Instreet Link Alternative Manager DPA product is part of the Instreet Link Series that seeks to provide investors with an opportunity to gain exposure to the price growth potential of an equally weighted basket of these alternative strategies. Exposure can be gained for a fraction of the notional exposure of the investment.  

Instreet managing director George Lucas says: “The Instreet Link Alternative Manager DPA has a low breakeven, at 1.3% a year. So the investment starts making money even with a modest increase in the basket value. It also offers known downside risk with losses limited to the initial investment amount. 

“With a relatively small one-off payment providing larger exposure, investors can add an allocation to alternative investments to their portfolio whilst maintaining the majority of their cash position, if they like” he said.  

Lonsec investment house, which has given the product a “recommended rating”, says the structure is a relatively efficient means of providing leveraged exposure to the basket of managers. It primarily suits “growth and high growth investors” and not those looking for income over the three-year period. 

The underlying strategies are managed by Aspect Capital Limited, Axiom Investment Advisors LLC and Quantica Capital AG. Aspect is a London-based manager specializing in systematic asset management, Axiom is a US-based specialist foreign currency trader, and Quantica is a Swiss-based systematic investment manager.

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“The report shows that managed futures trading strategies continue to show diversification benefits for investor’s portfolios, while assets under management within the industry reached new peaks,” said Michael Armitage, analyst at S&P Fund Services. 

“However, an increase in funds under management, which notably amassed within the largest managed futures products, increased our focus on potential capacity issues,” Mr Armitage said. 

Relative value and directional macro investing were found to present significantly different return profiles, which investors and advisers should understand. While both types of strategies will present variable correlation to traditional investments, directional global macro typically exhibits strong positive skewness of returns, and the ability to perform strongly in dislocated markets. Conversely, relative value strategies have historically been challenged in periods of extreme market duress. 

Reports for all funds rated as part of this sector review are available on S&P’s subscriber website www.fundinsights.com. A copy of the sector report can be made available to media representatives upon request.

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BlackRock Asset Allocation Alpha Fund and Winton Global Alpha Fund were both rated five stars in their peer groups, in which overall there were no fund rating upgrades or downgrades. 

The review has analysed 14 headline products, with three ‘NEW’ ratings on offerings from BNY Mellon, Man AHL, and Taurus. 

S&P Fund Services analyst Michael Armitage said: “Managed futures and global macro directional strategies highlighted their alternative return profile for investors with positive performance in the third quarter against the S&P/ASX 300 Accumulation Index result of -12%”. 

“Globally, the CTA manager indices were positive for the tumultuous third quarter and locally several of the funds offered to retail investors had very attractive positive returns,” said Mr Armitage. 

S&P is witnessing increased interest in the peer group after managed futures and directional macro products put in good performance during the GFC, and we note large FUM inflows both locally and globally into these strategies. 

“With continued strength of performance for these strategies in volatile and negative equity periods, we will expect continued uptake in consultant and adviser asset-allocation models and investor-driven demand,” said Mr Armitage. 

The long-only commodity funds continue to attract investor interest, especially gold-focused investments.

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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.”

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