Christian Nolting, Deutsche Wealth Management
Nolting’s view differs from a number of wealth managers that are recommending hedge funds. UBS Wealth Management, for example, is recommending clients allocate up to 20% of their assets to hedge funds as a diversifier. Bank of Singapore is recommending a 14% allocation to the asset class, while BNP Wealth Management is recommending around 5%-10%.
Other banks, such as Citi Private Bank, have also noted the role of hedge funds in diversification.
“Hedge fund performance was probably not the best in recent years,” Nolting said at a media briefing in Hong Kong yesterday.
“What we don’t want to do now is to put a lot of money into all hedge fund strategies. I think that is something we are really convinced of.”
Hedge fund performance vs bonds and equities
| Benchmark index |
YTD |
2017 | 2016 | 2015 | 2014 | 2013 | 2012 | 2011 | 2010 |
2009 |
| Bloomberg Barclays Global Aggregate |
-1.44 |
7.39 | 2.09 | -3.15 | 0.59 | -2.6 | 4.32 | 5.64 | 5.54 |
6.93 |
| HFRI Asset Weighted Composite |
1.62 |
6.65 | 2.84 | -0.06 | 4.49 | 9.46 | 6.32 | -1.88 | 10.69 |
18.73 |
| MSCI AC World |
3.43 |
20.4 | 9.66 | 1.81 | 9.89 | 26.17 | 16.54 | -5.96 | 11.07 | 29.97 |
|
S&P 500 GT |
4.96 | 21.83 | 11.96 | 1.38 | 13.69 | 32.39 | 16 | 2.11 | 15.06 |
26.46 |
Source: FE Analytics. Annualised performance.
However, he does not dismiss the idea that some hedge funds may be used as a diversifier in the portfolio.
“What we need in the portfolios is something which is uncorrelated to both fixed income and equities. That might be some hedge funds,” he said, adding that investors should be very selective, especially since the broader hedge fund market has become highly correlated with equities.
Within the alternatives space, the firm prefers to look at floating rate notes and convertibles.
“Duration for floating rate notes is normally zero, and from that perspective, it is immune to interest rate changes. So that is something we keep on highlighting.”
Source: Deutsche Wealth Management
Equity shift?
Deutsche Wealth is also seeing some of its clients shifting a portion of their portfolios to equities from fixed income, according to Tuan Huynh, managing director and Asia-Pacific chief investment officer and head of discretionary portfolio management for Asia-Pacific.
Tuan Huynh, Deutsche Wealth Management
“What we also see now is clients moving slowly to the equities space, but obviously they have higher risk profiles,” he said.
But the shift toward equities is not “massive”, Nolting said, adding that most clients are not really concerned about their fixed income allocations.
“We have not seen that clients have moved massively out of fixed income. For that to happen, clients would have to probably see higher yields and then it would take some time that they realise there are negative returns on the fixed income side.”
Most of the firm’s clients are still very conservative when it comes to investing, Huynh explained. These clients are mostly entrepreneurs or second generation family business owners.
“Their risky exposure is still in their company, and hence their liquid investment is typically more in the safer asset classes like bonds.”
For clients who are willing to shift a portion of their assets into equities, Nolting recommends to make use of some hedges, such as options or structured products, to protect against downside risk amid rising volatility in the market.
