Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Towers Watson looking for another hedge fund expert
(Pictured: Hugh Dougherty)
Towers Watson is doing a global search to appoint a hedge fund expert to one of its Australian offices as part of an effort to have “a much higher level of engagement” with hedge funds on behalf of its clients, according to Hugh Dougherty, the firm’s head of manager research, Australia.
Dougherty told the AIMA Australia conference in Sydney last week that while Towers Watson researched and rated hedge funds, this was not a big part of its research program.
“It’s less than one manager in 100 that makes it through to a rating across all asset classes. We spend about 150 hours doing due diligence on a manager. For hedge funds, it’s more hours,” he said.
In his view, the traditional 70:30 asset allocation of growth and defensive assets had become a “dangerous” portfolio construction because the average fund was at least double the size that it used to be when such an allocation became the norm. A lot of strategies would not work any more, he said. The concentration of risk in Australian super funds, towards equity risk, was “scary”.
Dougherty was speaking during a session involving “hedge fund allocators and advisors”. The other speakers were: Miles Collins, investment director of the Myer family office, Craig Balenzuela, Australian managing director of K2 Advisors, and Hersh Gandhi, Australian managing director of Man Investments. The moderator was David Bell, director of St Davids Road Advisory. The speakers noted the migration of fund of funds managers into advisors.
Dougherty said Towers Watson did not see funds of funds managers offering advice and bespoke portfolios as being in competition with the traditional consultants. “The big thing that is in common is that the investors are getting back control,” he said. “We actually appoint K2 to some of our mandates. We don’t think about whether they are competitors. We seek out people who can add value.”
Towers Watson held its first hedge fund conference for clients last year. The firm globally performed between 900-1,000 searches and due diligence on about US$75 billion in assets. Hedge funds made up about 10 per cent of that total. The firm has 30 dedicated hedge fund researchers. Its most common hedge fund strategy was fixed interest, followed by global macro and then smart beta.
