Should AU investors favour local hedge funds?

We know that buying local promotes economic growth. Every purchase feeds an ecosystem that creates jobs, collects taxes, attracts competition and builds industries. company formation On a country scale, buying local can instil a sense of national spirit – let’s not forget the great initiative where our quality home spun produce received the iconic Australian made stamp of approval. Yet where supporting local has helped to foster growth of industries from agriculture & resources to film & fashion, going a little lateral, how has Australia’s hedge fund industry fared with local buyers?

 

Hedge funds often attribute their success to their ability to invest in ways less correlated to traditional markets.  For them, the opportunity set is important, but more important is what they do with it. Many simply try to maximise the upside by being on the right side of the downside. These financial artists traverse mainstream markets and lesser known nooks and crannies to target risk-adjusted returns.  Those with operational rigour have become a mainstay of investment management.

Any rational investor looking to preserve portfolio volatility at desirable levels will likely be invested in hedge funds to some degree. Their genius is more related to skill than scope. So why are local hedge funds often overlooked in favour of the big-swingers offshore?  Paul Chadwick, AIMA Australia Chairman (Alternative Investment Management Association is the peak body representing hedge funds around the globe), raised this conundrum at the recent AIMA Australia Hedge Fund Forum in Sydney, going further than anyone in querying whether investors in Australia should in fact favour local hedge funds?

Time and again I heard statements from investors that they viewed all prospective managers equally and essentially tried to apply a consistent set of criteria to manager choice. It may well be argued that they should actually favour local managers as part of their overall mission in life as guardians of Australians’ wealth but that’s another story. It is, however, reassuring to know that they don’t go the other way and discriminate against local talent! Paul Chadwick, AIMA Australia

It’s a big call, but in my view one that needs to be asked if the Australian hedge fund industry is to truly break free from its shackles and live its full potential.

We’ve all been warned about our home equity (and fixed income) fund bias, but very few investors can be accused of home hedge fund bias, when it is these funds who are arguably better positioned to ride the upward and downward equity (and fixed income) market movements.

There have been a few cheeky references to a ‘frequent-flyer point’ bias. This perverse point may not be as silly as it sounds.  Being at the ‘end of the world’ has its advantages and drawbacks.  OK, yes, on some days Australia can resemble middle earth, somewhat lacking the sophistication and pace of other markets. But as Mr Chadwick suggested at the Forum, this relative isolation may help foster a more independent and original mindset, less influenced by group-think.  And while a walk up Martin Place or Collins Street just doesn’t have the X factor of Wall Street or Canary Wharf, it may be the domestic lounge for a few more institutional investors as transparency and corporate governance rule portfolio decision making and risk continues to be prioritised over returns. Any potential ‘frequent flyer bias’ in the asset allocation consideration will surely be eroded, just as most market inefficiencies eventually are.  Time will tell. bookkeeping While a sense of nationalism may hold little sway in portfolio construction, the local hedge fund talent and skill is clearly here and open for business and doing just as well, if not better than their global peers. It would be a shame to lose this talent to offshore hubs where reception maybe more positive despite par quality.

To view more issues talked about at the Forum, see the AIMA_Australia_Hedge Fund Forum_2014_News Wrap. Published by AIMA, content supplied by Investor Strategy News, produced by OneProfile Communications for AIMA. Photos by Christine Bright.

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