedge funds industry has brought credibility to the industry. With a better understanding of what hedge funds are about, the media would certainly portray hedge funds in a much more positive light.
FX: Given the rapid exodus of fund managers from large companies into the boutique sector at the moment, do you have any advice for any fund manager considering taking the same route at the moment? Is the time still ripe for such a move, and if so, what factors should be foremost in their minds?
DF: Be sure to have a solid backer/sponsor unless capital raising is not an issue. Despite all the money flowing into the industry, start up managers without a big name or big following will find it very difficult to attract capital early on before they have
built a track record.
FX: How is the economic downturn in the USA likely to affect the global hedge funds sector?
DF: It will impact different strategies differently - merger arbitrage and other deal flow strategies may suffer, while distressed securities should benefit. Equity long/short strategies have found the going very tough this year and may continue to struggle if the equity markets do not recover.
FX: How important has the offshore option been in the development of the hedge funds industry in the last 10-15 years? Do you think it is likely to play the same role in the next 10 years or so?
DF: The bulk of assets that came into the industry in the 1990's were through offshore funds and funds of funds. As hedge funds are rather inefficient from a tax perspective, I feel the offshore industry will continue to thrive. US pension funds are penalized for investing in domestic funds which generate UBIT (unrelated business taxable income) - offshore funds avoid this problem.
FX: How do you see the future of the international hedge funds business going forwards - and the HFA's relationship with it?
DF: The future of the industry is likely to look somewhat similar to how the mutual fund industry looks in the US today - dominated by big name institutions, but also by many large hedge funds that will spawn newer specialized funds, but driven by the retail investor. The HFA will become an important figure in the development of the industry and will continue to act as a uniform voice for hedge funds, service providers and others associated with the hedge fund industry.
FX: What other plans do you have for the HFA?
DF: As regulations are threatened by local regulators, the HFA will have to play a role in assisting in the drafting of those regulations, and in the education of the regulators to ensure the regulations make sense. Ultimately, the industry will have to be self-governed similar to the way in which the futures industry is self-governed.