There has been a clear evolution on how investors look at, analyze and use hedge funds in their portfolios. Institutional investors are no longer treating hedge funds as an asset class, says Daniel Celeghin of Casey Quirk. Rather, they are assessing hedge fund strategies on an investment basis.
"Hedge funds are too diverse to be considered an asset class. The risk/returns are too different for the various strategies ranging from dedicated short sellers to commodity trading advisors to distressed. They may share the same fee structure and share unconstrained approach i.e. none of them have an unconstrained benchmark, none have to be fully invested. That's where the commonalities stop. Unlike traditional managers, hedge funds tend to have the bulk of their net worth in the fund. Because of this alignment, fees, non benchmark constrained mandate, you can't say this is an asset class," Celeghin added.
The financial crisis accelerated this trend. Some investors thought they were hedged and were going to have absolute returns. Many had long/short strategies because they were comfortable with them and they were easier to understand. Long/short equity was down 32% and that was a huge disappointment, adds Celeghin. Other pensions had their portfolio allocated to CTAs and were up for 2008. "Institutional investors realized now the strategies were as different as night and day."
In the current issue of Infovest21\'s Investor Focus, this message comes across with two of the pension interviews. San Bernardino County Employees' Retirement Association says there are looking for long/short equity specialists for a $150 million mandate. That allocation will be part of the long/short equity portfolio, not the hedge fund allocation. Similarly, the State of Wisconsin Investment Board plans to allocate 2% of its assets to multi-asset strategies which will include a diversified absolute return multiple manager hedge fund portfolio.
Hedge fund/fund of funds searches expected to be strong in 2010
A need to shore up funding gaps is reviving pensions' appetites for hedge funds and funds of funds.
A recent survey of 70 North American consultants by eVestment Alliance and Casey Quirk found that managers with strong capabilities in developed and emerging markets stocks, global equities, hedge funds and funds of funds will be in most demand in 2010.The ranking by asset category is:
Highlights include:
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