Bringing you live news and features since 2013
Bringing you news, views and analysis since 2013
Michael Markov

21164

MPI cautions institutional investors over rush to exit hedge fund investments

RELATED TOPICS​

Institutional investors should undertake a quantitative analysis of their hedge fund investments’ long-term contribution to overall portfolio efficiency, rather than basing their asset allocation strategies on a short-term comparison with equity benchmarks. 

That’s the conclusion of a new research study – ‘Hexit: Is Now the Time to Pull Out of Hedge Funds?’ – based on analysis conducted by MPI (Markov Processes International, Inc.), specialists in the analysis of systematic factors influencing investment performance, which provides analytics and reporting solutions to the financial services industry.  

In response to the steady flow of announcements from large institutional investors scaling back or exiting their hedge fund investments – often citing under-performance against equities – MPI analysed the contribution of hedge funds to broad-based portfolios over three time horizons. 

By running established performance proxies through MPI’s asset allocation tool, the analysis found hedge funds, in general, still provide valuable diversification benefits and improve portfolio efficiency, even during periods of extended equity bull markets (2003-2016). Even though hedge fund allocations may not provide the same efficiency benefits over stock-and-bond portfolios in the current 2009-2016 bull run, they remain an effective performance stabiliser through turbulent periods.

“There has been a lot of attention paid to hedge fund fee structures and under-performance versus equity benchmarks, but we wanted to establish whether hedge funds were delivering on their core role within investment portfolios,” says Michael Markov (pictured), co-founder and chairman at MPI. “Hedge funds are not designed – and should not be expected – to outperform equity markets during protracted equity market rallies. Despite the focus on performance alone by many in the industry, hedge funds aim at volatility reduction, improving diversification within a portfolio and typically deliver superior long-term risk-adjusted return.”

Using an asset allocation framework, the MPI research team demonstrated that investment in hedge funds would have improved the portfolio efficiency of cash, bonds and equity portfolios, for any risk tolerance level, for the periods January 2003-June 2009 and January 2003-April 2016.

Nevertheless, MPI’s research also suggests that small allocations to hedge funds may not be appropriate for institutional investors in prevailing market conditions. “When analysing efficient allocations, we found that the optimal hedge fund allocation hits the 25% maximum constraint very quickly in the two cases that include the crisis period. This indicates that a small (i.e. 1%) hedge fund allocation may be harder to justify, echoing the results of our previous analysis of CalPERS decision to exit hedge funds,” said Daniel Li, co-author of the research paper.

As such, MPI asserts institutional investors should conduct a thorough quantitative analysis of their particular hedge fund investments’ contribution to their own strategy, using appropriate performance benchmarks and proxies. “In light of the challenges of implementing a hedge fund investment strategy effectively, we will examine the impact of fund selection on overall portfolio efficiency in a follow-up research paper,” says Markov.

Latest News

Irish domiciled funds surpassed EUR4.3 trillion AuM (Assets under Management) at end-March 2024, a 15..
New analysis by London-based Nickel Digital Asset Management reveals 38 listed companies with a combined..
Bloomberg has announced that for the first time, its proprietary Bloomberg Second Measure (BSM) transaction..

Related Articles

Global ESG Investing
On May 15 Florida’s Republican Governor Ron DeSantis signed legislation that furthers his ongoing campaign to oppose the role of climate change and ESG factors in state policymaking...
On May 15 Florida’s Republican Governor Ron DeSantis signed legislation that furthers his ongoing campaign to oppose the role of..
Trends
The trend to buyout among the UK’s smaller defined benefit (DB) schemes continues with a slew of new sub GBP100 million deals announced this month alone...
The trend to buyout among the UK’s smaller defined benefit (DB) schemes continues with a slew of new sub GBP100..
Different flavours
In what is believed to be the first survey of its kind in the UK market, Nedgroup Investments, the investment-led, multi-boutique global asset manager with over USD20 billion under management, recently undertook a survey with 204 UK investment professionals, seeking insights into their perceptions and attitudes towards boutique asset managers...
In what is believed to be the first survey of its kind in the UK market, Nedgroup Investments, the investment-led,..
UK map
UK local government pension schemes (LGPS) are leading the charge on investment in private markets issuing tenders set to be worth billions of pounds in the coming years...
UK local government pension schemes (LGPS) are leading the charge on investment in private markets issuing tenders set to be..
Subscribe to the Institutional Asset Manager newsletter

Subscribe for access to our weekly newsletter, newsletter archive, updates on the site and exclusive email content.

Marketing by