Detailed due diligence, legal advice and regular international meetings have all been cited as part of the extra workload for those investing in hedge funds, the seventh Conexus Financial Absolute Returns Conference heard.
Case studies provided by Sunsuper and Victorian Funds Management Corporation at the conference in Melbourne, also emphasised hedge funds’ key role as a source of returns uncorrelated to the return of equities.
Getting to know managers
The $24-billion Sunsuper has $1.5 billion invested in 15 hedge funds and it uses its allocation as a strategic means of outperforming its peers.
Bruce Tomlinson, portfolio manager at Sunsuper, said that hedge fund investing was a long-term program, which required a five to 10-year commitment to ensure a return on the time and expense made. Sunsuper’s hedge fund program, started in the fourth quarter of 2007, targets equity market-neutral strategies such as macro and credit, and has returned over 7 per cent net in the five years to June 2013.
Tomlinson, pictured right, cited the due diligence needed in reviewing contracts as involving SunSuper’s three inhouse investment lawyers, as well as regular international travel and the use of specialist hedge fund consultants.
“It involves a lot of work. You need to get to New York a couple of times a year and London, Geneva, Hong Kong et cetera. There is no replacement for looking the manager in the eye,”
he said. “You really do not know people that well until they go through crisis periods, [until you] see how they cope with stress.”
Victorian Funds Management Corporation has seen its allocation in hedge funds rise from 2 per cent to 8 per cent ($3 billion) with around a dozen managers appointed over the last three years.
Paul Murray, head of debt and absolute return at VFMC, said that hedge fund due diligence involved unique nuances, such as understanding how managers were protecting their funds from drawdowns and volatility.
“You need to do a detailed amount of due diligence of what can go wrong and what protections you have built into your documents. We carry out deep internal legal checks as there very unique and specific things we would look for in documents.”
Murray, pictured right, said he sought out managers that could offer strategies in relative value and that the returns should not contain access to beta wherever possible. “We use them within asset classes to provide relative value, rather than absolute returns. We want them hedging out the betas and to provide protection when the traditional parts of the portfolio are facing drawdowns from the beta parts of our portfolio.”