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Asia Pacific Intelligence

The return of the fund of hedge funds predicted Downunder

Thursday, December 05, 2013

Damien Hatfield of Triple A Partners has published his latest Australian hedge fund newsletter and finds, finally, a reason to be cheery about the Australian hedge fund industry.

"2014 could be a standout year for Australian hedge funds" he writes, reporting that since the global financial crisis, Australian hedge fund managers have 'done it tough'. However, there is now something of a recovery in process, Hatfield finds, with some managers achieving good performance and improving AUM. The Bank of Bermuda Asia Hedge Aust L/S Equity Index is up 22% in the last 12 months.Hatfield writes: "Institutional investors are adding alternatives to the asset allocation and Asset Consultants are building Hedge Fund teams."

As third party marketers, Hatfield has recently seen new potential investors and old investors beefing up their intended and existing allocations to hedge funds.

However, he warns that there still exists a tendency to compare Equity Market performance against the lower volatility performance of a portfolio of hedge funds. "Fund managers can never win. They are doing the right thing by clients, by adding exposures to assets with a low correlation to Equity markets but this can reduce the net return on a portfolio that has a standard allocation to Equities. Non market professionals will look at the multiple pieces of a portfolio, see outstanding year-to- date for equities and not as good performance of alternatives and possibly Fixed Income. They will ask the question, why have you got these allocations in your portfolio, and shouldn't you be overweight this booming share market?"

Hatfield declares himself as a great believer in a steady-returning Fund of Hedge Funds. "FoFs are still quite out of favour, but I do think they will come back" he writes.

In the local Australian market, Hatfield explains that gaining exposure to a fund of funds can be hard with only Advance Global Alpha and Fauchier Partners available in the Australian market. He comments that fund of funds are different now, post the financial crisis. "The old - style products were situated as Fixed Interest alternatives because the risk as measured by volatility was similar. Super Funds reduced Fixed Income allocations in favour of HF FoFs. The GFC hit and the miscalculation was the lack of liquidity with redemptions forcing huge declines in asset values. Many of the large Supers liquidated their FoF holdings never to be seen in the sector again. That seems to be changing but the product is different. Two factors have changed the product design: fees and liquidity. The Hedge Fund industry, to survive, has had to adapt to the new environment."

Hatfield reports that he met with a Superfund that has a fee budget across their overall portfolio of 50 bpts. "They have significant exposures to Alternatives and Property. The Fund would probably set the asset allocation weightings, add low - fee beta managers allocation in each sector, then add in active managers and hedge funds (PE as well) as satellite managers" he writes. Hatfield has also observed that the rise of Smart Beta is assisting Fund of Funds in the new environment. "Products in the Fund of Fund space are now becoming a combination of Hedge Funds, CTA and Macro Managed accounts and Replication, which can be achieved by investing in Smart Betas" he writes. "One of our clients, Ramius Alternative Solutions, is a leader in the development of Smart Betas. Combined, the products offer significantly lower fees and possibly daily liquidity. I think product issuers would rather monthly, but dependent on the client requirements, daily is achievable. Putting all of this together has me seeing to increase in allocations to Fund of Funds."

This article was published in Opalesque's Asia Pacific Intelligence our monthly research update on alternative investments in the Asia-Pacific region.
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