Soon after Jon Glass joined Media Super as CIO in 2009, he found a “nice, clean sheet of paper” within the fund’s $2.6 billion portfolio. There was empty space where a hedge fund program would feasibly lie. The industry fund had recently terminated some hedge fundof- funds (hedge FoF) exposure. But now that Glass is familiar with the fund’s asset mix, the former mathematician and hedge fund specialist is concentrating on building an “opportunistic alternatives” program that will invest up to 5 per cent of Media Super’s portfolio in hedge fund and alternative investment strategies. “I’m looking for fund managers and strategies who can justifiably occupy this area,” he says.

“But from the outset I’m looking for something that makes portfolio sense.” There is nothing new in this aim: all institutional investors in hedge funds want the strategies to deliver consistently positive returns without excessive risk and maintaining low correlations to the equity risk premium. But in his search for this El Dorado, Glass is breaking from convention. He is focusing primarily on individual managers based on the fund’s home turf. “Hedge FoFs give you access, but do they give you understanding? You get a lot of strategies and managers, but you can find yourself in structures you don’t necessarily want to be in. And they don’t perform well on commercial terms because of the extra layers of fees.”

He says the reinvention of some hedge FoF managers into platforms offering exclusive access to underlying managers marks an improvement. “They still provide access to the world of hedge funds, and the level of understanding has probably improved because you can get to know your managers to some extent, and the terms are better because a management fee layer has been taken out.” If the only dynamics that mattered were risk, return and correlations, Glass would be spending time in Connecticut, New York and London as well as Sydney in his hedge fund search. But there’s more to think about.

Three other factors – transparency, commercial terms and access – are also crucial in manager selection. Managers’ strategies and business operations must continually be visible to trustee boards so they are clearly understood. This means regular contact between managers and super funds. If Media Super finds compelling local talent, Glass would need only to board a cab, not a plane, to be updated about the manager’s strategy, risk controls and operations. The “purest arrangement” an asset owner can make with a hedge fund manager is a segregated mandate, Glass says.

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