Looking Beyond the Core
The past couple of years have seen a significant shift from investors placing theirfaith in active management to those losing their confidence in the ability tooutperform and, in an attempt to cut costs, focus on passives instead.Consequently, many asset managers have implemented a core-satellite model totheir fund selection strategy which relies on a passive core and a satellite of a selectnumber of active funds.This is not the case at Zurich-based multi family office Toledo Capital, as seniorfinancial adviser Guy Schochet explains: “In an ideal portfolio we will use a coresatellite model with hedge funds representing the core and ETFs and mutual fundsthe satellite.“However, there are some constraints such as liquidity needs of the client and theclient’s knowledge of hedge funds which can change the assetallocation composition. The average portfolio consists of six hedge funds.”His role entails responsibility for discretionary mandates, giving him significant roomfor manoeuvre when it comes to deciding on a particular investment strategy “Once the client has defined their risk appetite, we construct an appropriateportfolio, but I need to explain the purpose of alternative investments in general andhedge funds in particular to the client.“The main idea of the hedge funds is to protect your investments in distress times,losing as little as possible in bad times is key,” he stresses.
RISE OF ROBOTICS
What are the reasons for his faith in active management? First and foremost, it is hisgrowing scepticism of an increasingly automated fund selection process. “With therise of robotics investing, the way to differentiate yourself is through hedge fundsbecause the market is a lot less transparent and therefore harder for roboticsto enter,” he argues.Moreover, he believes that segments of global equity markets are currentlyovervalued. “If you look at key indicators such as earnings per share, it becomes veryobvious that the stocks featured in key indices such as the S&P are currently at leastfair if not overvalued and there is not much appreciation potential. In thiscontext, we prefer to employ the best minds,” he argues.Consequently, Schochet suggests that hedge funds fulfil a fundamentally differentrole from the short term hunt for profits. “When we decide to invest in a hedge fund,we tend to hold them for a longer period of time. We want them to perform as allweather funds and tend to have an averageholding period of three to five years,” he explains.Another key element of his fund selection process is the focus on correlation. “Welike low correlation funds to main indices, when selecting a fund to add to ourportfolio, we also check the correlation with other funds that we currently have,”Schochet says.
Due to the diverse nature of the hedge fund industry, with individual funds beingnotoriously hard to compare, his approach to selecting funds isunconventional. “Selecting hedge funds is not easy. We don’t currently use databases like Morningstar, instead, we get our ideas either from other investors,from Bloomberg’s weekly hedge fund bulletin, or from funds of funds we areinvesting in.”Similarly, his process requires attention to risk management, but he argues thatinvestors focusing exclusively on regulated funds might miss out on opportunities. “IfI can choose between an off shore fund and a Ucits compliant fund from a big houselike Blackrock , and I don’t have any liquidity needs, I see no reason to choose theUcits fund. Ucits can sometimes even destroy value because of limitations toinvestments. I believe in the liquidity premium,” he argues.At the same time, testing the fund manager’s knowledge is all the moreessential. “We do aim to meet the fund manager in person or at least have aconference call. Of course it depends on the size; if a fund is big enough we don’tneed to meet, but for smaller ones we expect a representative to visit our office atleast a couple of times. It is crucial that they understand exactly what is going on inthe companies they invest in.”