The Changing Roles of Hedge Funds in Asset Management – Phillip Duff, Chairman and CEO, Robson Ventures

See abstract below. Full transcript available for download here.

At a session of the 2007 leadership in hedge funds forum, Robson Ventures chairman and chief executive Phillip Duff delivered a speech on the subject of hedge funds and their changing role in the world of asset management. Hedge funds, Duff said, was the ultimate Darwinian business, citing their annual 20% failure rate as an example of the volatility of the market. Duff believed that this failure rate was the result not of insufficient consumer returns, but of a failure to deliver what the customer is looking for. Because hedge funds are actually a fund, rather than a business, they attract people who are talented deal makers, but do not feel that they are making enough money working for a business in the financial sector. Because this single person might not have enough money to start a business on his own, he levers his money to carry off other people’s money.

Duff described this as the best form of borrowing in the world, since the whole point of the enterprise was increasing one’s net worth.  According to Duff, the way the asset management business is set up, putting a great deal of importance in large-scale business and brainpower. Since the late 60’s, he said, the business has grown from millions to trillions of dollars, with no erosion of margins at all. Hedge funds, he said, were arguably the best part of asset management. This was a direct result, he said, of global demographic changes that were seeing the world get older and making asset preparations for their impending retirements. “You look at the industry structure, and you now have three firms in the industry that manage more than $1 trillion of assets; nine firms more than $500 billion; and more than 50 that are greater than $100 billion of assets. But, you’ve also had this shift from what I’d call the manufacturing – the production of a timed series of investment returns, a shift from the economics there, to the economics of distribution,” said Duff.

Another aspect of the asset management industry, and especially hedge funds, that was particularly attractive to Duff, was that there were an incredible amount of service providers in the industry, each making a unique effort towards effective management. Duff said that one of the huge strengths of the industry was that the integration between people and departments offering advice to clients, aimed at delivering a complete investing solution to each of the fund’s customers: “I think increasingly, people are starting to focus not so much on asset allocation, but on risk allocation, because if you have long-tail liabilities, whether they’re pension, medical-benefit plans, insurance, casualty-liabilities, or most households around the world – the liabilities of their future retirement expectations and desires are generally on present-value terms, significantly higher than their current assets.” Whatever liabilities one might have, though, according to Duff, the first goal was to survive and be able to pay them, which was where asset management came in.