“Four things CIOs care about: asset allocation, portfolio construction, manager selection, and risk management.” Kip McDaniel is the Chief Content Officer and Editorial Director at Institutional Investor. from capital allocators podcast
The comment from Kip McDaniel provides a roadmap for what any hedge fund needs to address when marketing to a pension or any client. It is not about you, the manager, but the investor.
How does this investment fit within the asset allocation framework of the pension? Why does it matter?
How should this investment be delivered to the client? How does it fit within the overall portfolio construction and use capital efficiently?
What is your edge versus other managers and how can you generate confidence that this edge can be achieved?
What will be done by your fund to protect the money allocated to you? How will your investment help protect the overall portfolio?
The questions are relatively simple, but the answers require a lot of thought if the manager wants to truly be a top service provider.
After hundreds of discussions with hedge fund managers, I am still surprised that there is a fear of revealing investment processes under the assumption that someone will steal their ideas and intellectual capital. There are few investment styles that are truly unique and special. What is special is still strategy execution – the practical process of delivering returns. Skill is with the decision-making execution of information and strategy.
All hedge funds are not created equal as the return box chart shows for the post Financial Crisis period. There is a significant amount of dispersion across hedge fund styles. Over the period 2009-2018, the difference between the best and worst hedge fund category is almost 7 percent after we account for global equities and bonds.
The attraction to private equity and other less liquid alternatives is clear from the Guide to Alternatives by JP Morgan Asset Management. The return profile is much higher for private equity and debt funds than more liquid alternatives and global bonds; however, the dispersion in returns is multiples higher than what can be expected from other public categories.
