Investment strategies for volatile markets

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formance of our FoHF portfolios as new
assets are invested. Securing investment
capacity is a critical issue for the FoHF
industry as a whole, but is particularly
challenging for the managers of the
largest FoHFs.
Cédric Spahr: Which hedge fund strategies
offer the best risk/reward profile on a
three to four year horizon?
Chris Goekjian: Currently we are positive
on event-driven, equity long/short and
macro. We think at this juncture in the
market there are some good opportunities
in the equity market, which provides a
positive environment for long/short managers.
In event-driven strategies, there
has been an increase in corporate activity
across the board, including the corporate
activity driven by private equity funds.
This has driven up the volume of merger
and acquisition activity and has meant that
there are very good returns to be had in
the event-driven space. Finally, if you look
at the opportunity set in the foreign exchange
market, the different interest rate
markets as well as the trends of the
equity market, there are substantial opportunities
for macro managers. So these
would be the three areas that I would
highlight as potentially doing very well over
the next three to four years.
Cédric Spahr: What kind of clients do you
have, institutions such as pension funds,
insurances, endowments, or more private
clients?
Chris Goekjian: Altedge has a diverse
client base comprising private banks,
family offices, high net worth individuals,
independent asset managers, insurance
companies and other institutions. And, of
course, our partners are heavily invested
in our own products.
Ulrich Kaiser: How would you define an
absolute or total return strategy?
Chris Goekjian: We define an absolute
return strategy as an investment strategy
which is designed to target an absolute
(positive) return over a defined period
(usually one year) and whose performance
is not dependent on the performance of an
underlying market benchmark. It is impor-
“Many investors
with just beating
the market ...”
tant to note that this definition makes capital
preservation (over a defined period)
a top priority for absolute return strategies.
Ulrich Kaiser: Is the total return approach
really different from other investment
strategies?
Chris Goekjian: Absolutely! The
starting point is to define what your investment
goals are, and particularly what your
risk tolerance is and if you are an absolute
or relative return investor. If, as an investor,
you are happy to earn the return of
the equity or bond market in the next 12
months and are happy with that risk profile,
then you are a relative return investor and
should invest in long-only strategies. If, on
the other hand, you are an absolute return
investor with a given risk profile, you need
to make sure that your investment portfolio
comprises investments which are consistent
with that goal – hedge fund investments,
capital guaranteed notes, money
market investments etc.
Clearly, the investment returns and
risk profiles from the two portfolios above
will most likely be very different. Not surprisingly,
there is a much greater chance
of loss of capital over 12 months in the relative
return portfolio than in the absolute
return portfolio.
There’s been a trend over the last ten
years towards absolute return investing,
particularly for the individual investor.
Many investors are not satisfied with just
beating the market or having the average
market return. Indeed, their goal is to
preserve and grow their capital. In response
to this, many of the private banks
have started developing absolute return
mandates which are focused on the preservation
of capital first and then incremental
return thereafter. Typically, these
mandates would contain a large allocation
to alternative investments.
Cédric Spahr: If we distinguish between
absolute return strategies based on static
methods like derivatives and dynamic
trading strategies, are both useful or do
you see the emphasis on one or the other
side?
Chris Goekjian: We think both are useful.
You can use derivatives, for example
capital guaranteed notes or long option
strategies, as part of an absolute return
strategy, but it is a quite conservative way
to invest, and the investor will be paying
for the cost of that protection or option.
That can be appropriate as part of the
overall strategy or of an asset allocation,
depending on the underlying asset or
investment trend that one wants to capture.
Equally, dynamic trading strategies
such as hedge funds are also a valid
approach and have provided historically
strong risk-adjusted returns. Both approaches
are valid and I think you have to
use both. Diversification in all these
things is your friend, so diversifying your
portfolio across different absolute return
strategies can be a very positive thing.
Ulrich Kaiser: Are there any risks involved
for a client if he chooses a total return
strategy?
Chris Goekjian: The main risk the
investor is taking is the fundamental decision
to invest in absolute return strategies
to begin with. This can be particularly
frustrating in years where the equity markets
do very well and an investor runs
a “frustration risk,” where an absolute
return investor might underperform a relative
return investor because he did not
across strategies and investments, then
I see absolute return investing as being
the low-risk strategy from an investment