Is it time to break down boundaries and go global?

Thu Nov 3, 2011

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Hedge funds are as useful a tool as ever to skirt around the thorny issues troubling global equity markets


By Susan Barreto

The latest trend to go viral can be found in the Occupy Wall Street movement that has grown to become Occupy St Paul's in London and even Occupy Chicago in front of the Federal Reserve Bank of Chicago.

JRR Tolkien summed it up well: "The wide world is all about you; you can fence yourselves in, but you cannot forever fence it out." So as protestors camp out in unlikely places in city centres, their voices seem united in providing more of a sense of economic certainty than Wall Street executives seem to have these days.

Caught in the middle, institutional investors of varying sizes seem to agree - perhaps to the chagrin of protesters - that hedge funds are as useful a tool as ever to skirt around the thorny issues troubling global equity markets.

Looking at the hedge fund industry globally, HedgeFund Intelligence has seen asset growth of 4% in Europe in the first six months of this year and a contraction of 5% for the same time period in Asia. Meanwhile, the US hedge fund market saw 8% asset growth up until 30 June.

Performance of hedge funds globally seems to be flat to slightly negative in some instances, which may sound disappointing, but investors know the S&P 500 this year is down roughly 1.4% for the year to date.

In specific global markets, we can see where domestic hedge funds may seem attractive even if they are plain-vanilla long/short equity. For example, Japanese investors considering their hedge fund options now have local managers to choose from (see page 22). In Australia, hedge funds are also an important diversifier for the Sunsuper fund, which has a 25% allocation, including a 7% allocation to hedge funds (see page 12).

The most active group in hedge funds in the past two to three years has been the retirement plans. Globally the largest pension funds have assets totalling $13 trillion. Hit hard by domestic equity markets, pensions are now reworking portfolios in a variety of ways.

In the US, most of the hedge fund interest has been in the public pension fund community. This is despite a credit crunch, the largest securities fraud case in history (Madoff, in case anyone has forgotten) and a lack of funding by the state legislatures. This month, InvestHedge has tracked $1.7 billion in new hedge fund mandates and add-on commitments in the US.

The focus going forward will be to place hedge funds outside the equity or absolute return buckets to other parts of the port¬folio, very much akin to what has been happening at funds such as San Bernardino County (see page 11).

Large European pensions have also gone direct with the help of managed account platforms and consultants. A recent example of this can be found at PGGM, the Dutch pension fund with $142 billion in assets and a goal of allocating to between 30 and 40 hedge fund managers by year-end.

Then there are other investor types such as US endowments and foundations that are also looking at the same hedge funds to provide them with risk-adjusted returns over the next few years. Family offices are also remaining active globally with their own role to play in the hedge fund industry after seeding a number of today's successful hedge fund firms.

And one must not forget the powerful Asian and Middle Eastern sovereign wealth funds that are also looking to carve out hedge fund stakes. As Russ Read, formerly of CalPERS, joins the Gulf Investment Corporation, it remains to be seen how hedge fund strategies will fare under his direction (see page 8).

The question remains, though: are these global investors united in the same cause? Just as protestors in Athens, Rome, London, New York and Chicago seem to be saying something similar, are they really asking

for the same issues to be dealt with? While global investors are protesting beta, they have yet to be unified on hedge fund structures, fees and liquidity needs. This is where the boundaries should be drawn clearly for the benefit of all.