Читать книгу Alternative Investments - Black Keith H. - Страница 42

Either as a result of monitoring or stemming from the desire to actively manage a portfolio of traditional and alternative assets, an investor may decide to redeem a fund or change allocations among funds. Even if the manager lacks the skill to forecast returns, such reallocations could provide benefits if the monitoring process has unveiled certain concerns about the manager. For example, the manager may have deviated from his original strategy or the fund may have experienced significant outflows, reducing his ability to spend the resources needed to manage an institutional-quality fund. While there may be benefits to redemption or rebalancing, there are also associated costs. The most important costs in actively managing a portfolio of funds are forgone loss carryforward opportunities and costs associated with liquidation and reinvestment: dormant cash, opportunity losses, and slippage from transaction costs and market impact.

2.1.3.1 The Cost of Forgone Loss Carryforward

The forgone loss carryforward is potentially borne by every investor in a fund with an asymmetric fee structure. Forgone loss carryforward arises when an existing investor loses the fee benefits of owning a fund below its high-water mark. The cost to the investor results from a managerial decision to liquidate a fund. Because a manager collects performance fees only when net asset value (NAV) is above the most recent high-water mark at the end of the relevant accounting period, a manager who is underwater (i.e., whose net asset value is below the most recent high-water mark) does not accrue performance fees until a new high-water mark is achieved.

The cost of loss carryforward should be taken into account when the decision is being made to replace a poorly performing manager with another manager. Going forward, the return realized from the poorly performing manager will be gross of performance fees, while the return earned on the investment with the new manager will be net of performance fees. This means the new manager will need to outperform the old manager by the amount of the performance fee just to break even. If the drawdown of the current manager is large, investors collect gross of fee returns for several periods. For example, if a manager experiences a drawdown of 25 %, then the next 33.3 % return (0.75 × 1.333 = 1.0) generated by the manager is passed on to investors gross of performance fees. Assuming a performance fee of 20 %, the new manager has to earn 41.67 % [0.333/(1 – 0.2) = 0.4167] for the investor just to break even.

While the loss carryforward represents a potential cost for replacing a manager that has recently experienced some losses, there are four reasons that an investor may still wish to replace a manager with a carryforward loss. First, the investor may be concerned that the manager does not have an adequate incentive to generate performance until the high-water mark is reached. That is, because of the lack of incentive on the part of the manager, the recent poor performance may continue for some time. Second, in the absence of a performance fee, the management fee alone may not be enough for the fund to retain its best traders and maintain its risk management and compliance infrastructure. Therefore, the fund may no longer represent an institutional-quality fund. Third, other investors may withdraw their funds, making the investor's relative position in the fund too large. Most investors want to avoid this situation, because if they decide to redeem their shares in the future, the fund's NAV and operations could be adversely affected when a relatively large part of the assets under management (AUM) is redeemed. Finally, the investor may wish to reallocate away from the poorly performing manager because he believes the fund's strategy is no longer attractive. Whether based on the investor's decision to replace a manager or the manager's decision to liquidate the fund, the investor suffers a historical loss from paying incentive fees on profits that were lost and a prospective loss from not being able to earn future profits without paying incentive fees while the fund returns to its net asset value.

2.1.3.2 Four Other Costs of Replacing Managers

One important cost associated with replacing a poorly performing manager was discussed in the previous section. There are four other costs associated with replacing managers, none of which are affected by the past performance of the managers. These include forgone interest on dormant cash, forgone excess returns on uncommitted cash, administrative costs of closing out one position and opening another, and the market impact of liquidating one position and starting a new position. The common factor driving the first two costs is that there are several leads and lags when making a decision to take money from one manager and placing it with another. The last two costs depend on the strategy being considered and the experience and resources of the investor.

To understand the first two costs (i.e., forgone interest on dormant cash and forgone excess returns on uncommitted cash), consider the lags that exist in the process of replacing one manager with another. The first lag represents the time it takes to review a manager's results and make a decision about redemption. This might take anywhere from a few days to, in some complex cases, several months. The second lag represents the time between the notification deadline for a withdrawal and the moment when a net asset value is struck. This can take several weeks. The third lag is the time between the striking of net asset value and the receipt of the first round of cash. The fourth lag represents the time that passes between the receipt of the first round of cash and the final round of cash. The last lag is related to the time between when the entire position is liquidated and the cash is returned to the investor and when the cash can be allocated to a new manager.

The first cost arises from the third and fourth lags and is associated with the liquidation and the forgone interest on dormant cash. This cost is borne by the investor, and depends entirely on a fund's practices with regard to interest payments on cash balances. Industry practices vary a great deal, but it is not uncommon to find that funds do not pay interest on the value of cash balances. In these cases, the cost of forgone interest depends on how quickly cash is returned to the investor.

The second cost is associated with the last lag and represents the opportunity losses associated with liquidation and reinvestment. These losses stem from the intervals during which investments are not committed to enterprises that promise returns in excess of market interest rates.

The third cost is related to transaction and administrative fees. Closing out old positions and opening new positions will entail administrative fees and due diligence costs. These costs will vary by investor. Experienced investors may have long lists of managers to choose from, and therefore due diligence costs may be relatively small. Also, since due diligence is a relatively fixed cost, the impact will depend on the size of the position. That is, this could be a significant cost for investors who have a relatively small allocation to this asset class.

The final cost will depend on the liquidity of the positions that have to be closed and opened. If the positions are not liquid or the strategy being considered does not have a large capacity, then the market impact of liquidating the old positions and creating new positions could be costly, and will be borne primarily by the investor.