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By Christine Benz | 03-04-2011 09:56 AM

Rogers: Don't Invest From the Rearview Mirror

Alternatives strategies will face challenges in replicating past success during the next decade, says Ariel's John Rogers.

Christine Benz: Hi. I'm Christine Benz from Morningstar.com.

I'm here at Morningstar Ibbotson Conference, and John Rogers, the chairman and CEO of Ariel Investments keynoted this morning.

He talked about his view on alternative investments and the role that they should play in investors' portfolios. I had the opportunity to sit down with John and talk about his outlook for that asset class.

John, your presentation this morning centered around alternatives, and that's another category that investors have strongly gravitated toward. You think that move is overdone. Can you give us some bullet points on why you think that is so?

John Rogers: One of the problems I think that's going on is that the investment committees have gotten too cautious and too conservative because of the last two bear markets over the last decade. So, people are looking to be in alternative investments and be in absolute return hedge fund because they think that helps them to diminish the volatility of the portfolio.

We think that if you look in the rearview mirror and invest, you're never going to be successful. You have to look forward. So that worked the last 10 years, and we had these two historic bear markets; that's not going to continue into the next 10 years.

I think, so number one reason is just that, you have to look forward, it's going to be a better time for growth, and the stock market is going to be strong, the economic recovery is going to be strong. So you don't want to be too cautious with your portfolio.

The second thing is I do think that there has been too much growth in the hedge fund arena. So, there is new competition, enormous amount of assets flowing in. It becomes harder to outperform when you have massive amounts of dollars chasing assets and equities in a real efficient marketplace. So, I think that's going to be a problem.

I think also that the regulatory reforms are going to make it more difficult for some of these hedge funds to do things that they've done in the past. I think that some people stretched and did things that maybe were not appropriate, misused some of the research networks, and you read about some of the collusion and some of the insider trading scandals. I think there is going to be a lot more scrutiny, and a lot more of that will be exposed, and that's going to be harder then for people to replicate that success from the past.

And then finally, I do believe that the fee structure is going to change, that investment committees are more sophisticated, they're smarter, they're asking tougher questions about the 2 and 20 structure and the ability for people to walk away from losing funds. And I think that's going to put pressure on the hedge fund industry, and it will make it harder for them to be as successful as they've been in the past.

Benz: So, successful from their own standpoint?

Rogers: Exactly, and you know the amount. It's just amazing to me that people don't talk about the amount of wealth that these top funds are making, where – when one person can make $5 billion in one year, that's an enormous amount of money. People criticize a Goldman Sachs or a J.P. Morgan exec or some big bank for making $30 million, and no one criticizes a hedge fund guy making more than 100 times as much. It just seems to be an odd disconnect.

Benz: Well, John, thanks as always for sharing your insights. We appreciate you being here.

Rogers: You're welcome.

 

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