“While a lot of the fund of hedge funds were diversifying in terms of the number of managers – some had as many as 70 or 80 managers – they were actually becoming increasingly concentrated in terms of some of these key risk exposures.” Hang the cost, give me control With all eyes back on the risks inherent within alternative investments and particularly private market investments, Barry says super funds have become much more focused on the structures that they’re investing in and the degree of ownership and control afforded to them as an investor. As a result, Watson Wyatt is working towards developing “more customised programs” for hedge fund investing that are tailored to individual clients’ specific objectives and liquidity needs. “It’s not going into an off-the-shelf pooled or commingled fund of hedge funds, but rather something that has been very carefully configured to target the specific objectives of the client,” Barry says. “Generally these configurations are much more focused, and have fewer managers, but do target a broader range of strategies. There’s not a lot of benefit of just having a lot of managers doing the same thing; what we’re looking for is some niche strategies, genuinely differentiated sources of return. Catastrophe reinsurance is a good example.”
Multi-asset class managers claim that rather than mark the end of asset allocation, the crisis has served to emphasise its merits, as well as the poor decisions some investors made when building portfolios. Simon Doyle, head of multi-asset at Schroder Investment Management says a major problem with portfolio construction is that most investment strategies adopt a rigid 60/40 or 70/30 type asset allocation structure, with the biggest component in equities. “If you move through an environment where equity markets don’t perform, the overall portfolio is not going to perform because equity risk dominates,” Doyle says. Super funds must really understand the underlying economic risk that they’re taking when they invest in something that falls into the “alternatives” bucket, he adds. “Generally what you’re buying is a liquidity premium, but often you buy the same risks you’re getting in the more transparent parts of your portfolios such as private equity or debt markets,” he says. Guy Stern, head of multi-asset management at Standard Life Investments in the UK, agrees asset allocation is far from dead. Rather, he says, its value is becoming increasingly apparent.
“The rules haven’t changed. In fact, the best performance has been achieved by those who remember the rules,” Stern says. “One of the basic rules is if you’re going to diversify yourself, you have to find things that don’t react to the same basic macro-economic environment. Over the past couple of years there have been a number of funds and fund concepts that have gone generically under the name ‘diversified growth’ where you’re combining several different types of growth assets in order to reduce the volatility of the portfolio somewhat and still participate in upwards movements. “The problem is the name reveals itself – it’s diversified growth, these separate asset classes are all responding effectively to the same macro-economic characteristic of economic growth. It’s kind of like buying several different flavours of icecream.” Stern says there is a growing interest in asset allocation as “a reversion to searching for better risk-return characteristics” from assets. Investing on a multi-asset basis is one way of improving the risk-return environment within portfolios.