The old institutional (and funds-of-funds) adage, “the bigger the fund, the better (safer, more open, etc.)” is taking another hit with the news that Fletcher Asset Management has refused 3 separate state pension systems their redemption requests.
An overview: A few days ago it was reported that instead of receiving their checks per their redemption requests, the Firefighters Retirement System, New Orleans Firefighters’ Pension and Relief Fund, and Municipal Employees’ Retirement System – 3 groups that combined invested nearly $100MM into FAM – were told by the nearly $600MM fund, “You’ll get your money after 60 days” (nothing shady here – this was per the original investor contract). This is where things take a turn, however: before the 60 days were up, FAM balked and told the funds, “Not right now. And we can’t tell you why. Here, take these ‘IOU’s’ and, well, just trust us. We’ll get you your money when we can.” In short, FAM refused to show (and explain) it all to investors that placed faith, confidence, and, most importantly, cash into the fund.
For too, too long, the institutional/funds-of-funds world has sworn by the “big-hedge-funds-are-better” (big funds>$250MM) investment thesis, claiming that large funds offer better pedigree, due diligence, and transparency than smaller ones. Instead of investing in tighter, more nimble fund managers (who can oftentimes trade “around” large fund positions), pension, etc. funds like the ones listed above focus almost EXCLUSIVELY on investing in larger funds, lining up outside Citadel to throw money at Ken Griffin and his ilk. Consequently, while institutional, etc. funds claim “everyone’s doing it, so it must be ok!,” smaller managers pay for lazy intellectual diligence, being forced to adhere to far more stringent rules, regulations, and diligence that no investor group would DREAM putting Griffin, et. al. through. Unfairly, then, as funds like FAM and Citadel hold out on redemption requests (while simultaneously posting barely-above-market-level returns, net fees), smaller, potentially more profitable investment vehicles suffer the backlash of this opacity at best and fraud (ahem, Madoff, anyone?) at worst.
Whether it has been out of intellectual laziness, lack of of understanding regarding trading strategies, or an adherence to the all-too-familiar “Cover Your As$” (aka, “Everybody’s doing it, so I’m covered!”) investor tenet, funds like the above-listed pensions would do well to start investing in smaller (<$250MM), more responsible and responsive funds.
Finally, pensions, funds-of-funds, family offices, and endowments can always look at it this way: you may take a bit of an individualist’s risk when investing in a fund no one’s heard of, but it’s worth it. Small funds simply can’t afford the reputational, financial, and legal risks associated with keeping your cash.