Tactical Portfolios : Strategies and Tactics for Investing in Hedge Funds and Liquid Alternatives

221 Pages·2014·21.07 MB·English

by  McCann

Tactical
Portfolios
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Tactical
Portfolios
Strategies and Tactics
for Investing in Hedge Funds
and Liquid Alternatives
BAILEY McCANN
with contributions from
Opalesque Editors
Cover image: top: © Fanatic Studio / Jupiter Images
bottom: © Photodisc / Jupiter Images
Cover design: Wiley
Copyright © 2014 by Bailey McCann. All rights reserved.
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Library of Congress Cataloging-in-Publication Data:
ISBN 978-1-118-73162-8 (Hardcover)
ISBN 978-1-118-73158-1 (ePDF)
ISBN 978-1-118-73163-5 (ePub)
Printed in the United States of America
10 9 8 7 6 5 4 3 2 1
Contents
Introduction vii
Preface xi
ChaPter 1
hedge Fund Strategies and how they Work 1
ChaPter 2
emerging Managers
Benedicte Gravrand 29
ChaPter 3
how to approach Investing in hedge Funds: Investment Structures 61
ChaPter 4
how to approach Investing in hedge Funds: Service Providers and
Due Diligence 79
ChaPter 5
regulatory regime Changes and Impact 115
ChaPter 6
Managed Futures
Mark Melin 133
ChaPter 7
Investment Mechanics 171
about the author 191
about the Contributors 193
additional resources 195
Index 197
v

Introduction
In just one decade, stocks have halved two times. After reaching a new high
in the first quarter of 2000, the MSCI World stock index found a bot-
tom in September 2002 following the dot.com crisis. The index, which cap-
tures large and mid-cap stocks, lost over 48 percent while hedge funds (as
measured by the HFR Weighted Composite Index) were up net of fees 2.1
percent. When the global financial crisis took stocks down over 50 percent
from their tops in early 2007 through October 2009, hedge fund investors
were reaping over 6 percent during the same time.
Helped by floods of quantitative easing, many global stocks have
reached new highs in 2013.1
You would think that investors would now “hedge their bets” and move
to hedge funds to protect their assets and establish a meaningful diversifica-
tion. The “smart” money has done this, maintaining a significant allocation
to hedge funds.
Investors exIt Hedge Funds at Fastest rate
In Four Years
“Investors exit hedge funds at fastest rate in four years”, says a Reuters
headline on January 13th, 2014. The article refers to the SS&C GlobeOp
Capital Movement Index which calculates monthly hedge fund subscrip-
tions (in-flows) less redemptions (out-flows). With −3.56 percent, December
2013 showed the biggest drop since September 2009. The article continues
that “while the end of the year period usually sees a pick-up in redemptions
as investors look to move money around their portfolio ahead of the New
Year, December’s reading is notably high. In the same month last year the
index measured minus 2.61 percent.”2
For 2013, SS&C GlobeOp’s Hedge Fund Performance Index was up
12.32 percent, which is about half of the return of the MSCI World Index.
So, hedge funds have performed well, but maybe not good enough?
Today (January 14th, 2014), as I write this introduction, another inter-
esting story: “Global stocks fall on concerns about earnings”—is angst com-
ing back to the markets?3 Right now, we don’t know what will happen
vii
viii IntroductIon
and may soon enter an environment where investors wish they had invested
more in hedge funds and absolute return strategies than in long-only equity.
Alexander Ineichen, one of the most well-known researchers on hedge
funds globally, offers the following advice: “Equity investors have been
dancing on thin ice and might continue to do so. It’s difficult to say how long
the ice holds. I’m quite certain though, that at one stage a hedged approach
will reveal itself as more intelligent than a long-only approach. Again. To
stick with the metaphor: A long-only investment style is like dancing on thin
ice, while a long/short investment style is like dancing on thin ice wearing
swimmies: it might look odd at times but it’s safer.”4
LearnIng From YaLe: 51 Percent aLLocatIon
to aLternatIve Investments
Yale’s $20bn endowment has included alternative investment strategies for
over 20 years now. The so-called “endowment model” aims to achieve supe-
rior returns by shifting a significant portion of investments away from tra-
ditional stocks and bonds into carefully selected alternative investments like
private equity, hedge funds, real estate, and others.
While the global financial crisis also managed to drawdown the value
of Yale’s endowment 24.6 percent in the fiscal year ending June 2009, the
endowment model is still regarded the most viable proposition for long-
term investors. How does Yale invest? For 2014, Yale’s investment targets
include a massive 51 percent allocation to alternatives, while only 17 per-
cent is reserved for international and domestic U.S. equities.5
Yale’s investment team, made up of 26 experts, are of course, not the only
institutional investors who look to create tactical portfolios using alternative
investments for both return and diversification goals. Ninety-four percent
of institutional investors surveyed by Russell Investments said they already
allocate to some form of alternatives, on average 22 percent of total assets.
This already represents a significant allocation, which over time will only
continue to go up. In the last three years, alternative mandates accounted for
over 40 percent of all institutional hiring activity made during this period.
Hedge Funds, emergIng managers, LIquId
Investments, and managed Futures
With an average allocation of probably in the single digits, private inves-
tors, together with a lot of their investment advisers, stand on the other
side in this game of investing. There is a lot to catch up, and like in sports,