Thriving during volatility
As winner of Asia Asset Management’s Best of the Best Regional Award 2022 for Alternatives House of the Year: Hedge Funds, WTW (previously known as Willis Towers Watson) takes a dynamic approach to its hedge fund portfolio to offer clients true diversification during periods of volatility.
The global advisory and broking company believes hedge funds are an important portfolio building block for institutional investors, providing them with solutions outside of traditional asset classes that have a low correlation to mainstream markets.
Head of Advisory Portfolio Group, Investments Asia at WTW Paul Colwell says: “Our team has successfully developed a suite of hedge fund solutions that can be utilised by Asian asset owners with quick and easy access to implementation strategies that can protect and enhance their total portfolio outcomes and improve overall resilience.”
He points out that during the past decade, many hedge funds failed to deliver, often lagging equity markets, and producing unpredictable returns, while still having expensive fee structures. The funds also failed to offer real diversification during periods of market stress, such as the selloff triggered by the emergence of Covid-19.
WTW sets itself apart from the competition by taking a dynamic approach to its portfolio construction, in which it identifies and isolates skilful traders and differentiated return streams, enabling it to benefit from market volatility and generate positive returns.
Colwell explains: “One of the key features of our hedge fund portfolio approach is to design a portfolio to have low beta to equity and credit markets, with alpha being the key driver of absolute returns. We believe this is critical in a multi-asset portfolio construction context, where the hedge fund portfolio is expected to diversify the risks from the traditional asset classes.”
He adds that institutional investors can access equity and credit beta very cheaply and should not pay hedge fund managers for it.
For its flagship Hedge Advantage Fund (HAF), which manages US$2.75 billion of client assets, WTW allocates to different strategies at different points in the macrocycle, retiring strategies when they become less attractive, and adding new ones as opportunities arise.
For example, in the past few years, it has allocated to carbon credit trading, a co-investment strategy with a micromanager, power trading, weather insurance, volatility trading, and a long-short sustainable opportunities fund.
The results have been impressive, with HAF delivering returns of 6.9% per annum over the past three years, with an equity beta of -0.1. Since its inception, the WTW client composite has outperformed the average fund of hedge funds by 1.5% per annum.
Diversifying risk
WTW diversifies risk at a portfolio level by allocating assets to a variety of uncorrelated strategies.
“To avoid over-diversifying, our team look to hold around 20 managers, which is lower than the typical fund of hedge funds portfolio. Standalone risk targets are awarded to each manager, while leverage can be employed to magnify returns,” Colwell explains, adding that the true test of the fund’s diversification came during the Covid-19 induced selloff in 2020.
HAF generated strong returns of 7.5% during this period, when equity markets were down 21%, and the broader fund of hedge funds universe was down 7%.
“This helped many clients to mitigate the negative effects of weaker equity and credit markets during this time, offering real diversification when it was needed the most,” he says.
HAF’s strong performance continued into 2021, when it delivered net returns of 9.3%.
Alongside strong returns, WTW also boasts some of the lowest fees in the hedge fund industry, with a current base fee of just 0.76% per annum.
“Essentially, because we work with investment managers to design specific custom-built strategies for our client base, provide seed capital and ensure sizeable allocations due to our scale and bargaining power, we can get clients a very attractive fee deal,” notes Colwell.
Looking forward, he is confident that WTW’s approach of pursuing multiple different strategies in its HAF to drive performance, will continue to deliver value for clients.
“All parts thrive on volatility, and 2022 is likely to be another year of elevated market volatility as a result of the prevailing effects of Covid-19, high and uncertain inflation, shifts in monetary policy and the potential for monetary policy to be rolled back, not to mention the recent geopolitical issues surrounding the Russian-Ukraine conflict.”
Colwell adds that if there is an indiscriminate market selloff again, it would create significant opportunities for HAF managers to take advantage of.