Without wishing to ‘jump the gun’ on the soon to be released October performance numbers, the Credit Suisse Hedge Fund Index was flat, year to date, at the end of September 2015 and has been failing to capture the attention of retail investors for a number of years. So the obvious question we have to ask, is whether allocation to these managers / this asset class is still appropriate for global balanced investors?
The London Stock Exchange saw a significant number of hedge fund listings ten years ago, but most of those listed hedge fund of funds have been wound up since the 2008 Financial Crisis, as they critically failed to meet return expectations and began trading at vast discounts to their stated net asset values (NAV). More recently, even one of the more popular listed hedge funds, the BlueCrest Blue Trend Fund, also tabled a proposal to wind up the fund, as its market cap has slumped below US$100mil. The BlueCrest fund was a relatively smart and liquid way to access a hedge fund manager wielding their CTA magic, but it also ultimately failed to deliver in performance terms.
Historically, most high net worth investors will have traditionally accessed hedge funds via offshore structures. Quite often located in warm climates such as Grand Cayman or the British Virgin Islands, many of these hedge funds had very illiquid dealing terms and very large fee structures, but their returns could often justify such costs. However, as returns have diminished and most pure hedge fund of funds have either gone out of business or scaled back significantly, these offshore structures have also dwindled in popularity and usage; not to mention the effect Bernie Madoff had on making operational due diligence an even more expensive and time consuming exercise.
However, possibly there is a superior alternative. At MitonOptimal, we believe that the benefits of diversification can produce superior risk adjusted returns and that the addition of hedge fund or absolute return strategies with unique risk return characteristics into any asset allocation optimizer is mathematically sound. Accessing these returns through hedge funds that offer liquidity and sensible fee structures becomes the more difficult agenda.
For some of our model portfolios, we have maintained relationships with those hedge fund multi-managers who have delivered on their stated returns within acceptable fee and liquidity levels. For some of our other investors, we have embraced the move by many underlying hedge fund managers towards daily dealing, high liquidity and low fee (by their standards anyway!) UCITS structures in more mainstream (albeit less warm) fund jurisdictions, such as the UK and Dublin. So far, their performance has been very encouraging.
Whilst avoiding individual manager risk, building a diversified portfolio of hedge fund managers is always paramount. There are now hundreds of UCITS available from traditional hedge fund managers, such as Winton Capital, to more absolute return strategies from institutional asset managers like Standard Life and their Global Absolute Returns Strategy (GARS) Fund. Adding a basket of these funds improves the overall risk and return characteristics of any client portfolio, but like all investments in this space, survivorship bias and identifying underlying manager skill remains a critical part of the process.
Simply writing off this investment style or asset class as a bunch of overpaid egotistical traders risks missing some of the best alpha return generators available. With the macro picture so difficult forecast and tactical asset allocation tricky at best, we all need as much assistance as we can get.
Hedge Fund Longevity