There is no time like the present to invest in hedge funds, according to abrdn’s Russell Barlow, whose team launched a new fund platform in the space this summer.
While many have sought out private equity strategies as a long-term investment approach or have simply leaned on long-only products in recent years, in Barlow’s opinion they are missing out on the flexibility that hedge funds offer.
“Hedge funds can invest long, short, use derivatives, leverage, can invest very short term, long term and can place relative value bets,” said Barlow, global head of alternatives at abrdn. “It’s a powerful model.”
In partnership with HFR, abrdn launched last month the Eclipse fund platform as a way to offer passive exposure to hedge fund strategies by tracking indices from HFR. HFR is a well-known firm that has created an investable hedge fund benchmark, the HFRI 500, which tracks hundreds of hedge funds.
HFR has long sought the creation of “passive” exposure to hedge funds, but only now will abrdn’s global clients actually have the ability to have a portfolio that tracks the HFRI 500 as well as other variations of HFR’s benchmark indices. Eclipse also includes exposures to eight sub-strategy indices, including Long/Short Equity, Equity Market Neutral, Merger Arbitrage, Event Driven Multi-Strategy, Discretionary Macro, Systematic Macro, Fixed Income Relative Value and Volatility Relative Value strategies.
Allocating to hundreds of individual hedge funds to track the HFRI 500 can be a daunting exercise for allocators to consider, however, abrdn’s ability to put money to work across such a wide swath of strategies all traces back to having the technology to get the ‘heavy lifting’ done.
“We’re collecting daily data on billions of dollars of exposures, we run risk on it, and we need to report on it. We need to share that data internally with our research staff and portfolio managers as well as externally with our clients,” said Darren Wolf, global head of investments, alternatives at abrdn, in a recent interview. “There is too much risk if you try to accomplish all of this without heavily leveraging technology.”
The investment team in total has over 2,000 manager interactions each year and collects daily risk and performance attribution on over 40% of the desk’s assets. This data is collected in the team’s research management system and analyzed by a 30-person strong team of investment professionals dedicated to handling research, index and structuring, managing risk, execution, portfolio engineering and operational due diligence. In addition to the new Eclipse platform, abrdn covers the liquidity and product spectrum in offering customized portfolios, managed accounts, strategic advice and pooled funds.
Wolf, said that one thing as a specialist in the space abrdn continues to do well is to understand the broader trends across the industry and grow and evolve as a result. They seek to translate those broader trends into industry exposures with the aim to become a one-stop shop for hedge fund allocators – whether it is a passive exposure, active fund selection mandate or risk mitigating strategies implementation.
Much of Wolf’s career has been spent researching hedge fund managers. He joined abrdn following the firm’s 2015 acquisition of Arden Asset Management, where he was a director of research. Prior to that he led research at Robeco-Sage Investment Management, where he helped build many of the research, risk and portfolio systems, as well as developed the quantitative and qualitative investment research framework.
At abrdn, the alternatives team is managing $14 billion in assets from offices in New York and London.
In casting a wide net, the team today is eyeing anything from long/short equity to distressed to quantitative strategies as well as macro and alternative credit. Macro has worked out well as the firm was early to the theme. Wolf said that abrdn saw that the U.S. Federal Reserve was slipping behind the curve in fighting inflation and that was an opportunity set that would be optimal for macro strategies.
Alternative credit funds are also under the microscope as many offer the financing strategies that bank proprietary desks previously had done in spades. But now managers active in structured credit, asset-based lending, direct lending, healthcare royalties and insurance strategies are under consideration.
Overall, Wolf said the main portfolio investment themes have worked out well over the past 18 to 24 months and he doesn’t see anything changing that thesis.
The team has extensive experience setting up and investing through managed accounts, and for many clients it has become a preferred route to access hedge fund strategies. A managed account platform allows for extra flexibility and as abrdn owns and controls the investment structure they are also then able to have full position transparency on a daily basis. But even in instances where a separately managed account is not in place with a manager, abrdn does require that the firm submit a monthly trade file to its third party risk aggregator, who takes in the trade file and then runs position level analytics on the portfolio.
“We definitely believe that the right analytical framework and due diligence process in place can help portfolios outperform,” said Wolf. “It’s research and labor intensive, involves turning over a bunch of stones to identify managers that are delivering something genuinely unique or different – or involved in underinvested segments of the market. But there are tools you can use and processes you can implement that help drive decisions.”
In many ways, the nuts and bolts on the research side that the team has harnessed over 25 years remain intact. But in rolling out a new product as well as putting money to work in volatile markets that are testing assumed norms, the team is looking for any edge they can find.
“Our database is an incredibly powerful tool we use, which allows us to analyze risk and exposure across the entire portfolio using a common framework,” said Wolf, who added that the level of transparency expected by investors has been making steady gains in recent years. That trend in turn has helped bolster abrdn’s investment process.
Wolf heads the firm’s Portfolio Management group, which houses a seasoned team in its own right comprised of Vicky Hudson, senior portfolio manager; Stephen Coltman, senior investment manager/top-down strategy; Greg Strassberg, head of alternative investment risk; and John Sedlack III, senior investment manager. The group averages 19 years of investment experience and meets on a regular basis to assess new ideas, review portfolio positioning, and recommend asset allocation changes and trading activity.
All this work feeds directly into the creation of customized portfolios that in Wolf’s view are gaining steam as more investors are looking to dial-up or down exposures depending on what else is in their existing investment programs.
When asked about current market concerns, Wolf’s answer is what one would expect from a classic risk manager.
“We’re worriers, so we may not be the best people to ask,” he joked. “We’d probably tell you to worry about everything.”
Yet, while the general market volatility doesn’t really spook the team due to its hedged and diversified posture, the known risks of inflation and the Federal Reserve’s response has been on most investors radar. He said it’s the unknown risks that the team prepares for whether its global geo-political instability, regulatory issues or fraud.
He advises investors to make sure to be disciplined and have diversifying exposures in their portfolios as one never really knows when left tail risks move from the theoretical to being reality.
“If the COVID pandemic or Russia/Ukraine conflict has taught us anything, it’s that these left tail events do occur – even if we hadn’t seen one for some time,” he added.
