For Australian superannuation fund Sunsuper, credit opportunities and co-investments have been good bets for the last few years, especially with many banks taking a step back from lending and financing to shore up their loan books.
However, the Brisbane-based pension fund, which has about A$60 billion ($43 billion) in assets under management (AUM), is looking for more diversification in its investment portfolio.
“We decided, really from last year, that we needed a bit more diversification, so we have been adding more to macro and to insurance strategies, which we expect to diversify some of our longer duration credit and co-investments,” Bruce Tomlinson, Sunsuper’s hedge funds and alternative strategies portfolio manager, said.
We’ve got a range of different insurance strategies, from catastrophe risk – which pays out if there’s a hurricane or earthquake – through to other weather-related insurance, Tomlinson told AsianInvestor.
The second insurance strategy works by hedging the price and volume risk that variable weather outcomes, such as extreme heat, cold, drought, and excessive rainfall, have on traditional and renewable buyers and sellers of power, he explained.
Macro-based hedges are another growing segment of Sunsuper’s hedge funds and alternative strategies portfolio.
Macro strategies are hedge fund strategies designed to take advantage of opportunities from economic and geopolitical trends, usually with a focus on currency, interest rates, and equity market movements.
Sunsuper’s macro strategy mostly focuses on interest rates and foreign exchange strategies, using both directional and relative value approaches, Tomlinson said.
Directional strategies bet on the future movement of the market or a specific security, whereas the relative value approach aims to find opportunities in price differentials.
Altogether, allocations to both insurance and macro strategies has grown to 40% of the hedge funds and alternative strategies portfolio, up from 20% two years ago.
Overall, alternatives make up about 30% of Sunsuper’s investment portfolio, split between hedge funds and alternative strategies, real assets, and private equity.
The hedge funds and alternative strategies portfolio managed by Tomlinson makes up about 6% of the Sunsuper investment portfolio and he aims to deliver returns of around cash plus 5% overall.
Hedge funds are becoming increasingly popular among regional institutional investors due to demand for cheaper and more liquid alternatives. Japan Post Bank said in December 2017 that it would raise hedge funds allocations as part of its plan to increase its $7 billion alternatives portfolio by a factor of almost 10, while Korea Post Insurance announced in April that it was looking for overseas hedge fund managers to oversee an additional 50% allocation to its hedge fund investment pool.
Korea’s Public Officials Benefit Association also said it would invest $100 million into overseas hedge funds this year, while the country's Government Employees Pension Service indicated it would begin allocating to hedge funds this year after having no investments in the asset class in previous years.
Sunsuper also increasingly prefers to take the more direct, co-investment approach, versus using a standard commingled vehicle or fund, partly due to fee savings.
"We’ll buy shares of a private company directly, the company that owns the asset, so that reduces one layer of intermediation and that cost,” Tomlinson said.
Compared with a generic commingled fund, the fees for co-investments are often half, or even less than half, of what you’d pay for the former, especially if you can write a big cheque.
Some co-investments are often fee-free because the manager is already being paid to manage the asset and the infusion of co-investment capital incentivises lower fees from managers who want to avoid syndicating with competitors, he said.
“It’s to an extent a buyer’s market – if you’re writing a cheque, also if you have longer duration capital, then you’ll get a fee break,” he added.
Getting lowered fees is only part of the equation, however – the manager still needs to attain a return figure exceeding the hurdle rate, or the minimum return before performance fees are paid out.
“A lot of strategies that are these kind of credit event or longer duration ones, we require a hurdle – there’s got to be 6%-8% hurdle before the performance fee is paid,” Tomlinson said.
Bruce Tomlinson will be speaking at the 10th AsianInvestor Southeast Asia Institutional Investment Forum, in Singapore on December 5 and 6. For more information about either attending or supporting this event, please click here.