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.
Hedge funds back in favour amidst market gyrations
The old adage about volatility bringing opportunity is proving true for hedge fund managers globally, who are more confident than ever that their strategies will once again be a weapon of choice in the arsenals of the world’s largest investors.
Around 83 per cent of the 100 respondents to a survey in SigTech’s 2022 Hedge Fund Report expect that institutional investors will increase their allocations to hedge funds “due to hedge funds being expected to generate absolute returns, mitigate risk, and improve overall portfolio diversification irrespective of prevailing market conditions.”
“In general, it is a healthy environment for hedge funds, with allocation from institutional investors expected to rise,” said Daniel Leveau, SigTech vice president of investor solutions (photo at top). “As markets brace for uncertainty, investors expect hedge funds to offer positive returns while reducing portfolio risk… Given the recent turmoil in the financial markets, hedge funds are in a prime position to show their true value for investors; having the ability to deliver absolute returns in any market environment.”
Quant funds in particular are expected to lead the way, with 84 per cent of respondents anticipating that the number of quant strategies being launched over the next two years will increase slightly or dramatically, while institutional investors are also demanding more transparency.
“With historically opaque investment processes, some hedge funds have evaded investor scrutiny by referring to the so-called “black box”,” the report says. “This is changing. In our survey, 90 per cent of hedge funds see an increased demand from institutional investors for greater transparency into their underlying investment processes.”
Sources of alpha are also expected to change, with 32 per cent of respondents saying that digital assets will generate the most alpha over the next three years compared to 18 per cent for equities and 15 per cent for fixed income. The market environment will also be more hostile, with respondents nominating inflation and global economic growth as key risks for returns.
There is also a wide dispersion in return expectations for 2022, with 32 per cent expecting the S&P500 to return between -20 per cent and -10 per cent, while another 23 per cent expected -10 per cent to zero percent and 27 per cent anticipating returns as high as 10 per cent.
While 20 per cent of respondents were from the APAC region, hedge funds aren’t as in favour with superannuation funds due to the high tracking error they often bring with them at a time when funds are unusually benchmark aware. Still, local outfits will get a grim kind of satisfaction from the fact that their strategies would have significantly alleviated the pain that funds experienced through the first half of 2022.
