Illiquids, such as infrastructure, are hard to hedge against. “We’re not trying to hedge the alpha. It’s more about hedging the beta, and this is done through options, futures, derivatives – and who does this? Usually, it’s done by an investment bank, a funds manager, or through implemented consulting.” State Street believes fund liquidity can be enhanced further by derivatives and futures overlay strategies that effectively equitise cash exposures to maintain market exposure while keeping cash on-hand to meet scheduled or unforeseen events. Hardeman expects new investment products, such as exchange-traded instruments, replication strategies or liabilityfocused fixed-interest programs, will become more popular as investors aim to maximise alpha opportunities while protecting liquidity.

However, Matterson says funds must always look at what is appropriate for certain cohorts of members. “If members are approaching retirement, their assets are at their peak and they have very little tolerance for losses, with an almost-zero ability to replace those assets. “And yet, people need some exposure to growth assets because retirement can be lengthy. So funds have to look at members’ liabilities as well as their assets.” Hardeman says a “barbell” approach to asset allocation was emerging. Investors were allocating larger proportions of their portfolios to liquid and passive investments, while at the same time dedicating their risk budgets towards “more exotic strategies such as long-short equity allocations and opportunistic fixed-income programs. Accordingly, hedge funds with concentrated risk exposures and low beta are drawing strong interest”, she says.