Focusing on superior risk-adjusted performance
As an independent division of Pictet Group, Pictet Alternative Investments benefits from the stability of the parent company, which last year collected USD15bn in net new assets. More than USD1bn went to PAI, which manages a total of around USD12.3bn in alternative assets including USD9.4bn in hedge funds.
According to PAI chief executive Nicolas Campiche (pictured), there is no obvious difference in approach between private and institutional clients; many of PAI’s private clients are large family offices that often apply institutional investment standards.
However, one major change over the last few years, according to Campiche, is that alternative investments in Switzerland are no longer considered a separate asset class. “Private equity falls into equity risk, while hedge funds, depending on the strategy, are included in different parts of an institution’s asset allocation,” he says.
“Clients tend to think more in terms of risk factors such as credit spreads, interest rates, liquidity and volatility, and build their portfolios either to benefit from those risk factors or to mitigate them.”
PAI is therefore concentrating today on helping clients blend hedge funds into their overall global asset allocation process. While Pictet Asset Management manages a number of internal single-manager hedge funds, PAI focuses purely on the selection of external managers.
Reflecting on the different approach that investors are employing, Campiche says: “One client might want risk-mitigating buckets that are uncorrelated with the rest of his asset allocation and therefore choose to concentrate on trading strategies. Another client could want an allocation to emerging debt and corporate bonds, and complement that with some distressed debt strategies in the portfolio.”
The point here is that institutions, not just in Switzerland but globally, are starting to think about how hedge funds can complement their portfolios to help them meet their risk/return objectives. PAI’s product range focuses on single-strategy products and customised solutions, offered either through traditional funds of hedge funds or customised portfolios.
“Some of our clients ask us to construct a portfolio of single managers, and that can be a fairly concentrated portfolio – five to 10 managers in a single strategy with very specific objectives,” Campiche says. “Smaller clients with less resources may prefer to invest in our trading or commodity funds of hedge funds to get that decorrelation benefit.”
Given that 2011 was hardly a stellar year for hedge fund performance, Campiche says that the top-of-mind concern for Swiss clients is whether last year was an outlier or ‘fat tail’ event, or whether there are actually structural changes in the marketplace that are preventing managers from generating alpha.
“That’s a question that pretty much all our clients would ask,” he says. “My answer is straightforward – I think that although performance was disappointing, it was a cyclical issue rather than a structural one.”
Over the past 12 months the majority of PAI’s inflows have gone into customised solutions and single-strategy products, which Campiche sees as an important trend. “The main focus for investors looking to add hedge fund strategies to their portfolios is how they get superior risk-adjusted performance,” he says “It remains the key question among our clients. Transparency and asset segregation are important considerations, but the most important remains risk-adjusted performance.
“The dominant theme we saw in 2011, and which continues to be a focus for clients in 2012, is investing in liquid, low-correlation trading strategies. Looking further ahead, distressed and credit strategies may also become a dominant theme, particularly the distressed space.”
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