Evolving relationships with managers and an openness to different investment vehicles is a theme for two of the country’s largest investors in hedge funds –– Sunsuper and AMP Capital – with both investors looking at co-investment in fund of funds and niche strategies.

Speaking on a panel entitled Investor trends in hedge funds at the Conexus Financial Absolute Returns Conference, Bruce Tomlinson, portfolio manager at Sunsuper, said the portfolio continues to change.

“Three to four years ago I would have said we were not interested in fund of funds at all. But when the facts change we will change.”

In its bid to gain greater control, the fund has progressively moved away from intermediaries and fund of funds in all assets classes including private equity and equities, but where its research is limited it will use fund of funds for hedge funds.

“We can travel extensively and engage with managers overseas, we have a specialist consultant in Aksia, and while there are clear limitations to being in Sydney we don’t necessarily have to partner with fund of funds for traditional allocations like global multi-strategy. But in specialists areas we think fund of funds can add value, and co-investments is an example of that.”

Sunsuper has between 6 and 10 per cent of assets in hedge funds, in a diversified portfolio that follows a defensive strategy. The objectives of the market-neutral program are as a diversifier to equity market risk producing net returns of between 8 and 10 per cent.

The fund is looking at building a specialist credit program, which he said is in “a ramp up phase”.

Sunsuper is also building a new allocation to diversified strategy managers which he likens to the relationships synonymous with the Teachers Retirement System of Texas. The managers will be given large mandates and will be able to take tactical bets around a 70:30 allocation.

“We will have a limited number of managers with large tickets, and we expect that there will be lots of feedback that will inform the team and the total portfolio.”

He said while the fund will continue to run an absolute return alpha based program, and has never had much hedged equity, it is not immune to the pressures of wanting improved alignment and lower fees.

“We are doing co-investments and reducing the number of allocations. And we are increasing conviction positions if appropriate,” he said.

To this end Sunsuper has moved away from the $10-$20 billion sized mangers which they see as less willing to offer preferential fees or treatment, to a more niche focus.

Similarly AMP Capital, which has about $3 billion in alternatives, which also plays a defensive role to limit downside risk and gain exposure to alternative sources of alpha with moderate beta, is looking to co-investment in fund of funds and niche strategies.

Celine Kabashima, who is a portfolio manager in the absolute return solutions, private markets team in the multi-manager group at AMP Capital, says the focus is on specialist managers.

“There is demand coming from retail investors and advisers for more alternatives,” she said, identifying daily liquid alternatives as a space that is growing.

“We are researching global liquid alternatives at the moment,” she said.

Return expectations for alternatives portfolio at AMP Capital is cash plus 4 to 5 per cent, and Kabashima said the days of hedge funds returning 10 to 15 per cent are “far behind us”.