Retirement funds and other institutions across the globe are increasingly looking for external firms to run alternative investment portfolios for them, says David Druley, global head of the pensions practice at investment consultancy Cambridge Associates.
This trend is driving the biggest changes in US-based Cambridge’s pensions business, he says. “The complexity of running alternative investments is driving the market that way.”
As a result, the firm has transferred staff from other parts of the business into the discretionary area. Other areas where it continues to add staff globally include the operational due diligence part of the manager research team.
Druley is also CIO at CA Capital Management, Cambridge’s discretionary investment division, meaning he oversees portfolios on behalf of pension clients. He spoke to AsianInvestor during a tour of various countries to meet both managers and investor clients. This includes 15 firms across Hong Kong and Singapore last week, following a trip to Europe earlier this month.
He argues that Asia-based managers now need to show the same sort of operational infrastructure and skill in alpha generation as those anywhere else. “If you don’t get that, you don’t get the value added to offset the high fees being charged. The days of diversification simply for the sake of diversification are no more.”
That said, Druley is seeing an uptick in quality among Asian alternatives firms in terms of the quality of staff and operational setup. A growing number of individuals from are spinning out funds in Asia from “high-quality global setups, so they know what top-quality operations and oversight look like”.
Prime brokers and other service providers in Asia agree there has been a significant rise in quality among staff such as chief operating officers in the alternatives industry, particularly in the past two years or so.
In terms of opportunities in Asia, Druley highlights funds acting as alternative sources of credit. Banks and prop desks have been pulling back from offering financing due to both regulatory and cost pressures. This has led to experienced teams with strong track records being spun out of hedge funds or coming out of banks.
More broadly, he points to the attraction of some long-only strategies being launched by long/short hedge fund managers, largely in the US. These allow investors access to high-quality managers that had already closed their long/short funds, having reached capacity on the amount of funds they can deploy in shorting, he notes.
Such products have been available for three or four years, notes Druley, and several more are reportedly being readied.
These funds are attractive as long as they have an appropriate fee structure, he says, and come from skilled managers with strong track records with hedge funds. Less appealing are long-only strategies set up simply because managers have had little success running long/short funds, he notes.
In many cases, Cambridge will have already carried out due diligence on the investment teams in question, and is therefore aware of whether it’s worth paying for the manager’s long book performance, says Druley.
“But the last thing we want to see is a degradation in returns in the long/short strategy because they end up taking too much into the long-only funds,” he adds.
Meanwhile, asked whether Cambridge is seeing more pensions in Asia looking at areas such as asset-liability management and liability-driven investment (LDI), Druley is hearing of this with some Japanese funds in particular focusing more on the former.
Global accounting standards have changed over the last decade, forcing funds to mark-to-market their liabilities, he adds, and that is driving wider adoption of LDI globally. “I wouldn’t be surprised if Asian institutions are doing the same.”
LDI strategies are supposed to reduce risk from declining interest rates or falling stock values. However, to be effective in reducing risk and still generate the required returns they need to be implemented holistically and flexibly, says Druley.