Hedge Fund Selection
What is the general approach?
What we try to achieve with the Alternative Hedge Fund Strategy is a product that should perform in most market environments and situations. Because of that we use more Alpha generating strategies than pure Beta-strategies. I am not looking for extremely high returns (and high volatility and drawdowns) but for returns in the range of 8 – 13 % p.a. with volatility below 10% on a monthly basis.
However, our view is not short-termed, but rather medium- to long-term looking for robust returns and good protection in a 3-5 year window.
The main part of investments is in strategies not available in this form to the average investor.
Why do we need it?
We need a product that will perform well in most times and market conditions, but even more important is to give protection in stress scenarios and market crashes when other asset classes like stocks and bonds suffer heavy losses.
It is said that diversification is a defense against major losses. Investors should seek uncorrelated asset classes so that if one falls, assets should be preserved elsewhere. Classical finance theory has held that an investor is diversified if they are invested in different asset classes and in different geographies with a significant sample size of individual securities (20-50).
Unfortunately, this approach tends to fall apart in financial crises like in 2008 when all the major asset classes took a tumble. Periods of increased asset class correlation and investor irrationality appear to be occurring more frequently than previously expected and have been marked by significant volatility spikes and meaningful market retreats.
Our strategies aims to profit when the market ignores fundamental valuations using a lot of divergent strategies often labeled as global macro and/or managed futures that performed extremely well in crisis like 2008.
When reviewed closely, the divergent approach held up during many crises and market shocks over the last 20 years. Past returns confirmed that divergent investment styles provided diversification benefits when most traditional investment styles became more closely correlated and experienced large losses.
How does the portfolio look like?
Liquid Alternative Multi Strategy Funds
We go for a “Core-Satellite” approach, investing 70% of the allocated money to large, well established Multi Strategy Funds (we started with 2 Top products = “Core”)) and the rest into 3 more aggressive “Satellites”.
In general, when choosing the funds the following criteria are most important:
- Most of the managers should have long track records and substantial AUM (500 Mio+)
- Low volatility and low drawdowns
- The strategies should be liquid and understandable, the structures transparent
- There should be personal contact to all managers
This approach produced superior results since 2007. I see 3 main reasons for the success of this approach:
- The “Core-Satellite”-approach
- The right selection of managers
- A very low number of changes in the portfolio
The reason, why many large banks and asset managers are less successful with alternative FoHFs is, that they often pick the managers, where the bank can generate the highest fee income and they tend to switch managers lot, always doing new due-diligences (because they have to “work” actively for their jobs instead of sticking long-term to a working setup).