WYSIWYG – “What You See Is What You Get”. This is a phase that has been applied in computing to describe the standard that what is on a computer screen should translate to what is on a printed page.
This should also be a reasonable standard for reviewing any hedge fund strategy. A hedge fund that describes itself as a certain style should deliver on that strategy. For example, trend-followers should follow trends no more or no less. When strategies are “polluted” with other strategies, returns may be smoother, but an investor will not be sure what he is receiving. If it is a mixed strategy, fine, then tell investors what is in the mix.
There is a growing trend in hedge funds to go back to basics after a period of strategy bundling. There are a couple of key investment currents converging.
If we go back twenty years, trend-followers were just trend-followers with intermediate and long-term look-backs. However, increasing performance problems caused firms to experiment with mixing strategies, for example, carry with trend. As quant strategies increased, there was further mixing of strategies to further smooth the return to risk. This made sense in a 2/20 incentive world since investors would prefer the bundling of strategies over paying multiple managers with different strategies each 2/20. The worst-case scenario is that you blend two managers one with a positive return and the other with a negative return. The net performance could be zero yet the investor still has to pay incentive fees.
The WYSIWYG trend is causing changes in the product mix. We are seeing large quant managers actually decomposing their funds into more specific products that may not have incentive fees. You can have pure trend-following or you can have a diversified pool of models. Similarly, instead of one large fund, firms are offering a few funds with different styles and objectives. Call it the product differentiation of the hedge fund business.
Similarly, the development of bank alternative risk premia swap products has lead to the institutionalization of WYSIWYG. Alternative risk premia swaps are well-defined with index rules. The risk premia a specifically measure through rules so there is no ambiguity. FX carry is a very specific strategy. Equity value is specific to the rules of the swap associated with it. The strategy is constrained by definition. The response of hedge funds will have to be transparency, so their value is defined.
WYSIWYG is good for investor transparency but requiring definition will constrain flexibility. The question is whether flexibility is the skill or bane of hedge fund managers. This is the result of industry maturity, good or bad.