Rene Buehlmann, managing director and head of investment products and services in Hong Kong for UBS Wealth Management, talks to Hubbis about opportunities and trends in the alternatives space, including in relation to due diligence and fees, and about what is required to help get advisers more engaged in conversations with clients about relevant products.
Date: Apr 13, 2012
What are the trends in alternative investments at the moment?
Since 2008, while there have been greater inflows from institutional investors into alternatives, the take-up in the private client space has remained slow, and there are no clear investment trends.
High net worth (HNW) clients are still feeling the effects of what happened to them during the financial crisis in 2008. Some of them were impacted by gating and others suffered losses from performance.
Since 2008, 2009 and 2010 were solid years in terms of recovery, but 2011 was another volatile year. Yet hedge funds did what they are supposed to do – reduce losses for investors. As a result, if the broader market is stabilising now after a year of losses, I would expect to see some pick-up.
Based on these trends, how should investors now view alternatives such as hedge funds?
We see a general move by HNW clients away from fund of funds. Instead, they are either buying single managers – but still diversified – or even single hedge funds in some cases.
A key benefit of this approach is transparency, because it is easier to explain what a single hedge fund is doing. Yet this also comes with the concentration risk of investing in a single fund or strategy.
Overall, if investors look at the last 12 years of hedge fund performance, there have only been two negative years in the non-traditional asset class space.
So while there are no clear trends in either hedge funds or private equity, we think that these investments should form part of a HNW client’s core asset allocation, rather than clients chasing performance. However, this requires a lot of education to re-emphasise the benefits of alternatives in an overall portfolio.
What interest is there in Asian-based hedge funds?
Asian hedge funds are still in their infancy, although more interest is slowly emerging. One of the issues is the need for a longer track record.
Historically, Asian hedge funds have focused on equity long/short funds, but some macro funds are coming to market as clients are looking for new strategies. Emerging market strategies in the debt space are also of growing interest.
How significant is the UCITS development in an Asian context?
These structures allow HNW clients in Asia to play certain themes in a more liquid way, given the regulatory requirement for bi-weekly liquidity.
In addition, the regulatory oversight can provide more comfort and confidence to investors.
In volatile markets, it is important to have strategies which can play on either side of the market. Even though investors might have still seen some losses through long/short strategies in 2011, these would have been much less than with long-only investments.
Saying this, the UCITS space is still evolving and track records will take time to develop. As with any fund, it is important to select the right managers and do thorough due diligence.
In what ways have you changed your approach to due diligence in the wake of 2008?
We feel that we navigated the difficult periods in recent years quite effectively. We avoided the big blow-ups because our due diligence process had previously uncovered concerns with those funds.
I therefore have a lot of confidence in our existing due diligence process, and I think that this distinguishes us as a firm and ensures we can deliver solid performance.
To what extent are investors now focused more on fees?
In response to this, we need to be transparent in explaining to clients what they are paying and what those fees are for.
Some clients shun hedge funds because they think they are too expensive for what they offer. But in reality, the fees paid to a fund of fund relate to the due diligence and other work required as part of the investment process.
This is another reason why UCITS structures are getting more popular, and this is where I see the market heading. These funds are cheaper, more transparent and offer greater liquidity.
At the same time, the trade-off is the lower risk-reward incentive given limitations on features such as leverage under the UCITS regime.
What is required to help frontline advisers get better educated and feel more confident about having conversations with their clients about alternatives?
We spend a lot of time training our client advisers about the merits of non-traditional asset classes.
This includes aspects such as: where they fit within a typical portfolio, in what proportion, how to position them, and how to explain them to clients.
Liquidity planning is also an important part of the education process.
What challenges do you face in the process of getting your advisers up the learning curve, for example with hedge funds?
Some of the biggest challenges include actually understanding what the various hedge funds do – for example, how they generate alpha and how the different strategies work in practice.
In addition to this, it isn’t possible to see the actual mechanism behind the strategy to understand how the hedge funds are implementing the strategy and making money.
This requires hedge funds to be a bit more transparent. Client advisers would then be more comfortable to sell the fund as they could explain the processes in more detail.
Until this happens, however, we need to explain to clients the basics, including the various tools that the hedge fund managers use, what UCITS is and how it works, and how to position hedge funds – or any other alternative – in an asset allocation context.
So how should clients view the role of alternatives in a portfolio?
Hedge funds have different value-drivers when compared with traditional investments.
These funds are less dependent on equity-market volatility or interest-rate fluctuations. Blending them with conventional equities and bond-fund portfolios can reduce volatility and optimize an investor’s risk/return profile.
Subsequently, certain types of hedge funds can be considered as a core holding, whereas others, predominantly single managers, can be included as satellite investments.
Historically, the advice has been that 5% to 20% of a portfolio should be invested in alternative investments. But I would challenge that today given the UCITS evolution.
For example, a UCITS long/short fund should essentially be considered as an allocation to equities – it is just about how it is managed. In fact, ongoing innovation in the industry results in more flexibility for clients, which is to be welcomed.