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The Pitfalls Of Buying Alternative Investments

February, 04 2013

The Darwinian Selection

A week ago I had the opportunity to confirm that sentiment as I participated to the Forum of Alternative Investment in Geneva.  Actually  I could evaluate the always strong interest in this asset class.

The funds of funds was virtually broke in 2008, because of the real absence of liquidity-side pockets are just tricks. Although that the industry as a whole did not really adapt to the new challenges, the crisis and its consequences favored actors who were well positioned before. The real direction of the natural selection: the best adapted individuals ex–ante are the ones who survive. The Darwinian selection does not bring in a process of adaptation within the same individual. In the end hedge funds, whether in their present or some reformulated structure, will move from being the alternative to being the standard.  The future looks promisising for a more specialized approach. Hence a core-satellite approach for liquid investments should therefore also become common among European institutions.

Among the favorite strategies for this year our PREMIUM RECO

  1. 1) CTA which brings a real decorrelation to other assets and can bring some additional returns (see Generating Absolute Returns in Stressful Market Environments)
  2. 2) Long / Short which can bring some either some smoothing or some accelerator
  3. 3) Event Driven and Macro  which offer opportunities based on tangible facts related to major challenges.  (See Fundana presentation)


Pricing, Transparency, and Liquidity

Since hedge funds are now a dominant force in the market, they can’t, as a group, outperform the market and as Georges Soros said “Institutions that invest in the industry should expect poor performance, in part because managers charge high fees”. Therefore we recommend investors to focus on pricing, transparency, and liquidity, including an increased ability to withdraw capital on demand and get it back in cash. In this scheme Investlogic  is part of this process and ready to advise and help his clients. In 2012, a larger percentage of assets went to funds with monthly or better liquidity while assets to funds with longer lock-ups continued to decline. This data suggests a trend towards investor desire for more liquid hedge fund structures.

In 2013

Looking at Europe and the Middle East, some investors will see the uncertain situations in these regions as a challenge and will look for opportunities in Emerging Markets. While credit will be tighter overall, many managers will seek to take advantage of the volatility in the European Union, seeing greater potential for returns.

For this year, the ever-shifting landscape in Asia has reinforced the sentiment that hedge funds provide relatively stable, core investment opportunities. To the extent investors see growth opportunities in the region, they will be interested in investing with fund managers that have a demonstrated ability to dampen the higher volatility that characterises many of the markets in Asia.

Last year statistics…

  • On a sector level, the range of dispersion was largest for the Emerging Market sector in 2012 though the bulk of returns were mostly positive for the strategy over the same period
  • Overall, a greater number of hedge fund managers posted positive performance in 2012, approximately 75%, compared to 35% in 2011
  • The industry outflows was of approximately $31 B in 2012
  • Overall, asset flows were positive for four months in 2012
  • Including performance gains, overall AUM is estimated to be $1.8 trillion as of 12/31/12
  • Fixed Income Arbitrage had the largest inflows by percentage of assets, gaining 16% in 2012
  • Multi-Strategy and Event Driven were the largest positive contributors to Dow Jones Credit Suisse Hedge Fund Index performance in 2012, while Managed Futures and Dedicated Short Bias were the only negative contributors
  • Over longer time periods, Global Macro has generally ranked as a top performing strategy while Dedicated Short Bias and Equity Market Neutral have performed near the bottom