For institutional investors, superannuation funds and fund-of-funds managers alike, it takes a lot of courage and trust to have lived through the 2008 dislocation and still have to allocate money. The key, according to Chicagobased Roxanne Martino, president and chief executive of Harris Alternatives which has $US10.1 billion in funds under management,12 per cent of which is from Australian investors, is to look at each funds manager individually and assess whether they stayed true to their strategy.
“Being a fund-of-funds manager it is a similar job to a trustee, we are both allocating huge amounts of money,” she says. “At times like this it requires nitty gritty due diligence to decide who to have confidence with.” The dual traps of liquidity and leverage are telltale signs, she says. “Look at the liquidity limits and whether your managers stayed within those. Some funds managers thought their capital was permanent and it’s not. With leverage most people see it as a way to maximise returns, we see it as a way to maximise volatility,” she says.
“It can pin you to the wall at a time when you need flexibility.” While hedge funds have had a hard time with the press, she believes alternatives are actually the good news story of the past few months, having lost only half as much as the MSCI, and that they present an even better opportunity this year. “Large institutions have a large pool of capital that must be managed on a global basis. If you look at the breakdown of investments into beta and alpha generation buckets, your view has to be adjusted. There were so many dislocations, maybe you ask if your 2008 asset allocation should be the same? Adjust your thinking to where your opportunity set is going forward.
The alpha bucket is the place to lean more than your beta bucket.” “If you look at how many companies benefited from this dislocation there are not that many, this is a worldwide event not geographic. Companies are not upgrading technology and are letting people off, no matter what the industry or region.” The implication, according to Martino, is less confidence that beta is the place to be. “European bankruptcies are predicted to be greater than the US. In addition intra stock correlations have been unprecedented,” she says. “There has been complete panic, dumping equities on a worldwide basis.” But she believes correlations will come down and long/short strategies will make money.
Once a year Harris Alternatives does a blank sheet analysis looking at a pool of capital in isolation and deciding where it should be allocated based on the environment of the day. “We look at a pool of capital today and ask where we would allocate it, not based on where we have it, but from scratch; it’s a fabulous tool,” she says. “It forces you to not be biased by previous decisions, we spend weeks talking about it.” This annual analysis is usually done in August but because so much changed last year it was done again in October.
At that time the decision was made to allocate more to long/short credit. In addition to a leaning towards credit, she says the long/short distressed area is quite robust. “In long short/credit the bankruptcies haven’t happened yet, in six months they will pick up, so we want money in place before,” she says. Harris’ hedge fund-of-funds portfolio has had up to 21 per cent in credit before, at the moment it is about 15 per cent. “This is a very exiting time, and there is a broad opportunity set. Also the landscape is different; in previous distressed cycles there were opportunities but capital moved quickly, now hedge funds can capture it for a while because proprietary trading desks don’t exist. This is a once in a lifetime opportunity. There are opportunities in dislocation for the stable and the strong,” she says.