We have had a good start to the year. Our seed account is up c.2.23% through to mid April, net of all fees and unaudited. This is pleasing as the account is ahead of both the equity indices and the bond market.
Of greater significance to us, is the stability of the returns. The account was only down 28bps in February, when the market went through a dramatic sell off and volatility spiked.
Three key drivers of performance:
1. Our asset allocation and some good stock picking. We came into the year with a relatively defensive allocation, being Overweight Alternatives, Gold and cash. While underweight direct equities, a number of the names we had allocations to performed well. We largely exited our equity exposure in late January, on the back of looking overbought.
2. Lower transactions fees from our preferred Private Bank. We have shifted a substantial amount of capital into alternatives (hedge funds) in the last few months and have saved the client in all likelihood around 50bps in transaction fees, by transacting with our preferred PB (we have negotiated some very low fees). This would otherwise have been a drag to performance.
3. Our allocation to Alternatives, namely Hedge Funds (or simply what we believe are super ‘smart managers’). Our analysis of the markets, with all its potential variables, has prompted us to shift more capital into hedge funds. Bonds are generally fully priced, as are equities in many markets, and we far prefer to invest in managers that can, for example, take equity exposure without taking on all the market Beta, or are able to play parts of the yield curve to capture market moves.
For example, one fund we like a lot is up c.14% YTD. It’s a Macro Fixed Income manager and while we like it for the performance, we selected the manager on the back of his limited correlation to the equity and bond markets. Important when volatility picks up in the markets, or they go through a sell off. We also like the manager as he has a consistent track record over the last c.15 years, has kept to style and is clearly capable of generating performance over various market cycles.
Another manager we like is on the Equity long-short side and is up around 4%, to the end of March. Not bad when the equity markets were down in most cases. This particular manager has demonstrated a consistent approach in stock picking, both on the long and short side and strong drawdown controls.
This is again a very important aspect of money management – we are looking for managers that can reduce risk at the right time and before portfolio losses mount. It’s an art that most managers find hard to follow, particularly if they have limited experience.
The table below shows a screenshot of some of the manager analysis we run. It highlights the correlation of managers against each other and the markets. While we have exposure to most of the managers shown, our preference is with those where the correlation is lowest. Most High Net Worth investors and family offices we meet with, are still very underweight Alternatives as an asset class. There seems to be a general lack of understanding as to how powerful an allocation to this asset class can be – both as a diversifier but also for increasing returns.
JP Morgan has an excellent chart which shows how the Efficient Frontier can be elevated by simply adding in Alternatives. Basically, for the same level of risk, or volatility, you get a higher level of return. Greater returns, less risk.
We have also done our own backtesting in our asset allocation analysis and find an allocation of around 30% to alternatives can have a positive impact on reducing drawdowns and improving returns.
The other fallacy that many have is that Alternatives, or Hedge Fund Managers don’t generate strong returns. They base this on the Indices which are a blend of thousands of managers. The reality is that many mangers generate outstanding returns. It’s about selecting the right ones and having the skill to do so. We feel we have a good mix of managers that generate outsized returns, as well as to those that are more conservative and have lower volatility.
Going forward, we are still on the look out for good macro managers, an area we want to add exposure to.
We like one in particular. The manager has a relatively simple process, having exposure to bonds, equities, FX and rates – but I like the manager’s aggressive stance to look for opportunities on both the long and short side. The manager is still relatively small and thus nimble to take such opportunities.
We are very happy to meet and discuss further, the benefits of Alternatives and Hedge Funds as an asset class. We currently manage a highly diversified Fund of Fund product, with a bias to alternatives and can very easily run this pari pasu for new clients, or establish something better suited to their risk/return profile.
This post is intended only for accredited or institutional readers, as defined by .The information presented herein is considered reliable at the present time, however, we do not represent that it is accurate or complete, or that it should be relied upon as such. Performance data is based on bank reports and is dependent on fund filings and bank reporting. As such they should be seen as estimates and regarded for information purposes only and should not be relied upon. Speculation or stated beliefs about future events, such as market and economic conditions, company or security performance or other projections represent the beliefs of the authors and do not necessarily represent the views of MW Capital Management PteLtd. Nothing in this document should be perceived in any way as a recommendation or offer to buy or sell any security or fund. Any individual securities or funds mentioned are simply an example of areas we are currently invested in and will not be suitable for all investors. Any views and current investments may and will change over time and should not be relied on in any way.This document is not an offer to sell nor is it the solicitation of an offer to purchase any services offered, or any fund managed or recommended, by MW Capital Management PteLtd. In no way should this post be considered as being approved by any regulator or regulating authority. Investment in hedge Funds can involve total loss of principle and are meant for sophisticated investors who understand and can afford the total loss of their investment. Many hedge Funds use leverage which can exacerbate losses. Past performance is not indicative of future returns. It is intended only for accredited investors, domiciled in countries in which collective investment schemes are permitted for public distribution, offering and sale under the applicable local legislation. General business, market, economic and political conditions could cause actual results to differ materially from what the authors presently anticipate. This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. The views expressed may change without notice. All investments involve risk, including the potential loss of principal.