The Future Fund is using hedge fund of funds as alternative solution providers rather than as an access vehicle, delegates heard at the Absolute Returns Conference in Sydney.
David George, head of debt and alternatives at the Future Fund, revealed how in some instances he was using fund of funds to help with risk systems or set up, rather than as a manager of money.
“We are not smarter or better or more experienced than what we can buy in,” he said. “We are an outsourcer and the right place for us to outsource is not always at the end.”
Where they have allocated money, they are using fund of funds to access unique types of strategies or managers, such as early stage managers.
“Their competitive edge is a bit different and they are seasoned at using it,” he said.
The Future Fund will have direct relationships with hedge fund managers in areas that have been identified as long-term macro trends.
“We look at areas that are strategic and long-lived for us, and where we can get scale,” he said.
“We want a manageable number of relationships and want direct access to economics people so we can leverage that out to the wider organisation. In cases like that we want to own the relationship.”
An example of that is the distressed debt, where George says the size and scale of the cycle meant it made sense for the fund to lead that internally.
“The distressed debt cycle is interesting for us and we wanted to allocate staff and resources to that.”
But now, he said, the opportunities in distressed debt have changed and the amount of money the fund has allocated to it has decreased, and more has been outsourced to fund of funds so internal resources can be allocated elsewhere.
The Future Fund will use fund of funds where it wants to access smaller niches, new strategies or short-lived opportunities. This is where the access point to investment opportunities might be 10 managers, managing smaller amounts and that is not something the fund wants to manage internally.
“It’s a headache and uses overhead,” he said. “We can get the operational leverage effect from fund of funds. It really depends on what access you want.
Chris Addy, chief executive at Caste Hall Advisors said there is a re-orientation of hedge fund of funds, evolving from an aggregation or access vehicle to a specialised service.
He said fund of funds have evolved from a pooled investment vehicle to offering bespoke customised structures and general advice.
They will continue to have a role, even for large institutional investors which have the scale and resources to manage hedge funds directly, as a way to efficiently access certain niches, geographies, or early stage seeding managers.