Newcits: hedge funds just don’t get it

To the outsider, a revolution can appear to be a sudden, almost spontaneous event. But look closely, talk to people who know the territory, and you usually find that sudden dramatic change is in fact the final act of a much longer process. Pressure has gradually built up, attitudes have gradually changed, until a tipping point is reached.

The arrival of Newcits has been described as a revolution in the funds business, but I think we’re still in the build-up stage and the big transformation is yet to come. In five or ten years’ time, the effect of the changes that are now under way will be clear right across the investment industry. I believe the strategies currently being launched in Newcits products will become mainstream – the standard offering.

Given the number of new products we have seen already, you might argue that my forecast is too cautious. But attitudes will need to change. At the moment, there is still a major communication gap.

Institutional investors are already buyers of pure hedge funds and so while our guest columnist Markus Hill sees significant movement in Germany, the Newcits phenomenon will be slower to take root in this space.

The fund selector community, despite its long-held desire for access to top hedge fund managers, needs better guidance on exactly how these new strategies work and how they should be analysed.

Hedge funds haven’t yet realised they need to work much harder to tap into the assets influenced by the selectors. They are used to having investors coming to them so most don’t really understand the need for proper communication and marketing – and they are horrified by the idea of talking to the press about what they do. The prime brokers who are advising them seem slightly more clued-up, but they still haven’t fully grasped the need to look beyond their traditional fund of hedge fund investors.

So at the moment, the winners look like being the traditional large long-only houses that have launched Newcits products and already know the potential investors. The hedge funds – the managers that selectors really wanted access to – are way off the pace.

The Newcits revolution can happen – it will happen – but there are still important parts of this fragmented movement that need to be connected. All sides need to step up their efforts.