Lonsec’s review of the Alternatives sector encompassed 25 funds across ‘Alternatives – Single Strategy and Alternatives – Multi-Asset/Multi-Manager funds. Five funds attained Lonsec’s highest rating, Highly Recommended – the Fauchier Partners Absolute Return Fund, BlackRock Scientific Global Markets Fund, Winton Global Alpha Fund, Aspect Diversified Futures Fund and Man AHL Alpha.
Senior Investment Analyst Deanne Fuller commented, “We reviewed over 40 managers in the lead up to the 2011 review, conducting on-site due diligence on managers located across the major hedge fund centres of Zurich, London, New York, Princeton, Greenwich and San Francisco, as well as Melbourne and Sydney.”
“As well as meeting with incumbent managers, it’s important for us to meet with ‘prospect managers’ and identify any potential managers that would enhance Lonsec’s recommended list. Not all managers we meet with are rated.”
Sector themes and observations
Sector flows
After the significant outflows experienced by the hedge fund industry during the GFC, 2010-2011 saw assets under management in the sector return close to 2007 levels according to BarclayHedge, a provider of alternative investment databases; total hedge fund assets were estimated at US$1.77 trillion at 30 March 2011.
“The managed futures, global macro and event driven sectors received the largest inflows,” observed Fuller.
“As many investors still have the effects of the GFC fresh in their mind, larger funds with longer track records attracted the majority of inflows due to their lower perceived risk.”
“Most flows came from pension funds and institutional investors driven by a desire to find attractive risk adjusted returns uncorrelated to the stock and bond markets,” continued Fuller.
One of the trends noted by Lonsec is the rapid growth in the managed futures space since the end of 2009. Assets under management in this sector globally have grown 36% to US$291 billion at 30 March 2011, making managed futures the largest hedge fund strategy in the market.
“The weight of money and high correlation among managers in this strategy leads Lonsec to believe that risks have generally increased, specifically the potential for signal decay and the inefficiencies and negative performance impact that can be attributed to the unwinding of crowded trades,” said Fuller.
“While we do not see this as an immediate concern, should growth continue at this pace, Lonsec believes there may be cause for a re-rating of funds across the sector.”
Active versus passive
“The active versus passive debate has now entered the alternatives arena,” said Fuller.
“While investors have been attracted to the low correlation with traditional asset classes, higher fees have made the sector less attractive.”
In an effort to reduce hedge fund fees, reduce trading costs, lower financing costs and increase transparency, a number of approaches have been put forward by managers, including investible hedge fund indices, hedge index tracker funds, hedge fund replication strategies and hedge fund beta strategies.
“Lonsec regards the hedge fund beta concept as being superior to hedge fund replication and investing in hedge fund indices,” commented Fuller.
“Essentially hedge fund beta examines a number of hedge fund strategies and identifies and implements the ‘bread and butter’ trades that underpin each strategy.”
“While the underlying strategies are less likely to perform as well as a dedicated manager specialising in a particular strategy, the trade-off to investors is that this strategy is substantially cheaper.”