Marcus Storr explains why FERI is focusing on risk control, liquidity and specialised long/short equity exposure as market concentration and leverage concerns mount.
Marcus Storr, Head of Alternatives at FERI, believes his team has navigated the recent period of volatility. The past several months have crystallised the notion that, in the current environment, FERI’s preferred allocation is to highly specialised long/short equity managers. “We do not invest in broad global equity offerings; this allows us to measure and manage risk more precisely. In recent years, emerging market equity long/short managers have delivered particularly strong results.” When making these investment decisions, for FERI, the starting point is always assessing the risk appetite of the client. “Family offices have fewer regulatory constraints, a longer investment horizon and greater flexibility in managing risk. Contrastingly, institutional investors operate within a stricter, rule-based framework.”
Additionally, the demands administered by their clients require strict liquidity management. FERI pays close attention to any mismatches that occur between manager requirements and underlying investments. “Our clients value liquidity highly. The majority of our portfolio can be redeemed quarterly.” FERI is averse to investments in illiquid assets which create “a structural mismatch that we find unacceptable.”
Despite the importance of managing the liquidity profile of assets, the point that Storr is most keen to highlight is leverage, and how, in his opinion, leverage has reached unsustainable levels. “It’s a two-fold issue. Investors are ultimately bearing much of the costs through pass-through fee structures; they are not only paying management fees but also the operating costs of the platform itself,” he further adds, “This also requires high levels of leverage. We are actively avoiding highly leveraged strategies, a significant contrast to much of the industry.”
FERI firmly believes that in an environment where regimes change frequently, it is fundamental to not be overexposed. Moreover, despite markets enjoying a strong bull run, much of their growth has been predicated on a narrow collection of stocks, meaning that sudden downturns could create a highly volatile environment. “If markets become volatile, leverage can quickly become a major problem. No matter the asset class you invest in, excessive leverage tends to amplify market stress.”
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