David Richter, Chairman of the Public Markets Investment Committee at Grosvenor Capital Management, with nearly $20 billion under management, likes hedge fund investing in what could be a scary world.

Hedge Fund Diversification
Hedge Fund Diversification

Speaking at the Reuters HedgeWorld Conference in Chicago, the press shy Richter said in public comments that, unlike index return performance reported in the media, their risk adjusted returns in hedge funds investment has been more a positive experience.

Richter breaks down a robust hedge fund diversification strategy

Richter broke down a robust hedge fund diversification strategy into three primary categories: Niche equity strategies, opportunistic credit and “lessor correlated” strategies.

Niche equities strategies includes activist investing, where Richter has a diversification methodology breaking down their seven dedicated activist hedge fund investments based on market cap and geographic region specialization.  He likes activism in the US and Europe by shies away from the strategy in Asia, where he thinks the activist strategy will find less success.

In regards to equity investing, Richter likes finding “good companies in bad zip codes.” He looks for firms in troubled emerging market environments with good assets and cash flow good yield. “It’s a micro investment in the company, not a macro bet in the country and the firm typically finds exposure in 12 to 24 companies per year.

Value commodity plays

In regards to the “lessor correlated” strategies he likes relative value commodity plays, certain macro CTA strategies and hedging related strategies. “The main competition from certain hedge funds came from Wall Street banks and that competition is now gone,” he said in the panel discussion. “Everyone is worried about volatility and rising rate environment. We are looking for strategies than can profit from these challenging environments.”

Joe Wade, CIO Meritage Capital, a Texas-based family office, noted that their families uncomfortable with fixed income market, in particular the specter of principal risk.  Wade likes European long short equity managers because stocks in the US have outperformed Europe and he is looking for reversion to the mean.  In structured credit, he likes exotic strategies, particularly likes forced sellers, banks cleaning up their balance sheets. Increased allocation to macro CTAs looking for validation of the thesis to allocate further. Wade also allocates to discretionary managed futures, livestock traders. “It’s been a difficult environment for traditional trend followers,” he notes .  Larry Shover, who operates a managed futures mutual fund, said he sees divergence in commodity fundamentals which should generate opportunity, and he, like David Harding, “doesn’t by the excuse that government intervention has dampened returns.”