Put Into Perspective – UBS Betting On Hedge Funds As Cure For Low Sovereign Returns by Skenderbeg Alternative Investments
“The business of central banks is like pornography: It’s not the real thing.” — Eugene Fama
UBS betting on hedge funds as cure for low sovereign returns
UBS Group AG is advising its wealthiest clients to stick with hedge funds. While the days of “double-digit and triple-digit returns” for hedge funds are over, they still generate enough to satisfy yield-hungry clients who face negative interest rates, said Mark Haefele, global chief investment officer of UBS Wealth Management.
“Their performance in the first half hasn’t been impressive but they provide diversification,” he said in an interview with Bloomberg. “They still provide a better risk-reward or different risk-reward than other parts like sovereign bonds.”
UBS in April boosted its recommended allocation to hedge funds to 20 percent from 18 percent, saying the strategy will provide stability from volatile markets.
The Fed’s to blame for hedge funds’ pain: CIO
Hedge funds have been underperforming for a few years, and the Federal Reserve could be to blame.
Dynasty Financial CIO Scott Welch believes that some of the central bank’s policies, coupled with investors’ fears since 2008, have challenged the traditional hedge fund structure and limited many of the tools needed for these institutions to thrive.
“If you think of what drives hedge fund performance, you’ve got four basic things: You’ve got leverage, you’ve got illiquidity, volatility and then you have manager skill,” he said on “Trading Nation”. “You think about the events following 2008, and leverage and illiquidity became very unpopular with a lot of investors.”
And according to Welch, quantitative easing from global central banks has removed volatility from the marketplace, and inadvertently robbed hedge funds of a key ingredient to their success.
“You have this environment where the tools that a talented hedge fund manager can use to try and drive performance just simply weren’t available to them,” Welch added.
Welch emphasizes that while investors could be questioning the fees they have to pay for an underperforming asset, hedge funds could actu-ally see the light of day further down the road.
“The question is not necessarily if they’re going to disappear, as to whether or not they’re going to be able to maintain their fee structure,” said Welch. “We’re already beginning to see that in the US, at least trying to raise rates even if some of the other major central banks are not. Once you have that divergence of central bank policy, I think you’ll start to see increased volatility in the market again.”
In other words, skilled hedge fund managers could see the tools they need at their disposal once again.
Incorporating alternatives into traditional 60/40 portfolios
In its recently released white paper “Finding a New Balance with Alternatives,” BMO Global Asset Management (“BMO GAM”) makes the case for incorporating alternative investments within traditional “60/40” portfolios.
A flaw in the 60/40 model
The historical reasoning for “60/40” – that is, 60% equities/40% bonds – is that the stability of bonds offset the volatility of stocks, while the higher returns of stocks offset lower fixed-income returns. But BMO GAM argues that this premise is no longer realistic, given ultra-low inter-est rates and consummately high bond prices.
If BMO GAM is right about the future of bonds, what choices are investors left with? They could accept lower returns, or take on more risk in pursuit of greater returns, but BMO GAM doesn’t like either of these options. Instead, they advise investors to find new sources of return by investing in alternative strategies, particularly actively managed ones.
Alternative investment strategies that are available to the retail market have grown increasingly popular over the past ten years, as illus-trated by the graphic below:
But investors can’t choose alternative funds blindly – they need to conduct due diligence to understand how an alternative manager or strat-egy can complement their overall portfolio.
Diversification within the alternative allocation is also important, and BMO GAM recommends “compiling a complementary blend” of active managers, while keeping correlation and risk in mind. Perhaps the easiest means of getting exposure to multiple alternative strategies is investing in one multi-manager fund. Such a fund’s “built-in diversification” helps answer the fundamental question of, “Is my portfolio diver-sified by manager and strategy?”
Investors willing and able to do the due diligence work themselves should consider strategy, performance, risk management, organization, and structure – among other items – in terms of differentiation, and not just bottom-line returns. To have a good balance of managers with-out diluting the contribution of any, BMO GAM recommends a pool of no fewer than six and no more than ten, with evenly distributed allo-cations to each.
As concisely as possible, BMO GAM summarizes the thesis of its white paper as follows: “An alternative allocation that combines expertise on manager research, asset allocation, portfolio construction and risk management should offer a flexible, portfolio-ready option.”
For more information, download a pdf copy of the white paper.
Damian Lewis: “Hedge-fund billionaires are misunderstood”
It’s fun to spend an imaginary million or two. Damian Lewis’s first purchase would be a private jet. “That would be the first thing I’d buy, undoubtedly,” he says. “Having been on a private jet only two or three times, it’s one of life’s great luxuries. I would do that. Then I might buy Liverpool football club.”
This discussion has come about because in his latest TV drama, Billions, the actor plays Bobby Axelrod, a US hedge-fund gazillionaire with blue-collar roots, a passion for Pearl Jam and a fine line in cashmere hoodies. “It’s al-most like there’s a new class of young billionaire,” says writer David Levien. “They’re 40, self-made, and casual in a way you don’t see depicted in the me-dia. These are guys who call their own shots, fly around in their own planes and seem to have the world at their feet.”
The show sets Axelrod on a collision course with US attorney Chuck Rhoades, played by Paul Giamatti. Rhoades is convinced Axelrod is using illegal insider trading and vows to bring him down. Over 10 episodes, the two titans – one in the public sector, one in the private – go at it like Foreman and Ali.
But Billions is more nuanced than just a slugging match. Lewis’s Axelrod – like most of his characters – is smoothly inscrutable. He genuinely seems to be a family man, grounded in a working-class background (to the extent that you can be while buying $84m mansions in the Hamp-tons).
“It’s as much a study of people as of kings and kingdoms,” says Lewis. “A study of what personality types tend to win these positions in our society – and what they’re prepared to do to keep themselves there.”
Lewis met with several “hedgies” to prepare for the role, to “examine them” and try and see if he could find any common ground. “I think they’re misunderstood,” he says. “I think very few people still understand the distinction between CEOs on Wall Street and the hedge-fund billionaires operating separately.” But his main reason was to try and hear an “intellectual defense of what they do, given that they know what they do is disliked”.
The defense he got, he says, was that hedge-fund managers are market regulators. “They go round and single out overvalued, underperform-ing companies. Yes, of course they hope to make some money on the bet that this company is going to fail. And yes, there has been adverse press suggesting they then manipulate markets and press, to convince shareholders to withdraw their money to drop the share price, so they can then make their money. All of that might be true, but if it’s clean and people are behaving honorably and honestly, then that is also a compelling argument. That they are there to, if you like, crusade on behalf of the shareholders.”
Hedgies as white knights? Surely he doesn’t truly buy that?
See full PDF below.