Feature – Hedge funds
markets and generate returns when market volatility and dis- persions are elevated.”
Geopolitical issues
Increasing allocations to hedge funds could be fuelled by a few factors: asset owners having a desire to diversify, or concern over the risks associated with persistent geopolitical tensions. Given the war in Ukraine, this is only going to intensify. “For investors who have the ability and willingness to build a direct hedge fund portfolio, we favour multi-strategy funds due to their ability to dynamically allocate across strategies without involvement of the investor,” McGuane says. On the comeback trail, according to research undertaken by BNP Paribas AM, quant equity and quant multi-strategy are also expected to make a big comeback. These strategies outper- formed the overall hedge fund industry last year, having under- performed in the previous three years. Interestingly, Asia Pacific and Europe are now the most sought- after regions. Investors are looking to increase exposure to equity long/short funds in these regions and have also expressed an interest in expanding their European credit exposure.
Stern stuff This comes after the US asset owner picture for the asset class is a positive one. It gives an indication of how pensions can exploit hedge funds in a way European counterparts probably have yet to fully grasp.
“US institutional investors are acutely aware of the long-biased exposure they have in their portfolios to equities and fixed income,” McGuane says. “They are now up to speed with hedge funds due to the funds’ ability to help diversify portfolios. “We suspect that US institutional investors like that hedge funds can go long and short across multiple asset classes,” he adds. “Hedge funds have shown the ability to opportunistically allocate capital as different markets become more or less attractive.”
As a snapshot, the $25.4bn (£19.4bn) City & County Employ- ees’ Retirement System in San Francisco allocated, at one time, a whopping $1.1bn (£840.4m) across a number of hedge funds, although that has been cut back significantly. The $76.6bn (£58.5bn) Oregon Public Employees’ Retirement Fund has $250m (£191m) invested in hedge funds. And the $54.2bn (£41.4bn) Maryland State Retirement & Pension System was an active investor in hedge funds pre-Covid, placing $200m (£153m) into Standard General’s event-driven master fund. However, the US’ biggest public pension plan, the $500bn (£383bn) California Public Employees’ Retirement System (Calpers), has a different take on hedge funds. This is based on their fees being “problematic”, according to pension fund chief
44 | portfolio institutional | April 2022 | issue 112
executive Marie Frost. She is not alone in this concern, with many institutional investors citing charges as a key reason for not using hedge funds.
That said, average hedge fund management fees have edged down in recent years from 1.5% of assets under management to less than 1.4%, according to data provider HFR. This could also be seen within a wider context of hedge funds being placed as the villains of the investment world. Think the nihilism of the Joker from Batman, but with an expensive pad in California. This narrative was played out when a group of retail investors clubbed together on social media platform Red- dit and attacked hedge funds’, rather inexplicably, short posi- tions on GameStop. But hedge funds are made of stern stuff and often thrive on the controversy that comes their way. This can be used by investors in a number of ways. The traditional benefit argument of insti- tutional investors using hedge funds is as a diversifier. “The primary objective of most hedge funds is to provide superior risk-adjusted returns with low correlations to traditional asset classes: stocks, bonds and real estate,” McGuane says. Hedge funds achieve this by using a broad array of strategies to make investments in mispriced securities regardless of size, style or other sector classification. “Hedge funds also have the ability to provide downside protection when broad markets selloff in times of stress,” McGuane says. “When market vola- tility becomes elevated, hedge funds have a track record of being able to generate returns when dispersion is higher.” And this is a key part of why hedge funds can pay such an important role for investors in the current environment.
Hedge funds have shown the ability to opportunistically allocate capital as different markets become more or less attractive.
Joe McGuane, Callan
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