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Institutional Investment in Hedge Funds: Evolving Investor Portfolio Construction Drives Product Convergence
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The performance of CTA and macro-focused hedge funds
during the 2008 crisis was one factor that has helped spur
interest in this new portfolio configuration. These managers
were able to post uncorrelated returns and generate large
profits at a time when equity markets were down sharply. For
calendar year 2008, the Morgan Stanley Capital International
Indices (MSCI) global equity indices were down -40.3% and
the S&P 500 index was down -37.0%, while the Hedge Fund
Research, Inc. (HFRI) systematic diversified index was up
+17.2% and the Barclay Hedge discretionary traders index was
up +12.2%.
As highlighted in our recent CTA Survey,
Moving Into the
Mainstream: Liquid CTA / Macro Strategies and Their Role
in Providing Portfolio Diversification,
many CTA and liquid
macro managers were also able to provide important liquidity
to investors in a period when they were unable to pull money
out of other investments. These two factors together were
coined the ’2008 effect” and helped create a perception that
having an allocation to CTA or macro strategies could work to
substantially improve diversification and enhance returns by
adding a differing source of beta to the portfolio.
“ The biggest thing I’ve seen is pensions and endowments
and other allocators now knowing where there betas are
and looking at macro and nondirectional hedge funds to
add to their portfolios to move them more along the
efficient frontier,”
– Endowment
“ People are starting to group macro with long volatility
strategies to call them the stable value hedge funds.
People have come to believe that market dislocations are
accompanied by high periods of volatility and that these
strategies generate ‘stress’ returns,”
–<$1 Billion AUM Hedge Fund
“ Directional hedge funds and stable value hedge funds
complement each other. Directional funds establish profits
in certain markets and stable value funds provide returns in
other markets,”
– <$1 Billion AUM Hedge Fund
DIRECTIONALITY
LOW
HIGH
Chart 16
Directional
Macro
Absolute Return
Long/
Short
Event
Driven
Macro
& CTA
Distressed
Relative
Value
Arbitrage
Market
Neutral
Volatility
& Tail Risk
Active
Equity &
Credit Long
Only
Passive
Corporate
Private Equity
Equity Risk
Public Markets
Private Markets
Actively
Managed
Rates
Commodities
Infrastructure
Real Estate
Timber
Stable Value /
Inflation Risk
LIQUIDITY
HIGHLY LIQUID
ILLIQUID
Chart 8: Grouping of Investment Products by Stable Value / Inflation Risk
Source: Citi Prime Finance