Hedge Funds And Liquid Alternatives – Put Into Perspective by Skenderbeg Alternative Investments
“One of the largest risks in the investing world is not simply the risk you are taking, but the risks those in the environment around you are taking.”
– Mike O’Rourke
Hedge fund assets seen growing by quarter trillion in one year
Yarra Square Partners returned 19.5% net in 2020, outperforming its benchmark, the S&P 500, which returned 18.4% throughout the year. According to a copy of the firm's fourth-quarter and full-year letter to investors, which ValueWalk has been able to review, 2020 was a year of two halves for the investment manager. Q1 2021 hedge fund Read More
In just one year the hedge fund industry’s assets under management are expected to climb by a quarter trillion dollars. Yes, that was a quarter trillion. Agecroft Partners, a third party hedge fund marketing firm, said in a recent update that despite funds underperforming the S&P 500 index, assets continue to flow into the sector. Don Steinbrugge, Agecroft MD, said that there has been a constant flow of negative stories about the hedge fund industry over the past couple years…“However, contrary to these stories, eVestment recently reported that 2Q 2015 hedge fund asset inflows were the 2nd strongest quarterly inflows since the third quarter of 2009, bringing total industry assets to a record $3.1 trillion,“ Steinbrugge said.
Hedge funds see $76 billion net inflow in H1 2015
The global hedge fund industry has seen a $76bn net inflow of assets through the first half of 2015, bringing the size of the industry to $3.22tn. The second quarter saw the greater amount of inflows from investors, with $48bn in Q2 compared to $29bn in first quarter. Single-manager hedge funds specifically saw net inflows of $52bn in Q2, three times as much as the $18bn net inflow of assets they recorded in the first quarter. CTAs, on the other hand, had a net outflow of $5bn in the second quarter, eroding the $11bn growth they had seen in Q1.
US foundations continue to grow their hedge fund portfolio
Foundations, a key and growing source of capital for hedge funds, account for over 18% of all hedge fund investors worldwide, according to Preqin’s Hedge Fund Investor Profiles. Ninety percent of these are based in the US.
On average, US-based foundations have been investing in hedge funds for 11 years. Over this time, their hedge fund allocations have steadily increased. In 2010, the average allocation stood at 14.5%; this grew to 16.9% in 2012. Currently, US-based foundations allocate approximately 18.4% of their total assets to hedge funds.
US-based foundations have shown a growing appetite for hedge funds over a sustained period of time and account for 10% of all capital in-vested in hedge funds today. With many US-based foundations likely to continue to invest more capital in hedge funds going forward, the volume and experience of such investors means they will remain a crucial source of capital for hedge fund managers.
Forward offers up 7 things to know about liquid alternatives
Liquid alternatives offer retail investors the opportunity to manage portfolio risk, and why shouldn’t retail investors want to emulate the time-tested strategies of high-net-worth individuals and institutions? Lack of understanding is perhaps one good reason, and in response to this challenge, Forward has published a new white paper titled 7 Things to Know About Investing in Liquid Alts.
The “7 things” are outlined below:
- Alternatives are designed to control risks – not chase returns: Contrary to the popular perception of hedge funds being „aggressively managed portfolios,“ the truth is that hedge funds are called „hedge funds“ because they hedge.
- Alternatives are designed to make diversification more effective in any market climate: The objective of a „60/40“ portfolio is to hedge equity risk through bond-market exposure, under the thinking that stock-market losses can be hedged from bond-market gains and interest income. But today, with interest rates at historic lows, the income component of this hedge has nearly disappeared. Adding liquid alternatives to a portfolio, by contrast, offers the prospect of increasing diversification in both up and down markets.
- History suggests alternatives have mostly performed as intended: Although liquid alts are a fairly recent phenomenon, hedge funds have been pursuing alternative strategies since the late 40’s, leaving a lengthy track record behind. Regardless, Forward thinks the fair-est period of evaluation is 2007-2010, during the broad market’s most recent downturn, when equity hedge funds posted much lighter losses than the S&P 500.
- Liquid alt strategies come in many flavors and serve a variety of objectives: Different alternative strategies can help achieve different objectives. For example, managed futures and long/short equity exposure have inflation-protection benefits, while market neutral and multi-alternative funds can help balance income with growth, and nontraditional bonds funds can help stabilize income. Considering „liquid alts“ as a single asset class is a mistake.
- Measuring performance is less straightforward with liquid alts than with traditional mutual funds: While returns are important, they are not the only measure of performance for any investment, especially alternative investments. Statistics such as the Sharpe Ratio, Maximum Drawdown and others can prove to be just as informative as returns.
- Alternatives are not a separate asset class and can neatly fit into an existing asset allocation: For example, long/short equity exposure could be allocated within the US equity sleeve of an existing portfolio; long/short credit could be added to the bond sleeve; frontier-market stocks to the international equities sleeve; and emerging-market corporate debt to the international bond sleeve. Within this model, a 20% allocation to liquid alternatives would be built from allocations to the existing sleeves of the portfolio without altering their proportional balance.
- To evaluate an alternative, you have to understand how it works.
See full PDF below.