With the trend to seek greater transparency fuelled by the financial crisis, tailored solutions for the requirements of big super funds are gaining popularity, especially in the previously opaque world of hedge funds.
In a series of presentations last week, Greenwich Alternative Investments stressed the risk management approach to a hedge fund portfolio would be the key ingredient for the foreseeable future.
According to Zhiyi Song, a Hong Kong-based managing director of the US-based Greenwich AI, it is important to have a single risk assessment system when building a hedge fund of funds (FoF), because each underlying fund tended to have one of several different off-the-shelf systems, such as BARRA or RiskMetrics.
“You need something of your own to integrate the other systems,” he said. “This gives us the ability to draw on a larger universe of managers and to optimise them.”
Greenwich AI (not to be confused with the research house Greenwich Associates) builds bespoke hedge FoFs and provides a variety of indexing and other services to institutional investors, including firms such as Morgan Stanley.
The firm’s Australian representative, Scott MacDonald of VanMac Group, said that, from a risk management point of view, each super fund was different because each portfolio was different.
“We can build portfolios of hedge funds which are truly complementary, from concentrated equity funds of funds to concentrated fixed interest to distressed securities,” he said.
“We’re 25-50 per cent less expensive per annum than the average fund of funds and we have a much deeper pool of managers to work with. Plus, we’re much more transparent and flexible.” He said that the Australian clients which had been with the firm for three years were now looking to top up their investments in the new year.
Song, who joined Greenwich AI from Bear Sterns in 2004, initially in the US, said risk management should be an integrated process, involving unbundling what the managers were really doing. “You have to understand the manager,” he said. “You collect all the information, look at a long time series to see that they are consistent. You look at their leverage. We have another tool, a factor model, to map the returns against various asset classes to understand where the return has come from. You have to look at the drivers to see how much is correlated with other markets, especially equities… You can stress test what the fund will do in any conditions, even extreme conditions.”