Godfrey is responsible for onboarding investment products for use in clients’ advisory portfolios at the Swiss private bank’s Hong Kong branch. In addition to funds, the products include ETFs, structured products, as well as cash equities and bonds.
Godfrey said that he has seen an increase in demand for market-neutral products and alternative strategies.
Have hedge funds changed?
Alternative funds account for around 20 out of 80 funds on EFG’s short list, Godfrey said.
While alternative strategy funds have much in common with hedge funds in terms of the flexibility of their investment mandates, there are significant differences between hedge funds of a decade ago and today’s alternatives, according to Godfrey.
Hedge funds are largely known as risky, opaque and illiquid instruments with high fees and sub-standard performance. They tend to use excessive leverage.
“Alternative strategies that we look for now are the opposite of that,” Godfrey said. “They are funds that neutralise certain risks and only focus on the risks they feel they are able to be compensated for by performance. They have become a lot smarter in following that process.”
Unlike hedge funds of ten years ago, “they tend to be managed by large asset management firms or large alternative boutiques”, he said, adding that some are Ucits funds, subject to world-class regulation that gives an additional level of comfort.
Godfrey named five types of alternatives that have been in demand. One type is funds that implement convertible arbitrage, or the purchase of convertible bonds while short-selling the underlying stock. The option component of convertibles tends to rise in value in volatile times.
Another promising area is that of global macro funds – unconstrained long-short mixed-asset strategies. They tend to do better in an environment with volatility derived from short-term trends, which have been absent during the past couple of years.
“We might see strong trends emerging and global macro managers may be better able to take advantage of them because they can move around asset classes very flexibly,” Godfrey said.
Similarly, CTAs (commodity trading advisors, who exploit short-term trends using futures contracts) would also benefit from strong trends in the markets, he said.
In bonds, facing the rising interest rate environment, “people have been looking for lower duration fixed income and unconstrained fixed income funds, which can move away from benchmarks and can neutralise duration bets,” Godfrey said.
The last type is systematic or quantitative strategies, which use large amounts of data to detect patterns that allow them to generate alpha, he said. They differ from smart beta in that they don’t follow a fixed index but respond to market data dynamically.
While EFG’s discretionary strategies are based on asset allocation principles and tend to be implemented using funds, advisory accounts implement investors’ views using a broad variety of products.
“One gets the impression that in this part of the world there is more appetite for short-term views than long-term thinking,” Godfrey said. “Those are probably not best served by funds.”
“[In advisory portfolios] you are not bound by the rigidity of asset allocation process, you don’t need to over-diversify into too many funds,” he said.
In onboarding a fund onto the firms’ short list of 80 products, quantitative analysis of performance and other metrics is a start to an in-depth qualitative analysis.
“There have been studies that show that performance data [by itself] doesn’t enable you in any way to predict the future,” Godfrey said. “You have to understand why they performed well and their chances of performing in future market conditions.”
In addition to performance attribution analysis, EFG’s analysts look at the way the fund manager uses research to make decisions. “You can have best research in the world but if the portfolio manager doesn’t make right decisions then they can actually squander the benefits of that research.”
In monitoring funds on the list, they look for indications that the investment process of a fund manager may be changing, how the manager handles fund flows and whether large inflows or outflows are disruptive to the strategy, he added.