Hedge Funds Plus Alternative Risk Premia
Canadian pension plan | October 2017
Engagement at a glance
This Canadian corporate pension fund aimed to invest C$200m in a customised portfolio of hedge funds and alternative risk premia (ARP) exposures. The key aim was to reduce equity risk and provide liquid diversification to the rest of the portfolio, with a target return of cash +4% and volatility of 4-7%.
The pension plan was in a relatively unusual situation of starting with a blank sheet of paper for their liquid alternatives allocation. At the heart of the search was a philosophical desire to allocate to alternative risk premia as core diversifying exposures, whilst also recognising that HFs were required to complete the opportunity set, bringing return sources that are not available within the ARP concept. There was an institutional structural bias towards favouring a single portfolio line item, i.e. finding a partner with strong capabilities across both areas who could combine them in a customised portfolio.
- Given the customised and specialised nature of the mandate, experience and capability were key to assessing the manager universe. Track records, where available, were of limited use in making selection decisions here.
- bfinance’ comprehensive coverage of the ARP space was key in finding managers that are able to offer such strategies alongside a custom portfolio of hedge fund exposures.
- Where managers have core capabilities in both ARP and hedge funds, a key differentiator of the strongest proposals was a clear philosophy on the integration of the two areas, including the complementary nature of exposures (not investing in HFs that provide ARP-like strategies) and the balancing of risk between the two areas.
- Fees varied widely (taking into account both portfolio level and underlying vehicle costs) – bfinance provided a full and transparent look-though estimate of total costs.
- After detailed qualitative comparison and due diligence, narrowing the group to eleven and then four, the client invested with one manager, who was able to demonstrate not only clear competency in both areas but also an ability to coherently combine ARP and HFs.
Our specialist says
The number of asset managers who can provide a top-tier multi-manager hedge fund capability as well as experience in alternative risk premia strategies is not large, particularly given the novelty of much of the ARP space in terms of dedicated products. Even among those with a clear capability in both areas, only a few were able to provide a unified, coherent portfolio using both (rather than a static combination of two separate sleeves).