The Future Fund is using insights from key hedge funds to help predict macroeconomic impacts on its portfolio, delegates heard at the 9th annual Absolute Returns Conference in Sydney.
Craig Dandurand, director of debt and alternatives at the Future Fund, explained how its ‘competition of ideas’ approach made it more open to such external input.
“An organisation that is less siloed in how its asset classes and portfolios are managed is better equipped to get benefits from such managers,” he said.
As such, the Future Fund’s strategy team has a “well-developed dialogue” with certain hedge fund managers’ assessment of the macro-economic environment and how risks such as currency can be handled at a total fund level.
“If we have a macro manager who is particularly good at gauging the conditions that might impact how we want to position our currency, this is a very useful dialogue,” said Dandurand.
On this point, he added: “The big element for us is sourcing talent and opportunities to make a robust portfolio.”
He explained the three tactical uses it has for hedge funds.
In the first and most traditional use, it is paying what can be a high fee for a manager that will pursue a niche strategy.
“We are not content to pay top dollar for managers, but we are willing if we can justify a fairly robust set of guidelines, that a manager has some demonstrable skill set which is truly unique, beneficial and diversified,” he said.
In the second instance, the Future Fund might access a tailored exposure, which would involve “splitting off a module” from a hedge fund manager’s strategy or main fund “and putting it to the side”, he said.
In the last instance the worth of a hedge fund manager is measured both in terms of the returns it brings and in how its macro-economic ideas can inform decision making.
He also told delegates of how the Future Fund had partnered with BlackRock to help in the due diligence and the selection of some of its hedge fund managers.
“It’s not something where we give BlackRock an open ended mandate and say ‘go forth and put money wherever you want to’,” said Dandurand. “It is a much more that they have ability to source managers in certain areas where we do not have the capability or where we do not intend to grow the capability.”
The main theme of Dandurand’s presentation focused on the governance structures needed to run a hedge fund program. He emphasised the need for a highly evolved board process and contrasted this with some of his experiences in the US, where public pension funds with siloed approaches to asset classes were common and a high turnover of lay people on boards led to an uphill struggle in explaining common hedge fund practices such as long-short positions.
As at the end of June, the Future Fund has 12.7 per cent invested in alternatives including hedge funds. Its biggest hedge fund positions are in distressed companies, systematic macro and discretionary. One area that might grow is insurance strategies, which it is currently researching.