Custom hedge fund portfolios gain traction with small to mid-size institutions

Large institutions have long been able to work with hedge fund managers to create their own customized portfolios, enabling them to tailor their allocations toward specific targets. Now as the market turns again toward active management, small and medium-sized institutions are going custom as well.

As the fund of funds space has grappled with middling performance and downward pressure on fees, it's been difficult for many programs to demonstrate value. Some investors have left the space while others have turned to customization. Trading a fund of funds program for a custom portfolio requires a bit more work upfront, but it can also help to maintain portfolio diversification and provide downside risk protection in the event of a correction.

"It's important to look at specific hedge fund strategies and understand what's happening in their respective category," says Tristan Thomas, director of portfolio strategy at 50 South Capital. Chicago-based 50 South, a wholly-owned subsidiary of Northern Trust Corporation, advises investors on portfolio allocations and invests in hedge fund and private equity managers. For Thomas, the key to a successful hedge fund portfolio is looking beyond headline performance numbers to consider the overall role of specific strategies in the portfolio and finding managers that you're willing to ride out the dips with.

"Macro, for example, has a very wide dispersion of return between funds. If you look at the index, it has been down broadly, but if you've been good with manager selection you can find those guys that are putting up good numbers. We see the same issue with relative value strategies where specialized managers can outperform the category," he explains. Findi......................

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This article was published in Opalesque's New Managers a top-down monthly analysis, news and research publication on the global emerging manager space.