Institutional investors are shrewder purchasers of absolute return managers as their ability to identify risk-premia to match their portfolios improves.
This was a common theme to conversations at the 8th annual Conexus Financial Absolute Returns conference in Sydney, at which representatives of the US and European based hedge fund managers Elementum Advisors, 36 South, GAM, Och-Ziff and Solus all made presentations.
Gordon Yeagar, chief risk officer at Solus, who travelled to the conference from New York, spoke of how reports from hedge funds now showed clearly whether investors were getting compensated for the risk they were taking.
Daniel Liptak, chief executive of ZG Advisors, expressed excitement at the progress in better risk systems and transparency which enabled investors to identify and capture isolated or individual risk opportunities, which could be holistically matched to traditional alpha and beta.
This would enable investors to have a higher sense of confidence of achieving the desired risk target for their whole portfolio.
“In the past, some investment committees have struggled with understanding the risk within their hedge fund allocations. They used to cross their fingers and hoped it worked.”
GAM portfolio manager Anthony Lawler had a similar message. He advised investors that alternative investments were only valuable if investors were expanding their efficient frontier.
The conference also saw a debate on the worth of hedge funds, with John Coombe, executive director JANA, argue against and Richard Johnston, managing director of Albourne Partners, argue in favour.
Coombe’s arguments were around the disproportionately large size of the fee budget that even a small allocation to hedge funds would eat up. He said, it was largely only clients focused on protecting value that would pay this premium, while clients focused on growth were less likely to use hedge funds.
He added that the returns Australian investors were making on higher allocations to infrastructure than the global average, obviated the need for the high returns hedge fund managers could achieve.
Johnston argued the potential life span of a hedge fund manager was shorter than a conventional manager, due to the need to justify their fees and as such, fees tended to be the natural market price for the most skilled fund managers that money could buy.
He also spoke of the growing market for hedge fund replication that was much cheaper than the 2 and 20 fees of some managers and also a growth in absolute return managers offering fees of 1 and 10.