Current perceptions of the hedge fund industry and the preferred strategies within the space were among the themes discussed by asset owners gathered at Agecroft’s Hedge Fund Investor Leadership Summit held in New York on November 3. These investors also shared traits they seek and signals they monitor when potentially terminating manager relationships. Participants included:
- Ben Chang, senior associate at the $62 billion Alaska Permanent Fund Corp. (APFC)
- Katherine Molnar, senior investment officer at the $7 billion Fairfax County Retirement Systems
- Matthew Sherwood, senior manager at the $2.5 billion Ministers and Missionaries Benefit Board
- Jason Josephiac, senior investment analyst at the $27 billion United Technologies Corp.
On the Role of Hedge Funds in the Portfolio
Chang: We recently revamped our hedge fund strategy such that we redeemed about $3 billion from fund-of-funds and put that to direct investments.
At previous board meetings, I had to defend exactly why APFC should continue to invest in hedge funds when hedge funds as a whole have returned lower than the S&P 500. The APFC uses hedge funds as an absolute return mandate. We’re hoping to achieve CPI +5%, regardless of the broader market atmosphere. We’ve been mostly invested in equity market neutral, macro, relative value [strategies], but most of the managers we’ve selected have relatively low correlations to the S&P, HFRI, Barclays Aggregate to anything that we can think of.
Molnar: [Under the three defined benefit plans the fund manages, hedge fund allocations range between 25-35%. Global macro and relative value are the primary hedge fund strategies within the portfolio.]
All things being equal, we’re looking for higher volatility versus lower volatility, which has been pretty hard to come by these past few years. If we can convince ourselves that a manager is diversified not only to the rest of our hedge funds but to the broader portfolio, then we prefer to have more volatility and the high requisite returns that comes along with that
Sherwood: We have [various] hedge fund buckets, [and] each have different mandates. We have long/short equity, global tactical allocations; it really depends on where we’re going to benchmark that strategy. We’re going to look for alpha, and because we have specified benchmarks that we use as hurdles, we’re looking for managers that can crush those.
Josephaic: We use [ hedge funds] in a portable alpha construct. We don’t invest in hedge funds; we invest in hedged funds. Most of our managers are going to be beta or market neutral.
Current Preferred Strats
Josephaic: I’m never hot or heavy on any type of strategy. Diversification is the only free lunch.
Sherwood: A great complement to [our] portfolio assets would be some trading strategies across asset classes: arbitrage strategies, with the interest rate hike cycle, maybe merger and risk arbitrage. Those are a few things on my radar.
Molnar: If [equity and/or interest] volatility increases, that should be good for certain hedge fund strategies, including macro, fixed-income relative value, equity relative value, long/short equity…I’ve been hearing and saying that for four years, so I don’t really know.
Chang: My favorite, personally, are sector specialist equity market neutral managers, [where] they lever up their fund 2-2.5 times such that they’re increasing returns on specific bets. So, if you have a skilled manager, you can still return 10-15% per year—that demonstrates skill. Being equity market-neutral and being able to demonstrate the same amount of alpha, that’s what really makes sense to me.
Signals Regarding Manager Selection/De-Selection
Josephaic: It’s relatively easy to evaluate track record. I want people that are in the business that are passionate about what they do, that aren’t necessarily loud about what they do. You want to be able to get through those tough environments when a manager has a drawdown and that they can come to you and explain what is going on, and you can have an honest conversation, as opposed to someone who doesn’t.
Sherwood: Personality does matter. If you’re going through an eight-month stretch of underperformance or negative returns and you’re not the most likeable person, it’s going to be easier to pull the trigger on you. If you make your money in market mispricing or credit optionality, and you continue to do that and you’ve had some bad breaks, but you’re going to stay the course, that’s what I like.
Even if they’re managing money and their assets grow from $1 billion to $10 billion in the course of a couple of years and they’re not taking the risks that they would, and instead of a trader [become] an asset gatherer, that can be problematic.
Molnar: I fired a manager a few years ago, not because they were in a drawdown, but once I became convinced they never were going to be able to get out of that drawdown because of their psyche. Something snapped. It became clear that because he was in a drawdown, he didn’t feel comfortable putting risk on when the environment dictated that.