I have  previously  discussed  that  since  the Global Financial  Crisis, Australian  Hedge Fund Managers have done it tough. There has been recovery  and some managers have done quite well, good performance and improving AUM. Institutional investors are adding alternatives to the asset allocation   and   Asset   Consultants    are   building Hedge  Fund  teams. Considering  our  business  of third party marketing,  we have seen new potential investors    and   old   investors    beefing   up   their intended and existing allocations to hedge funds.

At the same time, there is the age-old comparison of  Equity  Market  performance   against the  lower volatility performance  of a portfolio of hedge funds. Fund managers can never win. They are doing the right thing by clients, by adding exposures to assets with a low correlation to Equity markets but this can reduce  the  net  return  on  a  portfolio  that  has  a standard   allocation     to    Equities.     Non-market professionals  will  look  at the  multiple  pieces  of a portfolio,  see  outstanding  year-to-date  for equities and  not  as  good  performance  of alternatives  and possibly Fixed Income. They will ask the question, ʻwhy have you got these allocations in your portfolio, and   shouldnʼt   you  be  overweight   this   booming share market?ʼ. Iʼm still a great believer in a steady- returning Fund of Hedge Funds. FoFs are still quite out of favour, but I do think they will come back.

For years I have been thinking about my own Superannuation  Fund. Iʼd like a mix of Credit, Fixed Income,  with a couple of Hedge Fund of Funds is my  desired  portfolio.  Add  in  a  bit  of Long  Short Equity or Market Neutral, if you arenʼt getting that in your FoF exposure. Thatʼs my personal desire. For a retail client, it is really difficult to get an exposure to a locally based Fund of Funds. Advance Global Alpha and Fauchier Partners are available in the Australian market,  but there is not much  more on offer.

Fund   of   Fund   products   these   days   are   quite different to the pre-GFC products. The old-style products  were  situated  as  Fixed  Interest alternatives   because   the   risk   as   measured   by volatility was similar. Super Funds reduced Fixed Income allocations in favour of HF FoFs. The GFC hit and the miscalculation  was the lack of liquidity with  redemptions  forcing huge  declines  in  asset values.  Many  of  the  large  Supers  liquidated  their FoF holdings never to be seen in the sector again. That  seems  to  be  changing  but  the  product  is different.  Two  factors  have  changed  the  product design: fees and liquidity. The Hedge Fund industry, to survive, has had to adapt to the new environment.

I  recently  met  with  a  Superfund  that  has  a  fee budget across their overall portfolio of 50 bpts. They have significant exposures to Alternatives and Property. The Fund would probably set the asset allocation weightings, add low-fee beta managers allocation in each sector, and then add in active managers and hedge funds (PE as well) as satellite managers. By the way, Iʼm guessing that this is the case. The terminology Smart Beta has recently become widely used. Investors are looking to have exposures to Smart Betas. Interestingly, they are assisting  Fund  of Funds  in the  new  environment. Products   in  the  Fund  of  Fund  space  are  now becoming a combination of Hedge Funds, CTA and Macro  Managed  accounts  and  Replication,  which can be achieved by investing in Smart Betas. One of  our  clients,  Ramius Alternative  Solutions,  is  a leader  in the development  of Smart  Betas. Combined,   the products   offer  significantly   lower fees  and  possibly  daily  liquidity.  I  think  product issuers would rather monthly, but dependent on the client requirements,  daily is achievable. Putting all of this together has me seeing to increase in allocations  to  Fund  of  Funds.  This  will  be good news for Australian managers.

Australian  based  Equity  Hedge  Funds  have  done very well. The Bank of Bermuda  Asia Hedge Aust L/S Equity Index is up 22% in the last 12 months. The mixed news is that Iʼm not sure that AUM has gone up. Still, there is a lag lead in this business. Aussie managers will start to attract attention once offshore  managers  reach  capacity.  Hedge  Funds flows  tend  to  originate  out  the  US,  then  Europe. Flows find there way to Asian managers  and then down to Australia.  This was the pre 2008 pattern, which will probably repeat itself this time around.

2014 is shaping up to be a continuation of this year in  that  everyone  expects  tapering  but it  doesnʼt seem to faze the Equity market bull. Yes there are questions about an overheated market but that only suggests  corrections  in  an  overall  upward  trend. The  positive  tone normally  spills  over  into  other asset   classes   irrespective   of   performance   and hedge funds (still seeking a lower correlated return profile)   will   benefit   with   fund   flow.   As   I have mentioned, Fund of Funds will also benefit, in their new lower fee and liquid format. Then Aussie hedge funds should see that global flow make itʼs way to Australia. 2014 should be positive for Aussie managerʼs business, but itʼs been a long time coming!!!