High-net-worth investors should invest some of their assets into hedge funds, despite the poor performance and negative headlines surrounding the alternatives asset class, said Bank of Singapore, OCBC’s private banking arm.
The key rationale of the decision is the asset diversification that holding some hedge fund exposure provides. “To us it makes a lot of sense to invest in hedge funds within the long only portfolio, that’s why we advise clients to diversify into alternative investments,” said Bank of Singapore’s (BOS) head of managed investment Hou Wey Fook.
However, Hou conceded that it is a challenging process to build its alternative funds platform in the hedge fund space in particular, because of negative media headlines surrounding the latter.
Hedge funds have a bad year in general, with the asset class registering outflows for seven straight months since the year started, according to data provider e-Vestment. Asia-focused strategies have suffered the most, losing 10% of their assets from January to July because of poor performance and negative sentiment on China.
Investors withdrew roughly 1% of industry capital in the third quarter, which included outflows from the hedge fund sector totalling $28 billion, because of poor returns and high fees, according to Fortune.
Northern Trust, a US asset manager and custodian, predicted hedge funds will underperform most other asset classes over the coming five years.
Given these circumstances, investing into hedge funds might not seem a wise choice. But Hou noted that not all hedge funds are bad; the key is selecting the right ones.
“We recently hired a hedge fund specialist to ensure that funds on-boarded onto our platform promotes diversification in our clients’ portfolios with ample downside protection," he said.
Bank of Singapore also uses hedge fund research from Albourne Partners in its choice. Hou noted that the private bank typically recommends aggressive investors to allocate 10% to hedge funds, and advises investors to mix fund strategies, to help improve the chances of outperforming.
Hou particularly pointed to managed futures strategies, which "have proven to provide good diversification with low correlation to major asset classes and are generally indifferent to market direction while delivering absolute return,” he added.
Separately, Hou noted that BOS has been focused on locating and investing into innovation over the past two years.
"Investing in innovation provides opportunities for alpha returns. That said, the challenge for investors is to identify investible opportunities in innovations that have the potential to change our world in a sustainable way," he said.
Hence, BOS has been looking into investments related to the Internet of Things, or the concept in which multiple devices will end up with online access, including areas such as machine learning and artificial intelligence. Earlier this year it partnered with an unnamed global private equity manager to provide growth investments in innovative technology space, raising $200 million from investors.
Additionally, in September BOS forayed into factor-based investing, partnering with the world's largest asset manager BlackRock for its discretionary portfolio business.
"We looked at a factor-based solution as we believe that the solution is complementary to what we currently have on our discretionary mandate shelf," said Hou.
"The BlackRock factor-based way of investing identifies six macro factors that drive any asset class. These six macro factors are balanced before the individual investments are selected to form the portfolio," he added.
The full interview with BOS on what it recommends and how it selects funds is in the November issue of the AsianInvestor magazine.