Citywire printed articles sponsored by:
View the article online at http://citywire.co.uk/wealth-manager/article/a704255
Be your own hedge fund manager
by Robert St George on Sep 26, 2013 at 10:56
Hedge fund managers were among the pioneers of smart beta. But of course they did not call it anything as ungainly as that. It was, they assured clients, the purest of alpha – for which, naturally, they were entitled to their two and 20 charges.
Those were the good old days. Now the rigours of transparency have somewhat demystified how those managers were generating outsized returns – from derivatives, leverage, currency exposure and so on.
‘That can now all be broken down into individual products,’ observes Soobong Han, co-head of Harewood Solutions, BNP Paribas’ structured investments arm.
This is freeing wealth managers to employ such products in the construction of their own hedged portfolios.
Take a suspicion that the next year will bring a rally in European equities, with value stocks surging to the fore. Traditionally, a wealth manager willing to act on that supposition would have to trawl the fund data to find one with a matching approach and hope it worked out.
That need be the case no longer. Instead, a strategy could be constructed without much effort that married a long position in a European value index – there are several – with a put option of the manager’s choice, all sterling hedged.
Best of all, enthuses Han, that can be done at ‘a fraction of the cost’ of even a normal active fund. Prices generally range from 0.75% annually to a one-off initial 1.5% fee.
Chris Woods, a partner at Shard Capital, which advises on such deals, is surprised more managers are not adopting such strategies. ‘The private client wealth management industry perpetuates this myth that bonds and equities are the go-to assets,’ he says.
Woods decries the received wisdom that the bulk of any portfolio should be in fixed income and stocks. That model, after all, was premised on those two assets being broadly uncorrelated and it is increasingly hard to show they reliably are. So while he recognises they still have a major investment role, he insists more than the token 5% should be allocated to what are known as alternatives.
Tim Parker, the co-head of Harewood Solutions, echoes the sentiment: ‘Instead of asset classes, people are looking behind them for the risk drivers.' He adds there is no longer any need to accept shares or bonds as an aggregate lump as they can be micro-managed according to a macro view.
News sponsored by: