Allocating one-sixth of a $78 billion portfolio to hedge funds and insurance-related assets is a major commitment, even for an investor as sophisticated as Australia's sovereign wealth fund.
Admittedly the Sydney-based Future Fund has cut what it calls its alternatives exposure (which comprises only the above two asset types) to 16% as of June from 19% a year earlier. But other investors, such as family offices, have been more bearish on hedge funds post-crisis.
Most of the hedge fund exposure was allocated in 2009, notes David Neal, chief investment officer at the Future Fund*. “We felt there were lots of opportunities for skilled managers to add value amid all the volatility and dislocation. And we were a bit nervous about market risk. So this seemed a good opportunity [to take more hedge fund exposure].”
The organisation tends to prefer a small number of “relatively large” relationships, says Neal. “We worry about the risks of portfolio complexity and we want to build deep relationships with those managers. We would prefer a senior professional to know a lot about 10 managers than a little about 40.”
As a result, the mandates tend to be fairly sizeable, which means they tend to go to the larger hedge funds. “Admittedly we are probably missing out on some very good smaller managers,” says Neal, “although we do have some fund-of-fund allocations that would capture elements of smaller funds.”
Currently the state fund only uses one Asia-based hedge fund manager – Pacific Alliance Group.
So was Neal – CIO of the Future Fund since its inception in 2007 – not concerned about the sharp rise in correlation between hedge funds and the equity markets as a whole in 2008/2009?
“The crisis sparked a major liquidity event, and in such as situation everything will drop. So what happened wasn’t such a great shock to us, and it didn’t particularly rock our confidence in hedge funds. In fact, it allowed us to take some bigger positions.
“I don’t have much time for statements like ‘hedge funds did this or that’. There’s a world of difference between a long-biased commodity fund, a macro vehicle and a long/short equity strategy."
Neal argues that one must be specific in terms of choice of hedge strategies. He tends to have limited exposure to listed equities via hedge funds, preferring to invest in macro funds or themed strategies.
“For example, we built up quite a large distressed trading exposure post-crisis, because we felt there was a really big opportunity there.”
Meanwhile, as regards other investments, the Future Fund is currently positive on listed equities (up to 38% from 32.9% year-on-year to June) and 'tangible assets', such as infrastructure and property (15% up from 12.8%).
*A full Q&A with David Neal appears in the July issue of AsianInvestor