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Chapter 2 – Investor considerations in a low yield environment

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For hedge fund investors, trying to enhance portfolios in the current low yield environment is a challenge. As such, strategy selection and risk management are key tools to provide end investors with diversified returns that both compliment their long-only allocations to traditional assets, and protect against whipsawing markets. 

This topic was discussed in detail in a panel session moderated by Lukas Daalder, Executive Director, CIO Investment Solutions, Robeco, entitled "Enhancing portfolios in a low yield environment".

Daalder asked the audience to vote on how long low yields will last. Only 11 per cent of the audience felt it would be for "Two Years Max", with 25 per cent voting for five years. However, the majority of the audience, 51 per cent, said that the low yield environment was a "New Reality" and that low rates would remain low for decades to come, signaling a clear concern that the markets face a long period in the trenches. 

"Structurally speaking we had many decades of a credit binge and it will take decades to deleverage," said Eric Ebermeyer, CIO, Neuflize OBC Investissements, which provides multi-manager solutions and has close to EUR40 billion in assets. 

Logically, therefore, one would expect government bonds to be unappealing. This was felt by the majority of the audience, with 52 per cent confirming that at current levels, government bonds offered low returns at high risk and were not worth it. Only one quarter of delegates felt that as long as there was a positive yield, bonds still held value at limited risk. 

"Mid- to long-term they don't look attractive but investors will still need to hold some government bonds in their portfolios. We see some short-term opportunities to go long bonds but they are very specific ideas that we implement in the book," said Simone Tarozzi, Head of Trading Strategies, Cardano, a prominent pension fund consultancy. 

Investors are rightly concerned over the lack of upside that could be on offer in their fixed income allocations over the coming years, and given the increased level of volatility in global equity markets, many are relying on FoHFs and seeding firms to seek out "extra juice" by reallocating to other assets. 

Indeed, when asked which other assets they would prefer to allocate to, 31.5 per cent of delegates chose liquid absolute return strategies, and 31.5 per cent chose hedge funds. 

"We've started to move more into liquid alternative strategies; not to a huge extent. It's really more of a structural rather than tactical change to identify where we can make money," confirmed Daniel Capocci, Senior Investment Manager, Architas, the multi-manager arm of AXA Investment Managers. He said that for 2016, Architas favours market neutral strategies. "Three years ago we were 40 per cent allocated to market neutral, but over the last couple of years we have favoured more event-driven strategies. Now that there is higher market volatility we have gone back to market neutral," added Capocci. 

Ebermeyer said that strategy selection ultimately depends on the individual investor. He said that insurance company clients are moving up the illiquidity curve and requesting more real estate, private equity, loan and infrastructure assets and that private investors were "definitely looking for liquid AR strategies. We have put in place target-based risk budget strategies to cap expected outcomes such as maximum drawdowns, while at the same time trying to compensate by minimising the impact of market corrections," explained Ebermeyer. 

With respect to hedge funds, Mark de Klerk, Head of Seeding Strategies at Tages Group, highlighted that there was a lot to be positive about. Tages Group is one of the most active seed investors in Europe, having seeded or provided acceleration capital to more than 10 funds over the last few years. This is, said de Klerk, one of the solutions that institutional investors are looking for with respect to Solvency II, as they look to meet their liability funding gap.

"Flows into hedge funds are continuing and our belief is that in a low yield environment, if you can do a `cash plus' type return in a portfolio of hedge funds, but also get a share of the managers' equity, that can help enhance returns for those investors who have a long-term investment horizon," said de Klerk. 

The AIF Factor

The AIF Factor gives five hedge fund managers three minutes to pitch why their fund should be considered by investors. This year's finalists included: Serone Capital, a structured credit specialist; Mint Tower Capital, a convertible and volatility arbitrage strategy; Puzzle Capital, a merger arbitrage strategy, and Done Hedge Fund, an equity market neutral strategy and London-based Devet Capital, a systematic market neutral strategy that uses statistical arbitrage to trade across commodity curves. 

Devet Capital falls into the bracket of `liquid AR strategies' and was deservedly voted this year's winner of the AIF Factor.

Irene Perdomo (pictured), Principal & Founding Partner, Devet Capital said: "We are so pleased that our strategy convinced this professional audience. They really liked our track record of consistent positive risk-adjusted returns, with controlled drawdowns, combined with a strict risk management approach. This is achieved through an efficient combination of machines for trade selection and human intervention for the risk management."

"This was the 4th year we've held the AIF factor and the five finalists, selected by an esteemed jury panel, delivered high quality, concise and effective pitches. With the audience as the ultimate judge, it really was a close call. Congratulations to our 2016 winner Devet and the runner-up Mint Tower," commented Amzallag.

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