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.
Aussie hedge funds need greater scale
(Pictured: Simon Ford)
Simon Ford, head of alternative investments for ANZ Wealth and Private, delivered a few home truths to the faithful at the AIMA conference. He told them they needed to merge and keep merging until they got to at least $1 billion in assets under management. But in any case, 98 per cent of the investment opportunities for hedge funds lay overseas, he said.
Interestingly for the audience, Ford also explained how ANZ needed to keep its advisors informed about the alternatives program: “We have to get our list down to 20 managers – so that’s only about 10 for hedge funds – so that the advisors can get their heads around them and their strategies,” he said.
Ford suggested that the top 5 per cent of high net worth clients had virtually no exposure to alternatives. ANZ aimed to have a concentrated exposure to a small number of managers and he expected the bank’s allocation to hedge funds would increase in time.
“(Hedge funds) are completely logical for investors in regard to the net return for risk,” he said. But he said it did not pay for ANZ to take a risk on a small (Australian) manager, which is why they needed to build scale.
A notable benefit of hedge funds was that they did not “blindly” invest in equity or fixed interest funds, where there was too much money tied to indices. Hedge funds tended to see absolute returns.
