Hedge funds – Feature
HEDGE FUNDS: THE TIME HAS COME
These are the days that people write books about. Indeed, fol- lowing Covid and the impact of Russia’s invasion of Ukraine on natural resources, volatility is sweeping through the global investment markets, while traditional strategies, such as 60/40, are failing to protect investors. Yet hedge funds appear positioned to fulfil a need for institutional investors in an envi- ronment of raging inflation and rising interest rates. Tom Kehoe, global head of research and communications at the Alternative Investment Management Association (AIMA), says this is very much in evidence, with hedge funds placing themselves in the shop window for investor attention. “Amid increasing turbulence across financial markets, hedge funds are reasserting their value proposition among investors who crave capital preservation and portfolio diversification,” he says. So where should investors look within the hedge fund world, given the alternatives universe is a gamut of approaches? Two specific hedge fund styles stand out for investors to exploit. Discretionary global macro-focused hedge funds look a good bet given that macro policy is likely to remain a key factor driv- ing markets. Relative value also looks a good prospect given that volatility is presenting a more attractive trading environ- ment for active and relative value trading strategies. “We like both of these strategies, they make a lot of sense in the current environment,” says Patrick Ghali, co-founder of Sussex Partners, an alternative investment adviser. “And the opportu- nity set should remain rich for the time being,” he adds.
Tailwinds Expanding on these themes, Ghali highlights the all-important D word – diversification – benefit of investing in hedge funds. “It continues to make sense to invest in diversifying strategies such as global macro, quant/commodity trading adviser (CTA), equity market neutral and relative value strategies in the cur- rent environment, rather than to take market beta risk at this stage of the cycle.”
Looking at the two identified strategies, Kier Boley, chief investment officer of alternative investment at Union Bancaire Privée, agrees that discretionary global macro offers real bene-
fits to investors. “Performance of discretionary macro manag- ers continues to be on a positive trend that expected returns should be set at the top end of long-term trends,” he says. A number of self-evident tailwinds support the strategy: higher front-end rates, central bank policy determined by economic fundamentals, commodity pricing set by supply-side con- straints, higher levels of volatility across asset classes and deflating equity markets.
“Over the near term, we expect some retracement in strong recent gains, as a number of markets are oversold and so prone for a technical bounce,” Boley adds, but it should “provide a good entry point for investors who have been underweight the strategy”.
A challenging environment
Although for some institutional investors, management fees are one stumbling block. With strategies such as discretionary macro being actively run, they tend to come with a higher price tag. But fees should be compared to the potential return bene- fits when assessing such strategies. As higher fees should be set against a backdrop of shifting relative net returns. With traditional assets such as equities and bonds reverting to their lower long-term averages, discretionary macro continues to maintain its higher return profile. To back up this point, Boley says investors should benefit from returns ranging from more than 10% to 30% for discretionary global macro. Num- bers that should make investors sit up and take notice. However, the Eurekahedge Macro Hedge Fund Index, which tracks 238 constituent funds, showed an annualised return of 7.78% by October 2022.
In addition, some of the fees are offset by the nature of discre- tionary macro investing, Boley says, which sits on large amounts of portfolio cash, as they tend to express thematic views through options and futures.
Boley also shares his enthusiasm for relative value with man- agers set to perform in line with long-term averages in 2022. But he highlights that it is an interesting picture. “On the one hand, increased equity market volatility is wel-
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