Conversations that will lead to augmentation of structures and changes to relationships superannuation funds have with purveyors of alternative strategies are happening right now, with the end result of these discussions yet to be crystallised, Travis Schoenleber, Cambridge Associates managing director has said.

These discussions have been prompted by the introduction of APRA’s heatmaps, which essentially are designed to highlight funds that underperform benchmarks and their peers and are expensive.

The introduction of APRA’s heatmap system will have a significant impact on kind and extent of alternative strategies super funds deploy in the future, Schoenleber, who was joined by David Bell, The Conexus Institute’s executive director on a panel to discuss the impact of APRA’s heatmap on allocations to hedge funds and alternatives.

“The conversations have changed. I don’t know if there have been significant changes in portfolios yet, but there are still conversations going on in terms of how things are classified,” Schoenleber said.

The use of tail risk strategies is an area likely to change in light of the heatmap framework, Schoenleber continued.

“The conversation changes because the question becomes ‘what are you doing on the other side of that strategy to try to increase that overall return?’, and [to what] extent do you have negative carry in that portfolio,” he said.

In general strategies that are defensive in nature and have the potential for “fee drag” are being looked at closely by superannuation funds and investors as the heatmaps penalise funds with these characteristics, Schoenleber said.

“Any J-curve effect you need to be far more mindful of at this time than you have historically. Funds investing in these areas [closed end fund structures with alternative or PE exposures] need to be very critical in thinking about any type of fee drags particularly in the shorter time periods,” he added.

Indeed, the heatmap framework will benchmark alternatives against a traditional 50/50 growth defensive portfolio, a comparison the panel raised as a challenge for the investment category.

Bell, who has worked alongside APRA in the development of the heatmap framework, acknowledged categorisations such as growth and defensive are not perfect; Bell has a call out for submissions to improve these asset classifications.

The “biggest casualty” in the implementation of APRA’s heatmap framework has been funds’ abilities to incorporate diversification into the 50/50 growth/defensive metric, he said.

Bell conceded that funds prioritising diversification will be penalised by APRA’s heatmap approach.

“There is that small cross section of funds that are getting their exposure through diversification, largely with alternatives exposure, and they’re the ones that are unfairly viewed because they are planning for scenarios that may or may not occur,” Bell said.

While not perfect, Bell noted other methods of understanding and benchmarking the performance of funds is also challenged because of the industry’s lack of standardised data collection.

But it won’t be long before new structures and new approaches to implementing alternative and hedge fund strategies within super funds emerge, Schoenleber said.

“Funds are already doing this, but I would see us going much further in that direction in terms of how we structure relationships in the absolute returns world,” Schoenleber commented.

Whether APRA’s heatmap framework is doing its job by creating better outcomes for members, or whether it’s creating a new generation of funds and structures designed to work around the heatmaps measurement remains to be seen, the panel posed.

Bell contemplated whether the heatmaps framework was in line with APRA’s principles-based regulatory approach, or whether this regulatory foray has led APRA down a more prescriptive path.

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