Illiquid assets

GLOBAL INVESTOR 1.15 — 54
What additional return would a client
typically expect in private equity versus
traded equity, after fees?
Patrick Schwyzer: It’s difficult to price
the illiquidity premium. Research shows that
private equity does create a positive outperformance
over the classic equity market in
the long run. For example in a traditional
buyout private equity fund, a client would be
looking for annual double-digit returns over
the lifetime of the fund.
How realistic are those returns?
Patrick Schwyzer: What’s key in
private equity is to invest in what we call
top- quartile performers. So you tend to
go with managers who have proven that
they can achieve the double-digit return in
any particular strategy. Needless to say
that expertise and knowledge of the private
equity universe are key in identifying
such managers.
Where would you rank expectations for
hedge funds compared with cash, bonds,
equity or private equity?
Patrick Schwyzer: Again, it’s difficult
because hedge funds are not a homogeneous
asset class. We group hedge funds
into four different styles, so to speak.
And every style has its own risk/return
profile. For an equity long-short manager,
for example, a rule of thumb is that you
participate in two-thirds of the upside and
one-third of the downside compared
to traditional equity. There’s no such thing
as a free lunch, as you know. There are
other styles, e.g. managed futures, strategies
that tend to be uncorrelated to an
equity market. Keep in mind that any broad
hedge fund index is just the amalgamation
of all these different styles.
Nobody assumes that hedge funds are fully
liquid. But what about bonds? The financial
industry is reporting big rushes into high
yields and very high-risk bonds. Do you see
a risk that clients may have bought things
that they thought were liquid, but that may
end up not being liquid?
Patrick Schwyzer: Education is key.
Absolutely key. This is one of the lessons of
the financial crisis of 2008. Sometimes
a product behaves just like it is designed
to, but a different perception was linked to
the product and therefore caused irritation
with clients. An explanatory discussion with
a specialist typically helps in such situations.
Also, secondary market liquidity can be
provided for alternative solutions. While this
generates liquidity, it is not inherent in the
“What I see in most
discussions is that clients
want to understand
the thought process and
how we do things.”
Patrick Schwyzer
Patrick Schwyzer
is a Managing Director of Credit Suisse
in the Private Banking & Wealth
Management division, Zurich, and Head
of Alternative Investments for Private
Banking clients Switzerland and EMEA.
He was previously with GAM Global
Asset Management London. He graduated
from the University of St. Gallen
with a special focus on Finance and
Capital Markets.
Felix Baumgartner
is a Managing Director of Credit Suisse
in the Private Banking & Wealth
Management Division, Zurich, and
Co-Head Premium Clients Switzerland.
He was previously a Director at Credit
Suisse First Boston in Global Foreign
Exchange (GFX) and a member of the
GFX management team. He is a graduate
of the Zurich and the London Business
School.