At her former employer, Cambridge Associates, Devitt had seen investors overlooking funds outside their main area of focus that might still have suited their requirements. "My focus is on having a pan-alternatives approach," she says, "on having the flexibility to look across labels. I wanted to be flexible on the type of service that could be offered."
This involves talking to private banks or pension funds about portfolio allocation from an independent perspective, without any economic ties to a particular investment manager or group. "It is about giving investor-driven advice," Devitt says. "It is about helping the investor separate the wheat from the chaff."
This summer has been a wake up call for many investors, according to Devitt. It has taught them valuable lessons about hedge funds, lessons which she thinks could help them to be more selective about the hedge fund strategies they invest with.
"Up until the summer, there were too many funds carrying too much leverage," she argues. Blow-ups like that at Sowood have affected investor sentiment, and injected a note of caution when making further selections in the hedge fund space. "Some hedge funds have done well, for instance those that are net short, or tactical about being short," she comments. "But there is now cause for more caution, and more differentiation is needed. We are seeing a move towards strategies with more of a risk-controlled approach. Investors are starting to scrutinise the trading records of managers more closely than previously, to see how they have performed in similar crises, for example in 1998 or 2002."
Does this mean a growing role for strategy-specific funds of hedge funds? Devitt believes investors will not necessarily become more adept at choosing between hedge fund strategies, but she does believe they could become more sensitive about the way funds of hedge funds are carrying out their due diligence, as well as the degree to which they are diversifying their portfolios.
"We will continue to see a shift away from funds of hedge funds to multi-strategy offerings," Devitt explains. "I think the generic fund of hedge funds is no longer viable as an off-the-shelf option. I expect to see the increased use of funds of funds within a core/satellite approach by investors. For example, a market neutral fund of funds at the core, with more specialist vehicles as satellites."
With large funds of hedge funds – those managing over $10 billion – finding it hard to generate meaningful returns, investors may well turn to smaller boutique firms in pursuit of some level of alpha.
Going forwards, hedge funds' greatest potential threat is a political one. Addressing the operational risks and raising minimum investment levels is one means of mitigating diatribes from politicians, but Devitt also sees what she calls "a political threat to entrepreneurship" manifesting itself in both the US and Germany. The efforts by the SEC to require funds to register as broker dealers, and the plans to tax private equity partners, could well be part of a new climate for alternative investments, that will thwart innovation and development, and may well deter many of the more inspirational brains in the investment industry from starting their own enterprises.
But hailing as she does from a pan-alternatives background, Devitt is also well-placed to observe the ongoing process of maturation amongst firms in this space, particularly as they diversify from one core area of alternatives expertise into others. "We're already seeking long/short funds launching long-only products," she says. "They're seeking to leverage their best ideas on the long side while still charging hedge fund fees."
Clontarf is also seeing real estate specialists starting to launch long/short products, despite initial teething problems. Such products might fall between the stools as far as investor categorisation schemes are concerned, as they share hedge fund and property characteristics. Clontarf's value as an advisor however, is its ability to pick up one these overlooked investment stories when they arrive, and help investors to slot them into their portfolios.
But what about future growth in the alternatives world? Look for the off-shoots from more overcrowded strategies, Devitt advises. Those firms best placed to capitalise on this will be the multi-strategy managers. This can include funds set up on a very short term basis to capitalise on limited opportunity sets, the fall out from the summer's credit crisis being a prime example. Another growth area is the weather derivatives market, where a handful of specialists like Coriolis Capital have been able to make their mark, thanks to their established expertise.
"Multi-strategy managers are scouring around looking for new opportunities," Devitt explains. "The market for weather derivatives is still very limited, and the amounts you can put to work are quite modest. It will take a long time to get to critical mass. Such areas have not been liquid enough for long enough, unfortunately."
Investors still need to treat emerging strategies with a level of caution, as they may seem like liquid areas of investment at first glance, but in Devitt's view, when another credit crisis arrives, they can be the first investment people will want to sell.
Ultimately, the role of the consultant in the institutional sphere is changing. As European institutional investors become more savvy about their options, they are placing greater demands on their advisers, many of whom remain light on dedicated expertise in the alternative investment arena. "Some pension funds are dragging their consultants along with them," says Devitt.
In the wake of the 2001 Myners Report, which recommended that pension funds take steps to improve their skills base, funds are starting to consult multiple advisers, including specialists in alternatives where their original consultant is considered to be lacking in the required expertise. Firms like Clontarf are well-positioned to take advantage of this trend, and we can expect that hedge funds will find the questions institutional investors direct at them in the future to be more searching as a result.
AOIFFIN DEVITT
Prior to establishing Clontarf Capital in 2006, Aoifinn Devitt was a specialist consultant at Cambridge Associates Limited (London and Boston). Before she joined Cambridge Associates in 2002, Devitt worked in the investment banking division of Goldman Sachs International in London. From 1995-1999 she worked as a corporate attorney at Debevoise & Plimpton in their New York and Hong Kong offices. Devitt has a first class degree in law from Trinity College Dublin, a BCL (Oxon) and an MBA (Dean's list) from INSEAD. She is a member of the New York Bar.