“A new golden age”: Why industry pioneer Dixon Boardman believes hedge funds are now the place to be

Dixon Boardman, Optima Asset Management

For Dixon Boardman, the CEO and founder of Optima Asset Management and renowned fund-of-hedge funds pioneer, the dramatic turbulence that shocked markets earlier this year is unlike anything ever seen during his three decades-plus of investing.

Boardman – an industry trailblazer who launched Optima back in 1988 – believes the spiralling Q1 drop was more sudden and swift than even the epochal Wall Street Crash of 1929, while the sharp rebound that sent stocks soaring despite the ongoing coronavirus crisis was almost as remarkable.

“There’s never been anything like what happened in March,” says the industry veteran, reflecting on the 2020 turmoil. “It’s absolutely extraordinary - I’ve never known anything like it. We are, in a sense, in uncharted territory.”

All change

New York-based Optima manages money across an assortment of funds-of-funds, single-manager hedge funds, and multi-manager programmes built for institutional and high-net worth investors.

The long-running firm was acquired last year by FWM Holdings, the parent of Forbes Family Trust, a global multi-family office group which originally managed the wealth of the Forbes family before expanding to other family offices and wealth groups. The group has some USD6 billion in assets under management.

The current coronavirus-driven downturn is setting the scene for a substantially-altered investment landscape, says Boardman, offering up a wealth of lucrative investment themes and ideas to a hedge fund industry that has frequently struggled with decidedly lukewarm returns in recent years.

“I’ve been doing this for 32-odd years now and during the first 20 years, we had the wind at our back all the way,” he observes.

“Hedge funds tended to make money when the market went up, and they made money when the market went down. That's why people paid such large fees for them. But while some hedge funds have been able to continue to do that, by and large over the past decade they have not been the flavour du jour for investors.”

However, Boardman believes all that is now set to change.

Outlining his evolving perspective, he says the volatility that has torn through markets this year heralds a new “age of anxiety”, which will trigger sharp swings in market sentiment from extreme optimism to extreme pessimism. Against that backdrop of uncertainty, alternative investment managers’ ability to hedge positions will provide investors with effective downside protection and diversification.

“We’re going to have more volatility. We’re going to have disruption. So, with the market at these levels, you wouldn’t want to be long-only,” he explains.

Instead, he adds, “hedge funds will become the place to be from an investment point of view.”

Gaining an edge

As markets recover from the H1 ruptures, Boardman had identified several emerging areas of opportunity, both sectorally and geographically.

In equities, US healthcare and biotech stocks are “well-positioned” to benefit going forward.

Earlier this year, the firm unveiled its USD30 million Optima Healthcare and Biotechnology strategy, managed by four portfolio managers each trading a specialist healthcare sector.

“America leads the way in healthcare, and there are tremendous opportunities both on the long side and the short side. The development of a vaccine for Covid-19 will be a pivotal moment. The economy will boom, including the airlines and the cruise ships,” he says.

“But putting the coronavirus aside for a moment, I think that there are very strong secular trends in healthcare and in biotech that the US is well positioned to benefit from.”

Other areas of opportunity that Boardman points to include China, India and Asia generally, where valuations are cheaper in the absence of the sort of 10-year bull market seen in developed western economies. He also sees an assortment of opportunities for macro-focused hedge funds as well as market neutral strategies.

“A diversified mix of macro and market neutral strategies has the potential to produce stable single-digit returns. This is much more attractive than the almost non-existent yields you're getting in treasuries,” he explains.

“The edge that hedge funds have versus conventional money managers in this environment is their ability to concentrate their positions in the highest conviction ideas, both long and short, and to actively manage exposure.

Shock to the system

Reflecting on how 2020’s unprecedented events are likely to shape longer-term patterns, he describes the pandemic as a “once-in-all-of-our-lifetimes shock” to the global economy, and believes its impact is a critical inflection point for markets.

“In the old days, during a bull market, liquidity and low interest rates would dampen the volatility, so buying the dip and sticking with high momentum stocks was effective,” he says.

“I’m not saying that I’m a super-bear, but I think it’s going to be much more tricky to navigate the market going forward.”

Underlining the point, he continues: “I do think, by and large, the smartest money managers in the world have gravitated towards hedge funds because of the high fees, and there are some out there who are just extraordinarily talented and really worth investing with.”

However, he also points out how important due diligence and experience are in investing in hedge funds. “You've got to be highly selective about managers,” he observes. 

The discussion switches to the Covid-19 lockdown - which has seen offices closed, international travel halted, and investor-manager meetings moved to the digital arena - and its potential far-reaching impact on hedge fund businesses.

“Everyone’s been doing Zoom calls, but it’s really not the same thing as building a personal relationship,” he remarks. “If you already have an existing relationship with a manager, then a Zoom call works pretty well. But if you're trying to understand what makes a new manager tick, I don’t think it’s the same thing at all.”

Turning to how distancing measures have weighed on portfolio performance, he says: “A hedge fund manager typically travels a great deal to meet with company managements and conduct research, to get an edge on their investments. They tend to concentrate on a fewer number of positions. Not being able to travel is a disadvantage.”

In the end, though, Boardman remains highly confident in his outlook for the sector, and maintains that such obstacles thrown up by the current coronavirus crisis ultimately pale in comparison to the “tremendous” prospects that lie ahead for the sector as a whole.

“I believe that we are on the cusp of a new golden age for the hedge fund industry.”