Institutional Investor's Alpha Magazine - December 2008 - (Page 23)

running at ISAM are as close to zero beta as it is possible to get. But staying close to zero requires vigilance. Will fee structures change now that investors realize that in many instances they have been paying for beta rather than alpha? People have long argued that performance fees should only be charged over the risk-free rate, or some other hurdle. The curious thing is, now, although investors may ask for that more strongly than they have in the past, the riskfree rate or nominal interest rate is so low as to make it almost academic. When the interest rate in the U.S. is less than 1 percent, it really does make it almost meaningless. I do expect, however, that managers who have asked for premium fees and long lockup commitments from their clients will ﬁnd those arrangements much harder to sustain in the future. Are lockups now likely to shorten? a very illiquid strategy that resembles private equity, you probably do need it. But I don’t think long lockups can be justiﬁed simply to protect your own business model, and truthfully, a lot of lockups have been used for that purpose. If you want to discourage investors from trying to redeem assets for a certain period of time, then just be honest about it and charge them a redemption penalty; tell them there is a cost to getting out early. What have you learned from the crisis? I hope so. I have always held the view that you want to have happy clients — that is the best thing in the world. If clients are unhappy, the second-best thing in the world is just to let them leave. Keeping clients locked into an investment they no longer want to be in is a recipe for disaster. The only justiﬁable reason to have a long lockup is if the underlying investments require it — and if you’re in The moral of the story for me is that markets are healthiest when they have the broadest range of participants. We need investors who have different time horizons, different capital requirements and different regulatory contexts. We need investors who buy assets outright, others who hedge their portfolios and some who consistently short the market. I do think shorting is a healthy thing — but I’m not attacking the ban on short-selling ﬁnancial institutions because, in exceptional situations, people will panic. I can imagine that there may well have been some behavior that wasn’t entirely proper at the time; I don’t know the facts. What was fascinating from my perspective, though, was that everyone assumed that the banks would bounce back when the short-selling ban came into effect. Although a short-term bounce did occur, all of those ﬁnancial stocks quickly carried on falling. http://www.rsmmcgladrey.com http://www.rsmmcgladrey.com

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - December 2008

Institutional Investor's Alpha Magazine - December 2008 Contents Letter from the Editor Longs & Shorts Inside the Trade Pension Corner The Good Guys Interview: Stanley Fink Cover Story: The New Regulatory Reality United States: The Usual Suspects Europe: Flirting with Unity Asia-Pacific: What Asian Contagion? In Theory In Focus Strategies Research Center Alpha Bytes Unhedged Commentary

Institutional Investor's Alpha Magazine - December 2008

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