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Put Into Perspective – Goldman Pitches Hedge Funds To Insurers After AIG Scales Back

Put Into Perspective – Goldman Pitches Hedge Funds To Insurers After AIG Scales Back by Skenderbeg Alternative Investments

“It is ALWAYS okay to miss out on an opportunity, as opportunities come along as often as a taxi-cab in New York City. However, it is IMPOSSIBLE to make up losses as you can never regain the time lost getting back to even.” — Lance Roberts

UBS boosts global hedge fund allocations amid market volatility

  • Allocation in model portfolio increased to 20% as of April
  • Share of hedge funds gained one-third since beginning of 2015

UBS Group AG boosted its recommended allocation to hedge funds for the second time in as many years, saying that the strategy will provide stability amid volatile markets.

The bank increased the share of hedge funds in its global model portfolio to 20 percent from 18 percent as of April, after raising the alloca-tion from 15 percent in 2015, Kelvin Tay, Singapore-based chief investment officer for Southern Asia-Pacific at UBS Wealth Management, said in an interview. UBS, which managed 272 billion Swiss francs ($282 billion) of client assets in its wealth-management unit in the Asia-Pacific region year-end, cut the proportion of high-grade bonds by two percentage points to 11 percent.

The prospect of slowing growth in China and expectations of rising interest rates in the US have sent global stock markets tumbling over the past year. Hedge funds haven’t been immune to the selloff, with the Eurekahedge Hedge Fund Index up 1.5 percent last year for the lowest return since 2011, and down 0.5 percent in the first quarter. Still, hedge funds, especially those that invest across multiple assets, have tradi-tionally provided investors with protection in times of market dislocation and also offer better returns than bonds, UBS said.

“Hedge funds still offer a more attractive risk and return trade-off than bonds, whose yields have declined further,” UBS wrote in a report published in March. “We anticipate a well-diversified multi-strategy” will return 5 percent a year in US dollar terms over the next five years, net of fund fees, UBS said in the report.


Goldman pitches hedge funds to insurers after AIG scales back

  • Hedge funds still right bet to diversify holdings, Siegel says

Goldman Sachs Group Inc.’s Mike Siegel, who oversees about $190 billion at the bank’s asset management arm, said insurers should consider adding to hedge fund holdings, even after such investments slumped, to help diversity portfolios comprised mostly of low-yielding bonds.

“Companies have tremendous capital, they need to find places to put it to work,” said Siegel, the head of insurance asset management, dis-cussing results of the bank’s annual survey in the industry. “They don’t want to put it to work in any one sector.”

Hedge funds can be a tough sell for Wall Street after they underperformed the Standard & Poor’s 500 Index for seven straight years. Ameri-can International Group Inc. decided this year to exit at least half the hedge funds in which the insurer invested, with Chief Executive Officer Peter Hancock lamenting a “very negative experience.” New York City’s pension for civil employees voted to exit its $1.5 billion portfolio of hedge funds, determining that the investments didn’t perform well enough to justify high fees.

“Part of it is to be thoughtful and selective about which hedge funds you’re in, and making sure you have a diversified portfolio,” he said. “When you take a look at insurance companies that have gotten themselves into trouble for the last decades, it’s been undue concentration in a single asset class that then went bad.”


Retiring baby boomers to continue liquid alts boom?

Are liquid alternatives the next wave in asset allocation? Matthew Glaser, Managing Director and Portfolio Manager/Analyst at Lazard Asset Management, thinks so. In a recently published Lazard Insights white paper, Mr. Glaser highlights the advantages of liquid alts – long/short equity funds in particular – and asserts that these investments will become increasingly attractive to the growing retirement-age population. Indeed, baby boomers may be responsible for much of the liquid alts “boom” thus far.

Advantages of Liquid Alts

Alternative investments include everything outside of stocks, bonds, and cash. This broad category of investment choices not only includes hedge funds, private equity, real estate, and commodities, but also “exotic assets” like art and collectible wine. But while these alternatives may have the advantage of having low correlation to traditional assets, they each suffer from varying degrees of illiquidity.

As evident by their name, liquid alternatives – by which Mr. Glaser means ’40 Act mutual funds pursuing hedge-fund strategies – are liquid, which is their primary advantage over other illiquid alts. While many of the illiquid (or less liquid) alternative products are accessible only by high-net worth individuals and institutional investors, liquid alternatives are open to all investors.

Alternative mutual funds have daily liquidity and all the transparency and regulatory oversight of traditional mutual funds. They also typically have lower fees, lower initial minimums, and simpler tax reporting than hedge funds. At the same time, liquid alts provide exposure to hedge-fund strategies, such as long/short equity, which have low correlation to traditional assets. Thus, allocating to liquid alternatives alongside traditional assets can potentially dampen the volatility and enhance the risk-adjusted returns of the portfolio.

Long/Short Equity

One criticism of liquid alternatives is that they’re “hedge-fund light” and unlikely to perform as well as “real” hedge funds. Mr. Glaser acknowledges that this may be true of some strategies, which can’t work as well (or at all) under the confines of the mutual fund structure. But this isn’t true of the original and still most popular hedge-fund strategy: long/short equity.

Long/short equity portfolios consist of “long” (owned) and “short” (sold-short) positions. Since the value of a short position increases as the value of the underlying asset decreases (and vice-versa), long/short equity portfolios have low correlation to the broad stock market, since the short portion of the long/short portfolio will tend to have an inverse correlation. Long/short strategies also allow investment managers to express negative views on a stock by doing more than just not owning it – thus doubling opportunities for alpha.

Since long/short equity strategies have low correlation to the broad stock market, they can provide diversification benefits when added to an existing portfolio of traditional, long-only assets. The short aspect of long/short portfolios also provides natural downside protection. As shown in the image below, the HFRI Equity Hedge Index of long/short equity hedge funds has outperformed the S&P 500 in down markets:

Growth and Prospects

Liquid alternatives are already growing rapidly. Overall, liquid alternative assets under management (“AUM”) increased 160% in the five years ending September 30, 2015:

Hedge Funds Skenderberg

According to Mr. Glaser, 10,000 baby boomers in the US turn 65 every day – and this will continue for the next 14 years. Liquid alternatives have the following features that are attractive to retired investors:

  • Lower volatility
  • Capital preservation (downside protection)
  • Diversification

For individuals of retirement age, “an allocation to non-traditional investments in transparent vehicles represents a sensible solution,” ac-cording to Mr. Glaser. Thus, demographic trends bode well for the future of the liquid alternatives industry.

For more information, download a copy of the white paper.


See full PDF below.