A history major is probably not the most likely candidate to become a hedge fund manager.
However, given the industry’s recent turbulence, perhaps someone schooled in the art of studying past mistakes and attempting to learn from them is uniquely qualified to run money in the sector.
‘I love that tension between “does history repeat itself?” and “is today different?” The answer is usually a bit of both,’ said Andrew Beer, chief executive of alternative boutique Beachhead Capital Management.
Beer majored in history at Harvard University, and after a stint at business school he joined the hedge fund industry in 1994, working for the hugely successful Baupost Group.
‘What I found really interesting about hedge funds was the fact they could look at all of these different kinds of opportunities and the goal was just really to figure out how to make money,’ he said. ‘It wasn’t to beat this benchmark, it wasn’t to outperform the S&P 500, it was just [to find] the best way to make money over time.’
As a serial entrepreneur, he has now been a founding member of four hedge fund firms, the most recent of which is his current shop, the New York-based Beachhead, which manages $600 million in assets.
In fact, the firm does not offer hedge funds, but instead offers liquid strategies that aim to replicate hedge funds in terms of non-correlation to other asset classes and performance.
‘Hedge funds tend to be very illiquid – you can only invest in large dollar amounts and funds that did well last year often don’t do well this year. Also for high-net-worth investors, they can be very tax-inefficient,’ Beer said.
‘So people who have invested in hedge funds have always struggled with balancing investing in the hedge funds that they really like but also managing the liquidity within their portfolios.’
Breaking the cycle
The firm offers three strategies to institutional investors and as separately managed accounts. These are long/short equity, multi-strategy and managed futures.
The long/short equity strategy is available via the SEI Institutional Managed Trust Long/Short Alternative fund too, which Beachhead subadvises.
The other two strategies are also used in an SEI fund, the SEI Liquid Alternative – a Dublin-based Ucits available to investors outside the US.
All three strategies aim to capture the same drivers of returns as hedge funds, but use liquid instruments such as futures and exchange-traded funds (ETFs) to mimic those exposures.
‘For most hedge fund strategies, most of the returns they get are based on how different markets are moving. That’s what we pick up on,’ Beer said.
‘In general, replication can capture 80% or more of the pre-fee returns of actual hedge funds, which can translate into consistent outperformance in low-cost vehicles,’ Beer explained.
Aside from the liquidity, Beer believes the fee structure makes liquid alternatives preferable for investors. ‘80% of hedge fund alpha was paid to hedge fund managers not investors over the past 10 years,’ he claimed.
While alternative strategies in the 40 Act format have not always enjoyed the best reputation, Beer believes replication strategies can succeed where other offerings have failed.
‘Where [investors] miscalculated was that most of those hedge fund managers who have done really well running unconstrained hedge funds ran into real problems trying to run a 40 Act fund, which has a lot more constraints in terms of what you can do and not do,’ he said.
Beer likened liquid alternatives’ relationship with hedge funds to that of ETFs and traditional active mutual funds.
‘If somebody invests in a replication-based product, and the replication-based product does better than the actual hedge fund they selected, paid a lot of money for, and were willing to bear the liquidity risk of investing in, it calls into question the whole business model,’ he said.
One question remains though: is history on his side?