The needs of clients have changed in two clear ways since the end of the crisis, with respect to hedge fund investing, according to Nicolas Campiche (pictured), chief executive officer at Pictet Alternative Investments: the investment approach and service expectations.
Performance remains a top priority for those who are now more willing to allocate to alternatives but as Campiche mentions, “Clients have started to focus on more specific investment needs. They are articulating what their objectives are. The first set of objectives relates to trying to enhance the overall performance of their portfolio and that translates into focusing on specific strategies that can add value in terms of incremental performance.
“The other broad set of objectives is diversification. There again, the primary goal is trying to identify strategies that truly create diversification i.e. uncorrelated to traditional asset classes.”
This sounds obvious, but the reality is that many multi-strategy FoHFs failed to manage investors’ expectations when financial markets collapsed in ’08. This prompted investors to demand a more granular view of their hedge fund exposures. In response, managers today provide a lot more transparency regarding the risk drivers of different strategies. “You can break down risk and return into very specific factors that completely change the way investors use hedge funds,” explains Campiche. In turn, investors can benefit from a portfolio adapted to their broader asset mix.
Take an investor who wants to have less equity directionality in their asset allocation. Long/short equity is the most likely substitute given a more conducive trading environment since 2012. The climate for stock-picking or alpha generation has improved markedly now that high asset correlations have subsided and the market can more accurately price fundamentals. “For example, our global long/short equity solution ended last year +23 per cent with a net market exposure of just 40 per cent, highlighting the ability of our selected managers to generate alpha,” notes Campiche.
Similarly, investors are looking to diversify their fixed income allocation amid the threat of higher interest rates. In this case, there are hedge fund strategies that provide a specific premium by investing in less liquid credit, such as distressed debt and structured credit.
Investors also have higher service expectations that go beyond transparency and reporting. In a nutshell, they require a closer proximity to their underlying investments. “They want to be part of the decision process and to have access to the same information we have” recognises Campiche. In some cases, investors are truly hands-on, meeting with managers that form part of their portfolio. In other instances, they request educational events to help train their own investment teams. Certain client segments also need expertise in setting up specific fund structures and marketing support.
In Switzerland, regulation requires pension funds to publish the TER for all of their investments. They need clarity on all the costs that are charged by a hedge fund manager; not just the obvious performance and management fees but every element that may be charged by the manager. “We’ve developed a capability to do this and can give clients full details of the cost structure of their portfolio,” states Campiche.
“Investors’ desire to define specific investment objectives as well as their higher service expectations are good for the industry,” believes Campiche. “They help investors make an informed judgment on what to expect from their hedge fund allocations in the future and allow us to partner more closely with them to achieve their investment objectives.”