David Gaud, Pictet Wealth Management
Hedge funds saw massive outflows in 2018. Globally, hedge funds had net outflows of $35.8bn – the second worst year since 2009, just behind the $111.6bn of outflows in 2016, according to an Evestment report.
Performance was also in the red, with the Hedge Fund Aggregate Index returning -5.05% in 2018. However, that was higher compared to the MSCI AC World’s performance of -8.93%, according to FE data.
“It was an impossible year for certain hedge fund categories, particularly macro- and event-driven strategies,” David Gaud, Singapore-based chief investment officer for Asia at Pictet Wealth Management, said at a media briefing in Hong Kong yesterday.
However, Gaud believes that hedge funds are still necessary in a client’s portfolio.
“Hedge funds are a very stabilising solution in a long-term perspective. So the asset class cannot be put into question because of one difficult year.
“We also monitor them properly and provided that you get an explanation from the fund manager where the under-performance comes from, then you avoid big accidents,” he said.
The firm has a team of fund selectors who choose six-to-nine products for hedge fund allocations, which tends to be balanced among different strategies, Gaud said, but did not give further details.
Other wealth managers also allocate to hedge funds.
Union Bancaire Privée, for example, uses long-short equity hedge funds for both its US and European equities exposure, Norman Villamin, Zurich-based chief investment officer for private banking, said recently.
“We have long-short [exposure to] US tech stocks. That has helped us quite a lot in a period like November and December. It allows us to stay in without taking the full brunt of sell-offs,” Villamin said.
Deutsche Bank Wealth Management is also recommending a 10% allocation to alternatives, which include hedge funds, for its balanced portfolio, according to its latest CIO report. Like Pictet Wealth, the bank’s hedge fund allocation combines different strategies, including discretionary macro, event-driven, equity market neutral, credit long/short and equity long/short.
In the context of alternatives, Pictet’s Gaud also likes private equity funds. “The expected return of private equity is one of the highest you could hope for.”
However, he noted that like other asset classes, investors need to be carefully selective.
“In China, for example, there has been a credit squeeze, so you see a lot of difficulties in the private equity space. In developed markets, there are less opportunities, but the quality is better.”
Separately, Gaud noted that the firm is overweight cash right now, which represents around 5% in a balanced portfolio.
“Cash is rewarding right now. The risk-free rate gives you 2.6-2.7%, plus it is in US dollar terms. So it’s a fair return considering the macro is not clear,” he said, citing the uncertainties caused by the trade negotiation between the US and China, the slowdown of the Chinese economy and other macro risks in Europe.
As the macro picture becomes more clear, the cash can be used to buy other assets. For example, the firm is still “neutral overall” in fixed income, as it believes that returns for several sub-asset classes are not yet attractive.
He finds opportunities in emerging market local currency bonds. However, due to the currency risks, a majority of a client’s fixed income allocation should not be invested in the asset class.
Other wealth managers in the region have also turned to cash. In the last quarter of 2018, there was a clear consensus among Asia fund selectors to seek safe havens, such as cash, in the next 12 months, according to the latest asset class survey by Last Word Research.
Gaud is also positive on real estate investment trusts (REITs) in Asia.
“They are still interesting because interest rates are not rising as much. If interest rates were to go back to 4-5%, then this is an asset class you would like to avoid. But if you believe that interest rates will remain relatively low in the foreseeable future, these vehicles pay you a 5-7% annual coupon plus capital appreciation.”
Gaud added that REITs are safe vehicles given that they are not allowed to be over-leveraged. In addition, they are also required to distribute a minimum of 80% of their profits to shareholders in the form of dividends.
He also recommended that clients should manage their returns expectations.
“Don’t invest with high expectations. We have to be realistic, we are in a lower yield environment. And when an asset class provides you annualised returns of 5-10%, that is already high.
“Investing with the expectation of 20-25% returns – you probably are not understanding the risk you are taking.”