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Funds of hedge funds bring bargaining power

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By Ilario Scasascia (pictured), Harcourt – A well-diversified portfolio should include investments that offer alternative sources of returns, which can be found outside the world of conventional, long-only, bond and equity strategies. Sophisticated investors know this and understand, that when it comes to investing in non-traditional assets, hedge funds represent an important building block.

Hedge funds will therefore remain a staple in institutional investors' portfolios. In fact, after the financial crisis of 2008, hedge fund assets have been growing at an annual rate of 10 per cent and this growth is estimated to continue*. Growth has been supported by increased transparency and improvements in fee structure. So what is it that hedge fund investors want? The answer is straightforward enough: The main objective for hedge fund investors is to achieve its targeted return by allocating to a balanced portfolio, which benefits from the most significant alternative source of returns across different strategies. Simply put: Hedge fund investors seek absolute returns which exhibit lower correlations to traditional markets. Therefore, the prime question should not be what investors want, but rather how they can go about getting it.

As the world of hedge funds encompasses a myriad of different strategies, the conclusion that most investors come to is that they need a portfolio of hedge funds, not just a single hedge fund. This will lead them to three possible options: building their own team of experts, using consultants and advisors or investing via a fund of hedge funds. Building your own team might be feasible for very large investors, but for most this is not an effective use of capital. Accessing the knowledge of advisors and consultants is a popular option, but tends to be time intensive. Then there is the fund of hedge funds route, where the investor gets access to a diversified portfolio of hedge funds, managed by a team of experts. However, investors are understandably concerned about fees. But with the right kind of fund of hedge funds, this need not be a concern. A fund of hedge funds can and should use its size and experience to negotiate preferential fees and pass on these savings to its investors.

It's not just lower fees that a capable fund of hedge funds can provide, it is also access to the best performing funds. This includes both the smaller, harder to find hedge funds – often the ones making the better returns – and the larger funds that many investors don't have access to, due to investment size limitations.

Harcourt, the alternative investment boutique of Vontobel Asset Management, has been at the forefront in putting its expertise in hedge fund advisory to use for its clients by building fund of hedge fund portfolios, negotiating preferential fees and access and then passing on those benefits to its investors. For nearly 15 years, a major Swiss pension fund has been relying on Harcourt's expertise in hedge fund advisory to manage a fund of hedge funds strategy. By providing the pension fund with Harcourt's selection skills, combined with preferential access and fees to hedge funds, the strategy has provided stable returns averaging over 5 per cent annually since inception, and beating it's respective benchmark by a cumulative 44 per cent. In order to provide investors with simplified access to this successful strategy, it has been made available in a Sicav-SIF structure as a Harcourt alternative leaders strategy, offering institutional investors easy access to a proven and solid fund of hedge funds strategy. 

*Source: KPMG, Growing Up: A new Environment for Hedge Funds 

Please contact for further questions or information: Hubert de Froberville, Vontobel Asset Management SA, London Branch, 22 Sackville Street, London W1S 3DN. Tel: +44 (0)20 7255 8323. Email: [email protected].

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