Cover story – Hedge funds


the current environment is ideal for hedge funds. “More than at any time in recent history, both equities and bonds have been sensitive to macro events, particularly to inflation prints,” she says. “During periods of large positive US inflation sur- prises, macro hedge funds have tended to do better than a typ- ical 60/40 portfolio. “Conversely, when inflation has surprised materially to the downside, these managers have underperformed 60/40, though still managed to generate positive returns,” she adds. In addition, Patrick Ghali, managing partner at Sussex Part- ners, gives a nod to the fact that hedge funds appeal in the cur- rent environment, but with an added variation. “Institutional investors usually value more predictable return streams with less volatility, but not all of them want to have a large exposure to private assets. Hedge funds provide that type of return stream while still being liquid and without questions over val- uations – as can be the case with private assets.” Additionally, Ghali says, hedge funds can provide low correla- tion or “defensive characteristics” to support the overall portfo- lio in times of stress. It was this defensive/low correlation that was extremely attractive to investors in 2022, given the chaotic market environment.


A different world Ben Cooper, head of manager research at Cardano, the invest- ment firm behind Now Pensions, says that diversification away from traditional asset classes, such as bonds or equities, is a key reason why investors turn to hedge funds. “Yet not all hedge fund strategies fill the gap created by the breaking of the traditional stock-bond correlation,” he says. Although he adds: “The term hedge fund is broad and encap- sulates a range of strategies where diversification potential varies greatly,” he says. “For example, we would expect a trend- following fund to offer a different return profile to a long- biased equity long/short fund over the medium to long term,” Cooper says. For all that though, he questions whether institutional inves- tors are turning to hedge funds? “It’s not clear cut,” Cooper says. “And it is very much dependent on client type. “A focus and preference for liquidity has suppressed some of the appetite for hedge funds, which can have fewer liquid terms,” he adds. Cooper says one trend he has observed is that investors who use hedge funds have increased their exposure to them. “In general, though, those that already have an allocation to hedge funds are generally more positive on the outlook for the seg- ment, with the benefit of diversification as the main driver of this appetite,” Cooper says.


Although Claire Lincoln, global head of institutional investor relationships at the World Gold Council, says the economic


18 | portfolio institutional | October 2023 | Issue 127


While short-term


performance tends to be head turning, it often isn’t


that informative. Patrick Ghali, Sussex Partners


picture is a big spur for investors to turn towards hedge funds. “With recession risk still on the table, further bumps in the road ahead cannot be ruled out and investors may look to increase hedging and/or defensive strategies,” she says. Cooper adds that there are other reasons for investors to con- sider getting into hedge funds. “In addition to their potential to offer differentiated returns from traditional asset classes, hedge funds also have the potential to improve: one, risk/ad- justed performance; and two, downside protection of a portfolio.”


The price of growth


Despite the attractions of hedge funds, the long shadow pre- sented by high fees has frequently been a sticking point for investors. “High fee loads remain a challenge for certain inves- tors,” Cooper says.


The fees issue reared its head in an Alternative Investment Management Association (AIMA) investor survey. The key point it revealed was that investors are increasingly making a high level of transparency around fees and expenses a pre-req- uisite to any allocation.


The report asserts that hedge fund managers and investors are continuing to explore more “equitable compensation arrange- ments which meet their expectations”. This potentially sug- gests a power shift in favour of investors, with more varied and better fee models being offered by many hedge funds to investors. AIMA’s research also showed that North America had reclaimed the title of the most confident region for hedge funds, having trailed the UK for seven consecutive quarters. The reshuffle reflects resilience among North American fund managers, AIMA says, and could be a useful guide for inves- tors wanting to bring a hedge fund on board. And investors have gone big on hedge funds – at least when


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