The Future Funds’s chief investment officer has given testament to the role of know-how gained from retained hedge fund managers in the success of its dynamic-asset-allocation strategy.
In a presentation to the seventh annual Conexus Financial Absolute Returns conference in Melbourne, David Neal emphasised the value added by hedge funds as a contrast to some of the negative perceptions around high fees in this style of investing.
He described hedge fund managers as “some of the best risk managers on the planet” and said the know-how passed from them had “influenced how we go about investing in all other sectors of the portfolio”.
The Future Fund has direct investments totalling over $10 billion with 18 hedge fund managers and a further $3.7 billion that is run on a fund-of-funds basis.
The fund-of-hedge-funds allocation run by BlackRock has also influenced the Future Fund’s direct allocations to hedge funds.
“This has been an excellent relationship for us. They provide a lot of ideas back to us, which enables us to move quickly and to get exposures which we could not otherwise do.”
Competition for capital
Neal used the presentation to explain his fund’s dynamic model, which he said was inspired by a range of models from traditional superannuation/pension funds and endowments through to that of multi-strategy hedge funds.
“[Multi-strategy hedge funds] adjust their exposures actively as opportunities change. Why would we not do the same, albeit with a different time horizon of course? We think the world changes, and prospective risk and return changes, and we think that over longer time frames it is reasonably predictable. It strikes us as odd that investors have not routinely established this practice more.”
The 47-strong Future Fund investment team works as a unit discussing the relative risk-return profile of all assets, allowing fluid allocation holdings or creating, as Neal described it, “competition for capital”.
Within this remit, there is no specific objective for alternatives. “We expect the size of this portfolio to change, perhaps quite markedly,” he said, as opportunities waxed or waned.
Neal highlighted figures that showed the worth of hedge fund allocation to the Future Fund.
For the five years to the end of June 2013, the fund achieved an average return of over 7.1 per cent with volatility of 4.9 per cent, but if the fund had not invested in hedge funds and had instead allocated more to equities, the return would have been 6.8 per cent at 5.9 per cent volatility
The alternatives portfolio has generated an internal rate of return of over 12 per cent (hedged back to the Australian dollar) since inception.
Neal expected that hedge funds would continue to provide strong returns and an important risk-reduction role to the fund’s total portfolio.
He also highlighted the work of the Hedge Fund Standards Board in promoting stronger standards of governance, valuation, risk management and disclosure across the global hedge fund industry. “A stronger industry with improved practices is good for all of us – managers and investors,” he said. He also noted the important work the board was doing in engaging regulators around the world to foster effective and efficient regulation.
A survey of 391 alternatives managers by State Street found that 44 per cent have increased the amount of information they report on in their holdings, risk and performance since 2008 and an additional 16 per cent plan to do so over the next five years.
The Future Fund has recently appointed Ben Samild, head of investment strategy at LUCRF, to a senior role in the debt and alternatives team, which is responsible for the management of hedge fund exposures.