The ability to generate high returns in a low return environment is a key conundrum for the hedge fund industry right now.
Panelists at the Cayman Alternative Investment Summit, which took place in Grand Cayman last week (February 4-5), debated the search for uncorrelated returns in a world of rising correlation, with Professor Amin Rajan, CEO of CREATE Research, leading the discussion.
“Returns on almost every asset class are lower on a five year view,” Rajan said, adding that it appears we have used QE to borrow future returns.
Max Darnell, managing partner and CIO of First Quadrant, said this is absolutely the case. “We have had a false sense of confidence that central banks can save the day,” he said. “What happens now that we have become more sceptical in a more volatile world,” he asked.
Michael Kharitonov, CEO of Voleon Capital Management, said he was interested in the innovation in the quant space, with tremendous opportunities where science can be applied to financial trading. “Returns are low but volatility is high and a market neutral strategy can benefit,” he said. “We need liquidity and volatility and we have both.”
The panel then went on to consider the key value traps, where a trade looks attractive but doesn’t work out. Ross Levin, director of research at Arbiter Partners Capital Management, outlined two traditional value traps, firstly, where the value of the business has been misappraised or cyclical recovery doesn’t flow through.
Additionally, the assets and the discount may look reasonable, but returns are eliminated by factors such as a big fee, for example on real estate. “This issue of a superficially attractive dividend has been heightened by the QE distortion,” he said.
In terms of what should be done, Michael Rees, of Neuberger Berman, DYAL Capital, said more product innovation is required in the industry. “There is pressure on fees because investors won’t pay 2% for a co-mingled fund,” he said. “That turns the conversation to ‘what do you want that I can deliver?’ Be a solution provider for the next downturn and not a product provider.”
Cayman Alternative Investment Summit, Professor Amin Rajan, CREATE Research, Cayman