Asked to think about his ultimate unconstrained alternatives portfolio aimed at maximising 20-year returns, JANA’s Ian Patrick agrees there is a place for hedge fund-of-funds to “provide some liquidity and flexibility in case new opportunities arose”, but not a significant allocation because they “fail the fee test”.

Patrick believes the potential universe of alternatives should be broad enough to exploit global themes, particularly around changing demographics and globalisation, which to his mind means “private equity and property in emerging markets”.

Agricultural investments are attractive as governments in developing nations seek to secure future food supplies. “Prime farming land in Zimbabwe is the ultimate value play at the moment, if I can make a tongue-in-cheek comment.” Asian currencies are another favoured alternatives play, given the upward revaluation “that one anticipates is inevitable”, with the position achieved through a combination of assets domiciled in the region and a “raw currency play”.

How much?

If it was not for Mark Sainsbury, the chief investment officer of NSW-based First State Super, the answer to ‘how much alternatives should a super fund have?’ would be as vague as the attempts to define what they are in the first place.

Asked for the optimum level of exposure that the average fund should invest in unlisted or less liquid alternatives, Sainsbury counsels “no more than 15 per cent of the total fund, with unlisted property added into the illiquids weighting”.

Sainsbury says that the liability profile of the fund is the wrong thing for a CIO to be considering when he or she is determining an allocation to less liquid alternatives. “It’s not the length of the liability profile, it’s the length of the liquidity profile. Super funds are like banks, we ‘borrow short/lend long’ but super funds do not have the fall back of a lender of last resort facility if there is a liquidity squeeze. APRA is quite right to be concerned,” he says.

“Super funds have an obligation to meet member roll-out requests, which means they must be able to cope with a 30 day liquidity requirement, irrespective of the length of working life of individual members. This misunderstanding of the fundamental business task of superannuation is why some of the more illiquid funds arguably could not meet reasonable solvency standards.” Sainsbury is hardly the only asset allocator concerned by illiquidity at the moment.

The investment team behind Colonial First State’s Firstchoice master trust are understood to have been calling on many of their underlying managers, asking them how they would go about liquidating 25 per cent of the value of their portfolios if asked to do so within a three-month period. According to Ian Patrick, JANA is presently testing its super fund clients against a liquidity scenario in which listed markets dropped 20 per cent and ongoing contributions halved.