The evolution of hedge funds of funds businesses around the world has presented institutional and other investors with a greater array of partners with whom they can formulate strategies to better target outcomes. Greg Bright spoke with David Walter, the regional head of research for the US$10.5 billion fund of funds and advisory company PAAMCO, who is in Australia this month for the annual AIMA Australia Hedge Fund Forum.
In response to changing demands from, mainly, their big institutional clients, including an inexorable downward pressure on fees, the major hedge funds of funds firms over the past few years have morphed into something more akin to advisors in the alternatives space, offering implemented solutions along with traditional portfolio-building services.
According to David Walter, the head of research for the Asia Pacific region for US-based PAAMCO (Pacific Alternative Asset Management Company), big investors such as pension funds are no longer thinking of alternatives such as hedge funds as distinct asset classes. They are using the alternatives strategies to enhance their existing exposures – either through higher returns or reduced risk – in the mainstream asset classes of equities, bonds and credit. Walter will be speaking on the North American trends at the AIMA annual forum at the Sofitel Wentworth Hotel in Sydney on September 16.
He says that, while the focus on fund of funds fees has become sharper since the global financial crisis and investors are also keener to avoid strategies which are correlated with equities, they are becoming more diversified as a way to protect themselves from downside risk. This is good news for alternatives managers and advisors.
“The question I get asked a lot is: ‘what is the correlation of such a strategy with the S&P 500 or treasury bonds’,” Walter says. “We are seeing fees coming down and transparency going up. We’re also seeing more use of managed accounts and more customization.”
Walter got involved in the hedge fund industry in the late 1990s, as the tech boom was in full flight. He was running a long/short equities fund in Japan. He then decided to get into hedge funds of funds, after the tech bubble burst, built a successful business which was acquired by Belgian Bank. During the global financial crisis, when the bank needed to divest its non-core businesses, Walter joined PAAMCO, with a lot of his clients following.
These days he is based in Singapore, looking for Asian-focused investments. He looks for managers and ‘ideas’. This is the story of hedge funds of funds managers. PAAMCO has a little under US$1 billion invested in the region.
Walter says: “Our business has morphed, like a lot of hedge funds, it’s now an industry where people are looking for exposures rather than investments. It’s become much more sophisticated.”
PAAMCO’s money is 100 per cent institutional. The firm was founded in 2000 and has 130 staff, mostly based in Irvine, California, but with offices in London and Singapore.
Walter says that the firm will not go down the retail route, despite the attraction if a min-boom happening in the US whereby alternatives managers, offering daily liquidity, are flavour of the month. He says: “I think there may be trouble ahead… Our view is that the provision of liquidity does cause a conflict of interest, so we avoid that.”
All of the managers which PAAMCO invests with have either managed accounts or offer “funds of one” – usually for big pension fund clients. It operates mainly in liquids investments, with durations of about one year for a trade.
He says that most of the growth in alternatives in North America is being driven by demand from the big pension funds. “We’re seeing a bit of private banking money coming back, and some endowments, which take a longer view, but mostly its pension funds for us.”
Click here for the AIMA forum registration and agenda.