The difference in performance over the past two years among the various alternative investment styles is increasing the requirement for active management of alternative portfolios, according to Geneva-based 3A, the alternative asset management division of the SYZ & CO Group.
In the year to November 2002, alternative funds as a category made a significant contribution to the performance of a diversified portfolio, registering an increase of +1.96 per cent (CSFB/Tremont Hedge Fund Index) as opposed to a 17.0 per cent drop in world stock markets (MSCI World USD index) for the same period.
There was, however, a wide variation in the returns provided by the various alternative investment styles. For instance, global macro managers, who focus on the development of key macroeconomic variables, achieved an overall performance of +13.6 per cent, while the funds specialising in long/short equity strategies lost 2.3 per cent during the same period. There was also a variation in the performance of the different sub-styles within the relative value and credit strategies.
Tony Morrongiello, CEO of 3A, said:"The active management of allocation by investment style in alternative portfolios is a necessity today and should be used by fund managers to complement their usual bottom-up approach to manager selection".
3A has identified the key factors determining the future performance of approximately 20 different alternative investment styles. It indicates, as an example, that funds focusing on merger arbitrage are influenced by, among other factors, the economic production cycle.
In order to select the alternative strategies which are likely to be the most profitable over the next few months, 3A produces regular forecasts for each of the key factors relevant to that style. These macro-economic forecasts are based on 3A's proprietary "fog-lights", a set of quantitative models for macro-economic forecasting developed by Paolo Luban, a Partner of SYZ & CO and the SYZ & CO research team.
Based on these studies, 3A recommends an overweight position in global macro and distressed/high yield securities strategies in the coming months. On the other hand, 3A is currently underweight in the long/short equity, fixed income arbitrage and merger arbitrage strategies. Its position in convertible arbitrage funds is neutral.
Background Note: 3A - Alternative Asset Advisors is the division of the SYZ & CO Group specialising in alternative asset management. Its main business is to analyse and select the best hedge funds to be included in alternative multi-manager portfolios with specific characteristics in terms of performance and volatility. 3A offers a number of alternative investment products.
In particular, 3A manages two funds of hedge funds, segregated portfolios for both private and institutional clients, and several structured products in the form of "Notes". With 20 members of staff, including 9 analysts, and approximately US$1bn in assets under management, 3A is one of the leaders in alternative asset management in Switzerland
The performance of the ALTIN fund of hedge funds, listed in London and Zurich, and managed by 3A, stood at +6.3 per cent in the year to 30 November 2002 as opposed to +1.92 per cent over the same period for the CSFB/Tremont Hedge Fund Index.
Eric Syz, Founding Partner of the SYZ & CO Group, noted: "70 per cent of this outperformance in ALTIN's net asset value stems from the selection of managers and their allocation within the various styles, but 30 per cent of this outperformance comes from the allocation of investment style by 3A, a figure that is far from negligible".