Basic HTML Version
Institutional Investment in Hedge Funds: Evolving Investor Portfolio Construction Drives Product Convergence
I
21
adequately structured reward system is an important factor
for success, and one that far too many institutional investors
are still unable to offer.
Risk-Based Portfolio Groupings Focus on
Low-Directional Products
Investors that are moving their entire portfolio to a risk-
aligned approach note that after they have determined their
equity risk and stable value/inflation exposures, they are then
left with strategies that offer them little to no beta since they
are not aligned with any specific market returns. There are
two types of these exposures, as shown in Chart 9.
In the public markets, the strategies most able to provide this
type of exposure are those absolute return strategies that
look at pricing inefficiencies and run at a very low net long
or short exposure. These strategies are seen by many as
delivering the classic hedge fund alpha sought by investors
back when the first wave of massive allocations began in the
early 2000s.
There are also a group of strategies that are either fully in the
private markets or that bridge the private and public markets
and base their return stream around real assets, or what some
investors refer to as hard assets. This category is growing in
popularity across the institutional investor spectrum. These
strategies are typically offered by private equity managers
“ There has been a lot of emphasis on on-risk, off-risk
strategies based on signals. Pensions are approaching
stable value from a tactical side. They’ll sell S&P futures
and buy treasury futures and vice versa,”
– <$1 Billion AUM Hedge Fund
“ We’re looking at a number of options or overlay strategies
because we also have tail risk on the liability side via rates.
If our managers are up 30% on their risk assets and we’re
up only 15%-17% because we’ve applied these overlays,
we’re okay with that because our target is 8.75%,”
– US Corporate Pension
Chart 17
DIRECTIONALITY
LOW
HIGH
LIQUIDITY
HIGHLY LIQUID
ILLIQUID
Directional
Macro
Absolute Return
Real Assets
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
Chart 9: Grouping of Investment Products by absolute return and real asset
Source: Citi Prime Finance
“ Our third bucket is real assets. This includes real estate,
infrastructure and this is where physical commodities would
go but we don’t have a lot of commodities,”
– Sovereign Wealth Fund
“ If people can get the stomach and the resources to really
diligence infrastructure in the frontier markets or even
Africa, there’s a huge opportunity there. Even simple things
like toll roads. That’s a great investment. You see something
like that but it’s hard to take advantage of,”
– US Corporate Pension