The inclusion of hedge funds in an SMSF portfolio could be beneficial as they provided greater degrees of diversification and lessened the impact of market volatility for fund members, according to a global fund manager.
Certitude Global Investments chief executive Craig Mowll told selfmanagedsuper hedge funds could make SMSF portfolios more diversified as they did not attempt to outperform a benchmark and were more focused on producing above-market returns or alpha.
“That alpha is generally uncorrelated with long-only strategies. So what you end up getting is, when it’s uncorrelated that way, a consistency of returns with low volatility,” Mowll said.
“You tend to give up a little bit on the upside, but what you do get is protection on the downside, so elements of capital preservation, so you don’t get that huge drawdown if markets were to drop significantly.”
He said hedge funds had the ability to smooth portfolio returns as their managers looked to make money in both rising and falling markets, unlike long-only strategies that were purely reliant on markets performing strongly.
Typically, SMSF trustees had not shown much interest in the past, with lack of transparency and information being two hindering factors, but he said that situation was changing through the use of managed accounts.
“Any hedge fund manager worth their salt is now using managed accounts,” he said.
“For example, our hedge fund partner, Lighthouse Partners, is a fund-of-hedge-fund manager. So it’s investing into underlying strategies.
“But those underlying strategies are operating with complete transparency as Lighthouse owns the managed accounts. All the money is invested into the strategies by Lighthouse, but the fund managers don’t own the assets, Lighthouse does.
“So they can give complete transparency as to the underlying assets to see what they’ve got.”
He said he was starting to see SMSF interest in hedge funds pick up, mainly in the global equities space.
“What we’re now starting to see in the research we get is SMSFs are definitely looking for international equity diversification. So we’re starting to see them research the appropriate ways to manage that,” he said.
“When they’re going into hedge funds they’re looking at two types of strategies more than any other. One is a diversified multi-strategy where the manager themselves are dictating how much they want to allocate to areas such as credit, global long short, and market-neutral strategies.
“Or they’re really keen on global equity markets and they’re just looking for another strategy that’s going to have very low market risk to go with the long-only strategy they’re building.”
He said he considered a standard allocation to hedge funds would be between 5 per cent and 15 per cent.
