Investment strategies for volatile markets

GLOBAL INVESTOR 3.07 45
“The goal is to preserve
and grow capital”
Mr. Chris Goekjian, an experienced fund of hedge funds manager, gives us his
personal views concerning the characteristics of hedge fund investments and total return
strategies. Interview: Ulrich Kaiser, Equity Sector Analyst, and Cédric Spahr, Head of Alternative Investment Research and Portfolio Analytics
Cédric Spahr: Mr.Goekjian, could
you briefly describe what a fund of hedge
funds does?
Chris Goekjian: A fund of hedge funds
(FoHF) is a fund which targets absolute
returns by investing in a diversified portfolio
of underlying hedge funds. FoHFs
are widely used vehicles for hedge fund
investment. In fact, it has been estimated
that between 50% and 60% of all investments
into hedge funds go through
FoHFs.
The reason that these investment
vehicles are so popular is because FoHFs
are professionally managed vehicles,
which achieve instant diversification for
investors with smaller investment
minimums than individual hedge funds.
So FoHFs are a very good way to access
hedge fund investments for investors
who are not experts in the field.
Ulrich Kaiser: How big and how liquid
are these funds?
Chris Goekjian: Some of the largest
individual funds of hedge funds I’m aware
of are approximately five billion dollars,
but there are of course many smaller ones
as well. There can be advantages and
disadvantages to size – in particular larger
FoHFs will be restricted in their choice
of investments to the larger hedge funds.
Typically, FoHFs accept subscriptions
monthly, and redemptions monthly or
quarterly, depending on the liquidity of the
underlying hedge fund investments. So
FoHFs are unfortunately not as liquid as
traditional bond or equity investments,
but typically much more liquid than private
equity or property investments.
Ulrich Kaiser: In what kind of hedge funds
do you invest?
Chris Goekjian: This depends very
much on the specific risk, return and correlation
targets we set for each of our
FoHF portfolios. In Altedge’s lower-risk
FoHF portfolios, with a typical risk profile
akin to that of a bond portfolio, we would
choose relatively conservative hedge funds
across a range of hedge fund strategies
that do not have large market exposures.
In our more aggressive FoHF portfolios,
we might choose more aggressive hedge
funds with larger market exposures.
However, across all our hedge fund investments,
we always look for managers
who have realized strong risk-adjusted
returns across market cycles with strong
risk management and low operational
risk. This “safety first” approach insures
that our investors are well protected
in difficult market environments.
Cédric Spahr: Do age and size of hedge
funds have an influence on their risk/
return profile?
Chris Goekjian: Absolutely! Typically,
the trend is that the larger and therefore
typically older hedge funds tend to
have more stable returns. This is mainly
because of two reasons. First, for a hedge
fund that is managing larger assets, the
opportunity set in which you can invest
tends to be more restricted in that they
typically can only invest in the largest
transactions in their sector, whereas if
you’re running a smaller hedge fund, you
can invest in smaller transactions as well
as the larger ones. The second reason
is that more and more institutional inves-