Allison Hill

QIC is gearing up to expand its hedge fund allocation as – together with insurance exposure – the “strong double-digit return” of its liquid alternatives portfolio was a key contributor to the fund’s record $8.9 billion earnings in the 2024 financial year.  

Investing for various Queensland government clients, QIC’s state book has around $68 billion in assets under management overseen by chief investment officer Allison Hill.  

Its balanced fund-style Long Term Diversified pooled fund – which a range of state clients invest in as unit holders – returned 12.5 per cent (gross of management fees but after expenses) during FY24. The rest of the state assets primarily reside in an endowment portfolio, which returned 13.6 per cent net of management fees. 

Liquid alternatives are currently around 5 per cent of the allocation, Hill tells Investment Magazine 

“We have certainly been growing our exposures to hedge funds, and we intend to continue,” she says. 

“They do traditionally have a more expensive fee structure that can make it challenging for certain parts of the market to access those opportunities. 

“We’re very much focused on net returns, and fees absolutely matter, but if we can get a non-correlated source of return that we believe on a risk-adjusted basis makes sense for portfolio, that’s really valuable to us.” 

The increasing allocation to hedge funds is a trend Hill says she has observed in domestic and international sovereign wealth funds, partly because asset owners now have better portfolio analytics to assess the performance of different strategies.  

“I also think we’ve seen an improvement in the opportunity set for those [hedge fund] strategies,” Hill says.  

“For a long time when we had rates close to zero, there wasn’t a lot of volatility in bonds, [and] there wasn’t a lot of volatility in currencies. The macro was a fairly unilateral outlook, whereas now we have such divergent outlooks across the US, China, Europe, Australia and Asia. 

“For us, we’re very much trying to focus on non-market-directional sources of return. We’ve got a lot of equities in the portfolio and we’re trying to get other things that can help build that resiliency.” 

Hedge funds also helped deliver the Future Fund’s 9.1 per cent return in FY24 and its chief investment officer, Ben Samild, said it was “very unusual” that all strategies have performed well. Hill echoes the sentiment but notes that QIC probably has a smaller hedge fund program. 

“We’re in a fortunate position that pretty much everything worked last year and actually, even from our modelling, things that probably shouldn’t work at the same time did work,” Hill says. 

“[The Future Fund] probably started building their diversification a little bit earlier than we have, but certainly in terms of conceptual framework it’s a similar rationale for why they’ve chosen to do it as to why we’re also progressing down that pathway.” 

Ample opportunities

Elsewhere in the portfolio, domestic and international private debt remains attractive as QIC looks to allocate 8 to 9 per cent of the portfolio. 

Hill says the goal is to build a large, diversified program, and QIC is aiming to expand its asset-based lending and real estate debt, on top of its infrastructure debt and corporate debt exposure. QIC has in-house real estate debt capabilities via its asset management business which Hill says state investments support. 

“We remain really favourable on that asset class,” Hill says. 

“We think that there is good risk-adjusted returns, notwithstanding that spreads have come in from where they were, say, 12 months or 18 months ago. 

“With good credit selection, you can get access to good quality companies who are interested in private finance, rather than going through the banks, which are obviously having to adjust their programs based on capital adequacy requirements and so on.” 

The biggest detractor of performance during FY24 was real estate, according to QIC’s annual report, but with interest rate cuts elsewhere in the world and Australia expected to follow suit next year, Hill says “we’re probably likely to be at the bottom, or close to the bottom, in the real estate space”. 

“That potentially leads to a more interesting opportunity to invest, where you’ve got an asset class where it’s maybe not as in-favour as historically, and you’ve got valuations which have come down and are now much more representative of value,” she says. 

“We made an opportunistic investment into an international property fund, actually only just a couple of weeks ago (note: the interview was conducted on 14 October), on the basis that there was a secondary opportunity available. 

“We think now is not a bad time to get back in [real estate].” 

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