From Hedge Fund Allocation to Bespoke Implementation
As institutional investors increasingly seek more control over hedge fund exposure and portfolio outcomes, implementation has become as important as allocation. A well-designed hedge fund strategy can work well as a standalone allocation, but varying investment constraints and requirements may call for a bespoke approach. Bespoke solutions are becoming increasingly relevant as recent regulatory changes across Europe allow for greater customization.
42% of institutional investors prefer separately managed accounts due to customization, transparency and capital efficiency¹
Below, we share a few of the most common examples of bespoke solutions we have come across, along with their potential benefits and trade-offs. This is a hypothetical and indicative illustration of what a bespoke solution could look like compared to AIM Diversified Strategies Fund (ADS).
Case 1: Hypothetical investor with an objective to increase liquidity
In this example, a hypothetical investor seeks a more liquid investment solution. The chart compares the quarterly-liquidity ADS fund with a monthly-liquidity hedge fund portfolio consisting of more liquid underlying investments. Such a bespoke solution can provide a more liquid solution, offering the investor greater flexibility in managing capital and the ability to respond quickly to changing market conditions. The trade-off is that a more liquid investment solution often comes at a cost, which can in turn reduce long-term return expectations. Liquid hedge funds often need to allocate more to readily tradable asset classes, exposing them to greater price fluctuations and potentially also resulting in higher volatility.
Case 2: Hypothetical investor with an objective to emphasize equity strategies
In this case, a hypothetical investor seeks to increase equity beta by adding high-equity-beta funds on top of the ADS fund. The ADS is a beta-neutral fund, so with this solution, investors will be more exposed to movements in equity markets. Due to the higher correlation with equity markets, volatility generally increases, but absolute returns may be higher in line with the increased risk. On the other hand, funds with low equity beta may offer better risk-adjusted returns, so the investor should consider what level of risk they are willing to take.
In our view, a bespoke approach can be a useful tool for addressing specific portfolio requirements where a standard solution may not fully meet an investor's needs. The key is understanding how different objectives can shape the characteristics of the resulting solution.
If you would like to explore how a bespoke solution could work in practice, please contact us.
Disclaimer:
The hypothetical portfolios are constructed using historical performance data for selected liquid hedge funds. The portfolios have not existed or been offered as investment products. Performance is shown for illustrative purposes only. Past performance does not predict future returns.
For professional investors only. This is a marketing communication.