Embrace the alternative
A RECENT survey by Mercer, the consultancy, found that nearly 5 per cent of UK pension funds and 14 per cent of European pension funds are looking to increase their allocation to fund of hedge funds.
And well they might – over the past 10 years the HFRI Strategic Index, which measures the performance of funds of hedge funds, returned 41 per cent compared to an 11 per cent return from the MSCI World equity index.
But it’s not just superior performance that makes funds of hedge funds attractive. Michiel Timmerman, chief investment officer for multi manager investments at Aberdeen Asset Management, notes that the underlying assets – the hedge funds themselves – are poised to do well. “Hedge funds tend to outperform in volatile markets because they can adopt dynamic strategies such as long and short funds that also do well when the market falls,” he says.
But why choose a fund of hedge funds instead of just picking individual funds? There are three factors. Firstly, these funds are less volatile than picking individual funds, says Tim Gardner, head of sales at Signet, the fund of hedge funds specialist. “If you invest in a fund with 60 managers and one performs badly it will have less of an effect on your overall performance than if you invest in 10 individual funds and one has a bad year.”
Secondly, although you pay for an extra level of fees for access to funds of hedge funds, this is money well spent, especially if investors do not have the resources to do the research and due diligence necessary to ensure they are investing in the most appropriate fund for them.
Lastly, funds of hedge funds have become more robust since the credit crisis. At its peak, some hedge funds had to block redemptions from investors. This did some serious damage to the reputation of the industry. Funds of hedge funds have also had to change, says Signet’s Gardner, and this started with more efficient matching of assets to liabilities, and taking into consideration the needs of clients when making investment decisions: “If we want to offer our clients quarterly liquidity (which means that investors can withdraw their assets with three months notice) then we need to invest in hedge funds that offer at least quarterly liquidity so that we can match assets to liabilities.” This has paid off: Signet’s Global Fixed Income Fund has returned 14 per cent in the last 12 months and it has achived a 152 per cent cumulative return since its inception in July 1999.
Investors can also get access to a diverse range of strategies when they choose a fund of hedge funds. For example, Signet’s chairman and co-head of investment management Robert Marquardt is particularly interested in the credit repair theme in Europe and the US, and is investing in hedge funds that are exposed to corporate and sovereign debt.
Institutional investors who want to get the most out of an alternative investment should consider this asset class as an efficient way to boost their overall returns.