Fund of Hedge Funds
Overview
We consider hedge strategies a set of investment strategies that can offer potential diversification benefits for investors in traditional asset classes. Due to the potential non-traditional nature of hedge strategy returns, performance is not necessarily correlated with traditional investment markets or indices, such as equities or bonds. We believe that, through understanding the properties and behavior of different strategies, portfolios can be created that are not solely dependent on market direction for returns. Such investments can therefore be potentially diversifying for investors in traditional asset classes.In constructing portfolios, one of the key focuses should be the understanding, monitoring and management of risk. Risk exposures and market sensitivities must be appropriate to the longer-term investment objective. We also believe that value can be added through active portfolio management to reflect strategic and tactical views and opportunities. Throughout the investment process, we believe that the best outcomes are delivered by making team-based, high-conviction decisions.
Solutions
In recent years customized
portfolios, although not a new concept in itself, have become the preferred
method of achieving hedge fund exposure in institutional portfolios.
Together with our existing in-house
products Aberdeen is able to meet investors' needs using our adaptive
investment process to create bespoke portfolios. We are able to work with
investors to create:
- Customized portfolios of hedge funds: Designed as stand-alone solutions to provide exposure to specific asset classes or strategies. Working with client’s we could create, for example, portable alpha programs and portfolio completion programs.
- Customized Solutions: Portfolios built with a client’s existing asset and liability mix in mind. Through a risk factor analysis of existing investments, the intention is to provide a complementary contribution to portfolio efficiency.
- Global Allocation Mandates: Aberdeen provides strategy allocation across a client’s entire investment program to fulfill the client’s broader investment objective.
Process
Our investment process includes
three key disciplines, manager selection, portfolio construction and on-going
monitoring, although in practice they form a continuum and are not
compartmentalized. The process aims to deliver high-quality, long-term
performance with risk exposures and market sensitivities that are appropriate
to the investment objective of the relevant portfolio.
Manager
Selection
Our manager selection process
consists of a comprehensive range of investment and operational due
diligence. When we select managers, the investment team analyzes several
key areas including:
- investment process;
- risk management;
- business stability;
- quality of the team;
- infrastructure; and
- long term track record.
The investment team also undertakes
two further key sets of analyzes:
- a quantitative assessment using hedge fund specific, proprietary methodologies to analyze performance, risk, tail properties, factor exposures, and diversification implications; and
- a more qualitative assessment focused on the investment risk process, people, and platform at the hedge fund manager. This process generally involves separate interviews with the key people involved in portfolio construction and investment risk management at the manager.
In addition to the investment
analysis, to seek to minimize downside valuation , operational and fiduciary
risks, our independent Operational Due Diligence team analyzes several key
areas including:
- a review of a fund’s offering documents, key terms and good standing in its local jurisdiction;
- robustness and independence of reconciliation and valuation;
- Corporate governance effectiveness at the fund; and a review of operational controls and independence at the manager and its regulatory good standing.
Fundamentally, our selection process
is designed to assess whether a manager has a robust and repeatable, strong
investment process and an effective operational infrastructure. The process
leads to allocating an Investment Proposition score and a Conviction Rating to
each manager as they move through the various levels to become an approved
investment that can be included in a portfolio.
Portfolio
Construction
The portfolio construction process
begins with asset allocation to strategies which achieve a balance of
delivering the expected return/risk profile over the long term (Strategic Asset
Allocation “SAA”) and the best opportunities over the short term (Tactical
Asset Allocation “TAA”). Proprietary assessment of forward looking
return/risk, diversification, clustering, and factor exposures are conducted
using our Strategic Portfolio Analysis and Construction Environment (“SPACE”)
and optimized to each portfolio's objectives. We believe our role as an
allocator is to understand, measure, and manage risk; and this belief is
reflected in the SAA and TAA process. In measuring risk, our
proprietary Portfolio Decomposition System (“PDS”) includes a number of
aspects:
- distributional properties such as VaR and fat-tail risk incorporating non linearity and higher moments;
- portfolio risk decomposition along managers and strategies;
- historical simulation and stress testing;
The SAA and TAA approach to
portfolio construction is applied uniformly to our entire client offering,
whether it is a customized portfolio or one of our flagship products.
On-going
Monitoring
Managers are monitored closely after
investment, with formal quarterly reviews and a minimum of annual on-site
visits. We also undertake informal reviews for on-going risk and strategy
updates more frequently. Additionally, there is an on-going annual review
process of manager’s operational controls administrators. Our on-going
due diligence process, allows us to deepen our understanding of the evolution
of each manager’s business, and to assess the on-going application of their
investment philosophy, risk controls and strength of operational infrastructure.
Reports of these and other factors
are presented to and considered by Aberdeen’s Hedge Fund Investment Committee.
The Hedge Fund Investment Committee meets through a regular series of three
distinct meetings held monthly:
- Investment review and perspective;
- report and outlook; and
- Portfolio construction and implementation.
Inputs to these meetings include,
inter alia, individual fund reviews for each invested fund, strategy reviews on
each desk, as well as SAA and TAA, and risk reports describing the composition
of the portfolios and their returns.
This Investment Committee comprises
the Global Head of Hedge Funds, Head of Alternative Operations, Head of
Portfolio Construction and Quantitative Strategies, the senior members of the
investment team and the Head of Alternative Operations.
Strategies
This material is for informational purposes only and the strategies listed are only available to investors who meet certain suitability and investment requirements.
Credit
Managers focus on opportunities in the global debt markets, which include investments in public and private debt securities, loans, equities and derivatives thereof. Strategies may include, but are not limited to, Credit Value, Direct Lending, Distressed, Structured Credit and Trading Focused.Event Driven Equity
Using this strategy the Manager seeks to profit by realizing price differentials that are perceived to exist between the current market price of a security and its expected future value based upon the occurrence of a specific event, which may include but are not limited to announced corporate actions such as mergers, consolidations, acquisitions and liquidations. Other event driven strategies seek to benefit from events such as credit events, political events, or other situations which may have an effect on the value of the securities or financial instruments traded. Short selling, options hedging and other techniques are generally used to capture price differentials.Global Macro
This strategy comprises two major investment processes: discretionary and systematic. With respect to both strategies, Managers tend to focus on macro-economic opportunities across numerous markets and instruments. Investments may be either long or short in cash securities, futures contracts, derivative contracts or options, and may be in equities, fixed income markets, currencies or commodities (e.g. agricultural products, metals, energy products). Managers that follow systematic strategies tend to invest in numerous markets based on quantitative models and tend to follow investment trends and take positions based primarily on the output of their models. Managers that follow discretionary strategies tend to rely more on a fundamental or qualitative approach to their decision making and tend to have fewer trade ideas outstanding at any time than systematic Managers.Long / Short Equity
Managers employ research intensive efforts to identify long and short positions in the equity markets and seeks to outperform the relevant equity markets with reduced volatility. This strategy seeks relative value opportunities primarily by taking long and short positions in the equity markets and the portfolio is, generally, constructed to be as fully hedged as possible. Arbitrage opportunities may result from changes in the relative valuations of specific stocks or baskets of stocks. This strategy also includes statistical arbitrage, which employs quantitative and computational investment techniques which seek to identify statistically robust market inefficiencies in global equity markets.Long Bias Equity
Long bias equity investing consists of a core long holding of listed and unlisted equities (the size and number of investments in unlisted securities are expected to be relatively small) and seeks to outperform the relevant equity markets. Managers may also make investments in equity derivatives such as futures, option, and warrants, in addition, managers employing this strategy can hold cash or cash equivalents when this is considered appropriate, in particular to mitigate market risk.Niche
Niche strategies are considered to be specialist strategies that do not easily fit within established hedge fund classifications and include Tail-Risk Protection, Volatility Strategies, Directional Commodities, Active Private Equity and Reinsurance, plus certain illiquid exposures.Relative Value
Relative value funds encompass a range of funds that invest in equity, bonds, commodities and options thereof, by simultaneously taking a long position in an undervalued security and a short position in a similar security (by e.g. duration), that is overvalued relative to the long position. These types of strategies aim to profit from the re-pricing of one or both positions, as opposed to market direction and as such seek to generate returns that have a low correlation to equity or fixed income markets. These strategies may use leverage in order to achieve their objective. Included in this category are the following strategies: Quantitative Market Neutral, Fixed Income Relative Value, Mortgage-Backed and Asset-Backed Security Relative, Convertible Relative Value, Commodity Relative Value, Risk Arbitrage, Volatility Arbitrage and Equity Statistical Arbitrage.
This material is for informational
purposes only and the strategies listed are only available to investors who
meet certain suitability and investment requirements.
Credit
Managers focus on opportunities in
the global debt markets, which include investments in public and private debt
securities, loans, equities and derivatives thereof. Strategies may include,
but are not limited to, Credit Value, Direct Lending, Distressed, Structured
Credit and Trading Focused.
Event
Driven Equity
Using this strategy the Manager
seeks to profit by realizing price differentials that are perceived to exist
between the current market price of a security and its expected future value
based upon the occurrence of a specific event, which may include but are not
limited to announced corporate actions such as mergers, consolidations,
acquisitions and liquidations. Other event driven strategies seek to benefit
from events such as credit events, political events, or other situations which
may have an effect on the value of the securities or financial instruments
traded. Short selling, options hedging and other techniques are generally used
to capture price differentials.
Global
Macro
This strategy comprises two major
investment processes: discretionary and systematic. With respect to both
strategies, Managers tend to focus on macro-economic opportunities across
numerous markets and instruments. Investments may be either long or short in
cash securities, futures contracts, derivative contracts or options, and may be
in equities, fixed income markets, currencies or commodities (e.g. agricultural
products, metals, energy products). Managers that follow systematic strategies
tend to invest in numerous markets based on quantitative models and tend to
follow investment trends and take positions based primarily on the output of
their models. Managers that follow discretionary strategies tend to rely more
on a fundamental or qualitative approach to their decision making and tend to
have fewer trade ideas outstanding at any time than systematic Managers.
Long
/ Short Equity
Managers employ research intensive
efforts to identify long and short positions in the equity markets and seeks to
outperform the relevant equity markets with reduced volatility. This strategy
seeks relative value opportunities primarily by taking long and short positions
in the equity markets and the portfolio is, generally, constructed to be as
fully hedged as possible. Arbitrage opportunities may result from changes in
the relative valuations of specific stocks or baskets of stocks. This strategy
also includes statistical arbitrage, which employs quantitative and
computational investment techniques which seek to identify statistically robust
market inefficiencies in global equity markets.
Long
Bias Equity
Long bias equity investing consists
of a core long holding of listed and unlisted equities (the size and number of
investments in unlisted securities are expected to be relatively small) and
seeks to outperform the relevant equity markets. Managers may also make
investments in equity derivatives such as futures, option, and warrants, in
addition, managers employing this strategy can hold cash or cash equivalents
when this is considered appropriate, in particular to mitigate market risk.
Niche
Niche strategies are considered to
be specialist strategies that do not easily fit within established hedge fund
classifications and include Tail-Risk Protection, Volatility Strategies,
Directional Commodities, Active Private Equity and Reinsurance, plus certain
illiquid exposures.
Relative
Value
Relative value funds encompass a
range of funds that invest in equity, bonds, commodities and options thereof,
by simultaneously taking a long position in an undervalued security and a short
position in a similar security (by e.g. duration), that is overvalued relative
to the long position. These types of strategies aim to profit from the
re-pricing of one or both positions, as opposed to market direction and as such
seek to generate returns that have a low correlation to equity or fixed income
markets. These strategies may use leverage in order to achieve their objective.
Included in this category are the following strategies: Quantitative Market
Neutral, Fixed Income Relative Value, Mortgage-Backed and Asset-Backed Security
Relative, Convertible Relative Value, Commodity Relative Value, Risk Arbitrage,
Volatility Arbitrage and Equity Statistical Arbitrage.
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