SWFs get long view, hedgies stuck in tunnel vision

Hedge fund managers, particularly in Asia, have been pressed about their ability -- or in some cases the lack thereof -- to generate returns, particularly in volatile markets.

Pose this challenge to a panel of sovereign wealth fund executives, with hedge fund managers in the audience, and it becomes an interesting play in contrasts. 

"When GIC was first set up in 1981 we had the real objective of generating long-term returns," says Lim Chow Kiat, deputy group chief investment officer at GIC Asset Management, which is the Singapore government unit that handles investments in alternatives, equities, fixed income and foreign exchange. 

During a panel discussion at the Salt Singapore hedge fund conference yesterday, Lim recalls that at the time of GIC's inception, interest rates were 14-15% and US stocks were trading at mid-to-high double-digit multiples.

GIC views volatility as an opportunity. "That could be the time where you find that there are value gaps in the marketplace. As a long-term investor there could be a window for us pick up those assets. Keeping to that long-term perspective is key."

The Canada Pension Plan Investment Board (CPPIB) has a 75-year time horizon, notes its chief executive, Mark Wiseman. This is slightly higher than the average life expectancy of Canadian males, which is 78.

"Short-term volatility is an issue, but it's an accounting issue as opposed to a portfolio management issue," says Wiseman."We have to report on a quarterly basis and annual basis as if we were a publicly listed company.

"Volatility is a problem, but we try to separate ourselves from that. We try to stay away from worrying about annual returns of the fund."

The CPPIB has a 4% real return annual target over its 75-year horizon, which Wiseman acknowledges is "not an easy rate of return, particularly in current market conditions". 

Khazanah Nasional Berhad, the Malaysian state investment agency, likewise takes an equally long perspective. "If something goes wrong I'm not going to get a cue from people outside of the investment fund wanting their money back, thankfully," says the fund's managing director, Tan Sri Azman Mokhtar. 

"Of course [the government] expects some dividends, as one of our investors. When crisis hits, it’s often a case of musical chairs … you've got to look better than the next guy," says Mokhtar.

While Khazanah has no hedge fund investments, GIC has exposure to the asset class in "various styles and various segments, from long/short equity to macro to event-driven”, says Lim. "It remains a very important source of returns for us."

The CPPIB has about $12 billion in hedge fund investments, says Wiseman. "Increasingly we're backing managers that are based in Hong Kong." 

The long-term view taken by sovereigns is in stark contrast to hedge funds, which are faced with investor expectations of generating returns on a regular basis, regardless of market conditions. These expectations were addressed in a separate panel comprising hedge fund allocators.

A decade ago, hedge fund investing was "a fairly uniform approach", says Ray Nolte, managing partner of US fund-of-hedge-fund Skybridge, which is the organiser of Salt Singapore. "You could simply pick and choose almost any fund and it would work pretty well."

With the onset of the financial crisis, "there was a real awakening of the risk profiles that exist on strategies [and] it affected allocation in different ways”, says Nolte. He recalls a discussion about performance with a large institutional client "and they couldn't have been happier with [being] roughly down 20% [on their hedge fund exposures] because they were down 50% on the rest of their portfolio".

By contrast, "other investors couldn't comprehend how you could have actually lost money", says Nolte. "They really view [alternatives] as making money in all environments all the time."

Manraj Sekhon, chief investment officer and chief executive of Fullerton Fund Management, concurs: "A lot more conversations about what is realistic in this environment and expectation of returns is needed."

Harold Yoon, chief investment officer of Hong Kong-based fund-of-hedge-fund manager Sail Advisors, notes that some investors are asking for daily or monthly liquidity. "But the reality is, I don't think that is what most investors need. They're just scared of having a repeat of 2008 when [hedge funds] gated and suspended accounts."

While there are far fewer illiquid holdings in hedge fund portfolios nowadays, some investment assets are "somewhat illiquid", says Yoon. An Asian crisis, for example, can create huge opportunities, but the assets need to be held for one to two years to generate maximum returns.

Expanding hedge fund investment pools to the retail sector, as an alternative to focusing on institutional investors, is not an ideal way to grow capital, the panellists agreed.

"What would be the backlash, if retail investors invested in a fraud [fund]?" says Yoon.   

Scott Kalb, adviser to the Korea Investment Corporation, recalls: "I used to be in the position of being an asset allocator, and I always found it incredible that I could lose $100 million on General Motors stock and no one would really care, but if I lost $10 million on some alternative investment, everybody went crazy."

Kalb adds: "Don't put your rent money into the alternative investment space. This is really a part of your savings that you can afford to take some risk and take a longer-term view and it's very complicated and very painful when you try to make an illiquid asset suddenly very liquid."