Niche Funds Perfectly Positioned in Current Environment
During the past several weeks, BHA has interviewed an increasing number of investors that are sitting on a substantial amount of dry powder and are now deploying capital to niche, uncorrelated, and unique hedge fund strategies. These investors have stressed that funds employing traditional alternative investment strategies are of little interest; the past year has proven that such funds are correlated to the market, rather than uncorrelated as claimed.
The chief investment officer at a multibillion-dollar investment firm has been actively searching for hedge funds using strategies other than equity, credit, and fixed income-traditional strategies that have been heavily affected by the global recession. The firm is looking for new and unique asset managers that are operating in fields unaffected by financial markets. Some examples of the types of opportunities they are looking for include MLP’s, intellectual property, re-insurance, tax liens, commercial litigation, film finance, and other completely uncorrelated investments.
This same sentiment is being echoed by wealth managers, endowments, and foundations. The managing director of a multibillion-dollar U.S. endowment is anxious to diversify the portfolio; however, the endowment will allocate only to funds that will remain unique and niche in their strategies and return streams.
Investors recognize the significant value in having an alternative portfolio as long as it is uncorrelated to the rest of their holdings. However, instead of investing in hedge funds that are uncorrelated in theory, they are demanding funds that are uncorrelated in practice. To this end, using the increase in transparency, investors are monitoring managers’ positions to ensure that they are providing the niche and unique return streams as advertised. For managers that can deliver on their promises, there is a long line of investors ready to diversify their portfolios.