Hedgeweek: Virtual meetings, vigilance, and the Mayfair effect
Published: 06 July 2020
The original piece is published by Hedge Week here.
In a recent interview with Hedgeweek, Jack Inglis, the CEO of the Alternative Investment Management Association, discussed hedge funds’ response to the assortment of operational obstacles arising from the coronavirus-imposed lockdown, how virtual conferencing has reshaped manager-investor relationships, and what the future holds for the industry’s traditional Mayfair nerve-centre following months of remote working.
Reflecting on the ways in which Covid-19 has impacted the day-to-day running of hedge fund businesses, Inglis – who has been at the helm of industry trade body since 2014 - believes firms and their staff largely took the lockdown in their stride, adapting to homeworking in a surprisingly swift, “business-as-usual” way.
While firms of varying sizes have adopted different degrees of remote-working approaches, grappling with a raft of operational and technological demands, one common theme among AIMA members is how certain roles have functioned particularly well working from home, and others less so.
In an at-times closely-knit industry that remains reliant on face-to-face networking, hedge funds’ client-facing roles – such as investor relations and business development – have had to contend with particularly acute challenges, Inglis says.
“If your role is one of marketing your firms’ products to clients, then that has been severely curtailed in terms of opening up new leads and establishing new relationships - absolutely no doubt about that,” he observes.
“What managers have been doing is spending a lot more time with existing clients, and existing investors, making sure that they’re getting all the information and explanation that they need as to how the portfolio is performing.”
While certain firms have launched new strategies to tap into opportunities arising from the unprecedented volatility and dislocation stemming from the market ruptures in Q1, these again have tended to be pitched by firms towards existing clients where relationships have already been well-established.
“That's where the focus of these groups has been, as it has been so much more difficult to reach out to new clients and get any real traction going.”
A balancing act
Six months on from the initial coronavirus outbreak, businesses have begun the tricky process of returning to work while still mindful of maintaining vigilance against the ongoing deadly pandemic. For the hedge fund industry, questions surrounding investor due diligence, international travel, and client meetings make the situation is no less onerous.
A recent poll of AIMA members found that more than four-fifths (82 per cent) of allocators do not expect on-site meetings to recommence until Q1 2021 at the earliest. Managers themselves were slightly more optimistic, but a majority – 59 per cent – still felt meetings would not happen until next year.
While in Australia and Hong Kong anecdotal evidence suggest firms are back to near-normal, managers based in EMEA and the Americas are unlikely to return to offices in any meaningful sense until after the summer at the earliest.
“What our members are signaling is that real client meetings cannot happen for many months yet,” Inglis adds.
Virtual meetings held via video conferencing - whether for new investments or annual operational due diligence checks - have also become the focus of a very specific series of complications confronting hedge fund managers of all stripes.
“Necessary due diligence has to continue to be a major feature of interaction between manager and investment client. There is simply no alternative at the moment. But video calls are not as good as the real thing, the face-to-face meetings,” he notes.
It has been consistently flagged up not only as a challenge for those on the investment side, but also among portfolio managers looking to invest in companies.
“Looking into people’s eyes, getting a feel of the office, how it all interacts together - you can learn so much more from that direct, across-the-table interaction, and even during that walk back to the elevator when some additional comments might be made - all that is missing. It’s impossible to get through virtual means.”
Looking ahead, Inglis points to more practical risks looming on the horizon for fund managers as lockdowns continue to ease in the UK, Europe and certain parts of the US.
These include public transport (which Inglis describes as potentially “pretty uncomfortable”) and sweeping new measures needed to ensure workplaces meet post-Covid hygiene and safety standards.
“The situation is extremely fluid,” Inglis says of the gradual return to work. “When you are a small firm with a small number of people, and you’re not in a large office block with a large space, the ability to return to your office, and still be extremely responsible as to how you manage that safely, is so much easier than if you’ve got many hundreds of employees.”
With regards to real estate, he points to certain practical barriers for larger fund managers, who may occupy multiple floors and use several elevators of a Midtown or City of London office block alongside several other major firms every day.
“Compare that to a townhouse in Mayfair where a firm has one floor, and you can walk up two flights of stairs to get to it. They’re two very different scenarios.”
Underlining the point, he continues: “The stakes are much higher the larger your firm is and therefore I think that explains some of the reticence among bigger firms to return. The bigger your firm, the more likely it is that there are staff coming in from multiple different directions, with many of them requiring public transport.
“But for a small nimble firm of five or six people, or maybe even ten, you can still ask certain people travelling from home to safely distance very easily in the office. You can put all the measures in place much more easily compared to larger firms. All those factors come into play here.”
As talk turns to the lasting legacy of the remarkable events of 2020, Inglis believes the difficulties of the last six months have proven “a real catalyst” in allowing fund managers to take stock and reflect more closely on their costs and margins, and where they might look to save money.
“What is very clear - right across asset management, and not just within the hedge fund industry - is that margins have come under pressure in recent years,” he says.
“Costs have gone up, fees have come down, and therefore the returns on running a business are not anywhere near the peak they once were. If it means firms reducing their office footprint and carbon footprint, those are all considered to be very positive.”
While lease agreements cannot be terminated overnight, he suggests that the next few years may see firms begin to “seriously question” their future requirements in terms of office space, their working environment and more flexible work-from-home policies.
But what might that mean for Mayfair, the well-heeled locale-of-choice for London-based hedge funds, and a district that has become a core part of this industry’s very identity on this side of the Atlantic?
When hedge funds first began to settle in the area, it not only offered managers what Inglis describes as a “prestige postcode” and appealing surroundings, but also a more convenient location for many managers and traders who had previously worked in Canary Wharf and the City.
“That still all remains,” Inglis says. “Being able to be in a location which is attractive for your clients to come and visit you is very important, and once it began it quickly created a cluster effect.
“That cluster effect grew and grew. It became very easy for investors meeting managers to then visit other managers if they were situated next door or round the corner,” he adds of the Mayfair effect.
“Mayfair served, and still serves, those very needs.”
Ultimately, he does not believe the coronavirus-driven shake-up of the working environment will lead to an abandonment of the exclusive central London neighbourhood, which remains synonymous with Europe’s hedge fund sector. “Perhaps, rather, it might just mean a different usage of office space,” he remarks.
Expanding further, he adds: “This is still a customer-driven business, an investor-driven business, and you wouldn't want to remove the benefits that have been felt in recent years. But potentially you can do it in a smaller space in the same location.
“I think this provides a very good opportunity for managers to be able to reduce costs very significantly.”