Rise of CTAs and global macro
Of the 59% 0f respondents to this month’s survey that do invest in hedge funds, 10 invest via funds of funds and 10 invest direct – confirming a trend to combine the two approaches to the market. One UK fund confirmed that it was moving from funds of funds to direct investing. The move towards managed accounts is also confirmed – with four respondents using them.
The perceived advantages of managed accounts were pretty clear, with a UK fund citing the benefits as “better control of costs, and the ability to influence portfolio construction”, and a Dutch fund approving of the “daily knowledge of exact positions, daily liquidity, and the ability to do look-through reporting”.
The survey showed that managed futures (CTAs) and global macro are in favour. Six of the seven respondents that invest direct (through funds and/or managed accounts) focus on specific strategies. Commenting on their strategy choice, a UK fund had a single GTAA fund (equivalent to global macro); a Dutch fund chose GTAA and CTAs “as a counterbalance (diversifier) for equity risk”, as did an Austrian fund; and a UK non-pension fund institution used long/short equity as part of its defensive equity portfolio, while favouring “GTAA/global macro/CTA/multi-strategy” for an absolute-return diversifier against its equity risk.
A similar pattern is evident among funds that continue to use funds of funds. Three of nine respondents used diversified multi-strategy funds of funds, three used strategy-specific funds of funds, and three used both. An Austrian fund that previously invested via a diversified multi-strategy funds of funds, decided to stop doing so as “the performance was non-sufficient, and correlation with equities was too high”. While one UK fund that favoured strategy-specific funds picked a credit fund, thanks to its specific track record, the other four again favoured CTAs, global macro and systematic trading.
Several funds highlighted a lack of expertise and experience as the main justification for incurring fund-of-fund fees, rather than attempting to invest directly. But the survey also picked up on growing confidence. Half of respondents did not use consultants. Some 29% used a specialist consultant, while 21% used a generalist. A Dutch fund using a generalist commented: “The reason we use a consultant is purely to speed up the search process. Our small team is very well able to do the due diligence in-house, but that is time-consuming.”
Some respondents were sceptical about the future of hedge funds. “The prevailing market environment is definitely difficult for hedge funds but, at the same time, due to the spin off of many prop-trade desks, opportunities are still there,” said a French fund. A Swedish fund added: “Some hedge funds will deliver in the future but, as an aggregate, I am not so optimistic about their future returns.”
However, a UK fund was more positive: “While we recognise that market conditions make it more challenging for certain hedge fund strategies to deliver good returns (eg, equity long/short), our hedge fund managers continue to deliver the return profile we expect from them.” A Cypriot fund went further: “The risk-return relationship is among the best in almost every category.”
Reasons given by those respondents that did not invest in hedge funds included the fees, too much reputation risk, lack of transparency and uncertainty about whether hedge funds add diversification.