Lonsec Releases Hedge Fund Sector Reveiw

By: Lonsec Limited  16-Dec-2005
Keywords: Superannuation Research, Industry Super Funds Research

Lonsec has recently completed its Hedge Fund (excluding Long / Short Equity) Sector Review. Lonsecs 2005 review encompassed a total of 12 funds, including eight hedge fund of funds, two single manager global macro style funds, one single manager relative value / arbitrage style fund, and one single manager event driven style fund. A further 15 long / short equity hedge funds were reviewed and these funds form the basis of a separate research document. There is no doubt that the Hedge Funds (excluding Long / Short Equity) Sector is particularly strong, with a greater skew towards higher ratings when compared to most other asset classes reviewed by Lonsec. This can be in part attributed to the offerings currently available in the market, and in part to Lonsecs somewhat conservative approach towards selecting which managers to rate in this sector. Of the 12 funds rated in this review, five were awarded Lonsecs highest rating of Highly Recommended, five received Recommended ratings, and two received Investment Grade ratings. In the Hedge Fund of Funds sector only one fund received a Highly Recommended rating (HFA Diversified Investments Fund), whilst amongst the single manager hedge funds, the BGI Global Markets Fund, the Basis Aust-Rim Opportunity Fund, the Rubicon MA Fund, and the GSJBWere Global Alpha Fund all received Highly Recommended ratings. Four funds were rated for the first time, being the GSJBWere Multi Strategy Fund (Recommended), the UBS Global Alpha Strategies Fund (Recommended), the Select Gottex Market Neutral Fund (Recommended), and the Challenger FM Global Hedge Fund (Investment Grade). Lonsec upgraded the ratings on 4 funds, being the HFA Diversified Investments Fund (to Highly Recommended), the CFS Global Diversified Strategies Fund (to Recommended), the Rubicon MA Fund (to Highly Recommended), and the GSJBWere Global Alpha Fund (to Highly Recommended). Regarding newly rated funds: The GSJBWere Multi Strategy Fund is a diversified hedge fund of fund advised by boutique US manager, Federal Street Advisers. The Fund aims to achieve an above peer average return through constructing a significantly more concentrated portfolio than most, and managing the Fund to a higher volatility expectation. In Lonsecs opinion, what the firm lacks in depth and longevity is counterbalanced by the experience of its Principals, their long established working relationships, the strong alignment of interests stemming from a high level of co-investment into the funds they manage, and the prudent management of funds under management. The UBS Global Alpha Strategies Fund is a diversified hedge fund of fund. Despite only managing funds within the sector for a moderate period of time, UBS Alternative Investment Solutions (AIS) group has grown very rapidly in recent years to become one of the largest hedge fund of funds managers in the world. AIS has geared up to service the institutional market place and accordingly supports a transparent, robust and repeatable investment process with a desirable and logical separation of functions. The process is very well supported by resources and infrastructure. The Select Gottex Market Neutral Fund is a diversified hedge fund of funds investing into a range of predominantly market neutral strategies. Gottex Fund Management (Gottex)) is a relatively new player in the hedge fund of funds space but supports a team of above average depth and breadth of experience. Lonsec also considers Gottexs investment process to be well structured and thorough. Compared to peer funds reviewed by Lonsec, this fund is far less concentrated, less directional, has a higher tolerance for the use of leverage by underlying managers, and has a far higher allocation to new emerging hedge fund strategies. The Challenger FM Global Hedge Fund is a diversified hedge fund of funds managed by HSBCs internal hedge fund group, HSBC Republic Investments Limited (HRIL). HRIL supports an above average team size, although the average experience level is marginally below that of other managers reviewed by Lonsec. Lonsec considers HRILs research process to be solid and well supported by investment tools and resources, and the manager had a solid long term track record. However, in mid 2005 the groups founder and CEO retired from the organization. In addition to being a loss this also increased key person risk surrounding the remaining senior team members. There were a number of industry themes and trends identified in this review. These include: Massive growth in hedge fund assets (driven by institutional demand) The institutionalisation of many hedge fund of fund managers (driven by the desire to attract this institutional money) The average underlying hedge fund manager (across the industry as a whole) is of lower quality (due to the rapid rise in new managers) Lower recent returns (due in part to adverse market conditions and in part to supply / demand imbalance) Increased staff turnover (due to shortages and wag

Keywords: Industry Super Funds Research, Superannuation Research,

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