Fund of fund the best hedge fund strategy

The growing number of hedge fund managers globally, and the plethora of investment styles, makes it hard for advisers and investment consultants to pick managers for the sector.

RCG Capital Partners managing principal Ken Phillips said the solution was to pick fund of fund products that have done the research on managers and their investment styles and how they can be blended into a single product.

“There are more than 8,000 hedge fund mangers in the world, but only 10 per cent get 90 per cent of the money,” he told Money Management.

“The public investing in hedge funds has boosted the size of the big players, but size shouldn’t be a comfort zone when picking managers.”

RCG runs fund of fund hedge funds and is in Australia to talk to Allco Finance Group about launching a new fund for Australia. The fund of fund product will be launched around September.

Phillips said hedge fund managers are there to exploit the inefficiencies of the markets, but once these inefficiencies have been arbitraged, then the manager moves on.

“The fundamental process of a hedge fund manager is to develop Alpha returns not Beta,” he said.

“The role of a fund of fund manager is to build a portfolio of managers that have specific targets and different skills that can deliver Alpha.”

Of course, there are people that say fund of fund managers are just another layer in the investment process that adds another fee.

Phillips argues the skills of a fund of fund manager are to wade through 1,000s of hedge funds and identify the best managers that will execute the mandate.

“It is a very dynamic process and in every portfolio there will be a 15 to 20 per cent turnover of managers in a year,” he said.

Philips said managing a fund of fund is a full time job rather than just selecting a few managers and then walking away.

“What a fund of fund manager does is to deal with managers who screw up and replace them with similar managers to keep the product true to its mandate of positive returns,” he said.

“It is the value proposition of what I do.”

What RCG is also looking for is consistent performance. It wants to avoid the manager that achieves a 20 per cent return one month and a negative 20 per cent return the next.

“We don’t always take the top manager in a sector as you win in this business by not losing,” Phillips said.

“We want managers who can consistently generate Alpha, and that is down to a selection skill by the manager.”