From multi-asset strategies to funds of funds, there has always been demand for products that can spread risk across portfolios. George Mitton talks first to a top-down, multi-asset investor, and then to a fund of hedge funds provider who prefers a bottom-up approach.
When Euan Munro, one of the architects behind Standard Life Investments’ Global Absolute Return Strategy (GARS) funds, left the firm to become chief executive at Aviva Investors, he was widely expected to create a multi-asset challenger to the fund that had served his previous employer so well.
He didn’t disappoint. Earlier this year, Aviva Investors unveiled the Multi-Strategy Target Return fund. Launched with £100 million (€127 million) in assets from other Aviva funds, the fund aims to deliver 5% a year over the Bank of England base rate, over a rolling three-year period, with less than half the volatility of equities. The quality that enables the fund to meet its difficult target is its focus on high-level asset allocation, says Dan James, chief investment officer for fixed income and a top-down investor. He and his co-manager on the fund, along with their investment team, are not concerned with the selection of individual securities, but with creating a balanced portfolio with downside stabilisers that can weather many storms.
If James were to fear a spike in inflation in the US, his aim would be to devise a hedge that could neutralise the fund’s exposure without costing it anything in its core scenario. “You need the breadth of asset classes to be able to do that,” he says.
The strategy is important if you believe, as James does, that equities and bonds are at risk of becoming more closely correlated in future, a circumstance that will weaken the effectiveness of traditional balanced funds.
In essence, the Aviva fund reflects the view that asset allocation accounts for the bulk of an investor’s returns. The team is also fond of risk mitigants that can preserve the fund’s value in adverse market conditions.
“The danger over the last five or six years is anybody has become an investing hero,” says James. “It doesn’t matter what you bought, it all went up. The future will be tough. You need to work out what’s going down, and avoid it.”
James says the architecture and philosophy of the fund is similar to GARS. The firm has also priced the fund in line with others in its category, with a 75 basis point management fee and 10 extra basis points for the cap. However, he believes the Aviva fund has some advantages over Standard Life’s fund.
“The big thing for us is we believe we have broader capabilities than at Standard Life,” he says. “Aviva Investors has six centres for fixed income, in Toronto, Chicago, Paris, London, Poland and Singapore. It’s important to have a geographically diverse team. If something is going on in Asia you want to be close to the ground.”
The financial crisis hit the hedge fund industry harder than most. Not only were there a series of scandals as poorly managed funds were revealed to be invested in asset classes they were not supposed to buy, but the crisis brought on a re-evaluation of the industry that challenged its claim to deserve high fees.
The widespread “two and 20” scheme, a 2% management fee plus a 20% outperformance fee, was under pressure.
Neuberger Berman is one of the asset managers that saw an opportunity for a competitively priced fund of hedge funds, an asset class it calls liquid alternatives. The firm negotiates with alternative managers and pays a weighted average 1% fee to them, with no performance fee. It then levies a 75-basis point fee on top. With extra costs included, investors pay 1.95% for the fund.
Fred Ingham, head of hedge fund investments, international, says the strength of the Multi-Strategy Fund is that it combines the expertise of a range of alternative managers, many making tactical investments at the level of individual stocks or bonds. As such, the firm aims to capture the bottom-up expertise of the underlying managers, providing diversification while also giving access to the ideas of innovative stock or bond pickers.
“Multi-asset funds are different to our product,” says Ingham. “The target outcome is similar but the way of getting there is different. They’re generally top down and we are looking at security level allocation.”
The fund aims to provide good returns by picking managers that have a range of strategies so that if, for instance, equity long-short funds have a bad year, their performance loss will be balanced by good returns from managers who buy emerging market bonds, or some other asset class. In either case, the aim is to access the investment ideas of managers who are close to the markets they invest in.
Ingham says his fund can help investors who want to allocate to hedge funds but are put off by high fees or governance worries. The idea is that the fund offers the benefits of alternative investment without the risk that comes with exposure to just one or two funds. It is also focused on transparency and liquidity, providing daily dealing as well as disclosure of all long and short positions at the security level every quarter.
“There should never be situations like during the crisis when investors thought they were in a long-short strategy and half the fund was in private equity,” he says.
Defined benefit pension schemes have been among the biggest investors in hedge funds in recent years, having largely taken the place of high-net-worth investors as the industry’s key client base.
However, Ingham says the largest growth area could be among defined contribution funds, which have on average only a 1% allocation to alternative investments. Some consultants suggest this figure could rise to between 10-15%, which ought to provide opportunities for providers of liquid alternatives.
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