“The industry tries to boil down the universe to one benchmark,” she said. “Last year more than 20 different types of strategies comprised the top 5 per cent of fund performance. CTAs were first, followed by long/short.”
Data from Pertrac, which fol- lows the numbers from 22,000 funds (“which you can see and touch”) shows that ‘younger’ funds tended to outper- form their older counterparts, as has been shown to also be the case among boutique long-only managers.
“You should keep an open mind about manager selection and get away from the view that it’s got to have a three-year track record and $500 mil- lion under management before you invest,” she said.
Gregor Andrade, a principal with AQR Capital Management, said the big issue over the past year had been the correlation between many hedge funds and the MSCI World index.
“Almost every hedge fund strategy has some common element or hedge fund beta and we think that there are probably two or three which are entirely hedge fund beta,” he said.
“We think that hedge funds still show great promise but there some drawbacks… A portfolio of hedge fund betas came through the past year okay – not great, but okay.”
The strategies which did the worst were those with greatest leverage or directional strategies. The equity market neutral universe was impacted by fraud, given a large chunk of it was accounted for by Bernie Madoff ’s Ponzi scheme. Capturing hedge fund betas was not as easy as it seemed, the confer- ence was told by the head of alternative beta strategies at Partners Group, Lars Jaeger.
He said the replication factor strategies favoured by top-down at- tempts to capture hedge fund beta were sub-optimal, because they were linear approximations of hedge fund returns which did not consider the erratic payout profiles inherent in hedge fund strategies, were backward-looking and loaded up on the equity exposure of their reference hedge funds – “the part that is least attractive to investors”.
Partners Group favours a bottom- up, non-linear rules based approach to capturing alternative beta, which identi- fies hedge fund risk premia and sup- ports the analysis by combing through academic research, and then investing in a rules-based fashion rather than mere direct exposure to the explaining factors.
A lot of super funds are also re-thinking their approach to portfo- lio construction following the crisis, looking for investments which offer more genuine low correlations, such as currencies.
