Are hedge funds a separate asset class or a superior alpha generator within traditional asset classes? Or are they simply an expensive fee model for high frequency traders? This debate has raged since George Soros took on the Bank of England (and won). As an investor in global hedge funds and other alternative strategies since the mid 1990’s, we reflect on the changes in our approach, philosophy and implementation.
Since 2008, much attention has been given to hedge fund liquidity and transparency, and rightly so. Hedge fund of funds were aggressively marketed to retail investors around the globe leading up to the banking crisis and proved in many cases to fail on both of these counts, all for an extra layer of fees. Basically, many of them were a fundamental disgrace to the investment world.
However, the hedge fund universe is very diverse and “manager risk” is everywhere, so diversification of manager and style is paramount to the long term success in this investment space. The dilemma for multi asset investors is how to achieve the benefits of a diversified hedge fund portfolio, without the negatives mentioned above.
Within our global multi asset portfolio we have formed our own private fund of hedge fund managers. This is treated as a separate asset class for optimization purposes as the risk return profile is very different from traditional asset classes and currently has an allocation of 20% in the fund. The style of allocation within the hedge portfolio is modeled on past performance and includes significant macro/managed futures/active traders, as one of the prime objectives is low correlation to our other risk asset classes.
The portfolio is then allocated to 20+ managers to minimize “manager risk” and attempts to add alpha through top quality manager selection. Liquidity of underlying managers is care monitored and we have very little liquidity risk at the private fund level, as we are the only investor along with our family office joint venture partner. Transparency and cost is managed as this is an investment driven process, not a product marketing one!
The result is that we have a hedge fund portfolio that exhibits the low correlation and risk adjusted returns we require and which history has shown to deliver over long time periods, without the manager risk, liquidity headaches and lack of transparency that the retail hedge fund of funds industry exhibits in abundance. One should not be scared or cynical about hedge funds as the long term numbers show that it is an important asset allocation performance generator. The short term results table shows that index returns YTD have added value relative to French Banks but also that overweighting macro traders in volatile times adds sector alpha, with our portfolio still up for the year.
The above data and research was compiled from sources believed to be reliable. However, neither MBMG International Ltd nor its officers can accept any liability for any errors or omissions in the above article nor bear any responsibility for any losses achieved as a result of any actions taken or not taken as a consequence of reading the above article. For more information please contact Graham Macdonald on [email protected]
