BlackRock director Ji Bing has advised institutional investors to adopt more flexible strategies and increase exposure to alternatives including hedge funds and private equity amid continued global capital market volatility.
Addressing more than 200 delegates at AsianInvestor’s 4th annual China Institutional Investment Forum in Beijing last week, Ji – whose primary responsibility is for institutional business development in China – stressed that alternative investment strategies were better positioned to prosper and exploit market inefficiencies in the present environment.
“The information ratio of alternative assets is higher than any other asset class,” Ji pointed out, urging institutional investors to have 10-20% exposure to alternative assets as a means to diversifying portfolios, achieving downside protection and boosting returns.
Ji said he expects the price of commodities to continue to go up and add to persistent inflationary pressures, with market inefficiencies being created on the back of government intervention to balance supply and demand and the hedging activities of producers.
In fact, Ji is of the belief that hedge funds will be the big winners from the sharp recent increase in market volatility. The S&P500 Index didn’t fall more than 2% on any day from May 19, 2003, to February 27, 2007. By contrast, the past month has seen such a drop on at least a weekly basis.
“The global macro strategy is back,” said Ji. “Different from the era of George Soros, the new generation of macro hedge funds are equipped with multi-strategies and more prudent risk management and they will find opportunities in volatile global markets both this year and next.”
He pointed among other things to potential mispricing opportunities in the European corporate credit market on the back of lingering uncertainty over the eurozone’s sovereign debt crisis.
Further, Ji argued that market inefficiencies would be even more prevalent because of the shakeout of the hedge fund industry and the regulatory clamp-down on prop trading since the 2008 global financial crisis.
“The competition level has come down since 2008 as a lot of hedge funds have gone bust, while proprietary trading by investment banks has decreased sharply,” he explained.
It was highlighted that the total value of securities held by hedge funds and proprietary capital has shrunk 45% in three years, from $9.7 trillion in January 2008 to $5.3 trillion this January. Proprietary capital alone has shrunk from $4 trillion to $500 billion over the same period.
The BlackRock director also pointed to opportunities for private equity investment as entry-price multiples have dropped. “In the next two years there will be an ample supply of investment targets, but fewer buyers in the market, meaning the price levels for private equity investment will be low.”
Ryan He, executive director at the think-tank Center for Strategy in Financial Crisis, pointed out that the chief challenge institutional investors face now is whether they are “too big to survive” as they struggle to react to the European debt crisis, a depressed US economy and China’s unpredictable macro policy.
“In the foreseeable future over the next three years, the survivors in capital markets will be speculators rather than investors,” he suggested. “It requires institutional investors to adopt a more flexible investment strategy.”