Milken panel sees solid demand for hedge funds despite lower returns

Hedge funds should continue to garner institutional inflows in coming years even as an increasingly crowded field of competitors weighs on returns, according to a panel of industry veterans speaking at the Milken Asia conference in Singapore.

"Average returns have come down" as more and more managers have entered the space but "there's still room for asset owners to put hedge funds into their portfolios," said Jeffrey Jaensubhakij, group chief investment officer of GIC, the Singapore sovereign wealth fund managing a portfolio estimated at more than $500 billion.

The "zero-sum game" of paying for the skill of the manager has become less rewarding as more great managers have continued to emerge, Mr. Jaensubhakij noted. But with significantly lower expected returns from fixed income and equities as well, the downside protection offered by a well-constructed portfolio of hedge funds has become more important than alpha just now, he suggested.

"We're not aiming for a portfolio that has the highest returns, competing with equity year-on-year, but rather one that can have a good return but good downside protection" when other assets are selling off, Mr. Jaensubhakij said.

GIC's website doesn't list the scale of its portfolio's allocation to hedge funds.

Joe Dowling, the global head of Blackstone Alternative Asset Management, the hedge fund-of-funds unit of New York-based Blackstone, speaking on the same panel, said "more and more sophisticated clients" are turning to BAAM to create a bond replacement — "a very stable, low-duration uncorrelated ballast" — for their portfolios.

"If you're an endowment manager or you're a long-term allocator" seeking both capital preservation and prudent growth, then with U.S. Treasuries yielding 1.5% or 1.6%, the 30% or 40% of the portfolio traditionally parked in sovereign bonds is "really, really problematic" now, Mr. Dowling said.

According to BAAM's website, the hedge fund-of-funds business has $81 billion of client capital under management.

Hazem Ben-Gacem, the co-CEO of Bahrain-based private markets and absolute-return manager Investcorp, said hedge funds could be the answer for an uncertain transition period facing global investors at present.

Demand for hedge funds could be "a prequel for something to come," he said.

"There is a market nervousness around where we are today" and there is an expectation — against the backdrop of current market valuations, inflation rates and geopolitical tensions — that capital will be rebalanced across different asset classes, in public and private markets alike, Mr. Ben-Gacem said.

Hedge funds could provide "that perfect holding pattern until there's clarity" regarding where the world is heading, he said. Investcorp currently has $37.6 billion in assets under management.

Mr. Jaensubhakij said the "topsy-turvy" behavior of markets now has led to a quick rotation in styles, leaving asset owners without well-diversified hedge fund portfolios at risk of being "whipsawed." Portfolio construction is "very key to being able to stay invested," he said.

And maintaining relationships with large-scale managers that have the resources to attract the best talent as well as strong performance and risk management cultures gives asset owners "the chance to create that portfolio of managers," he said.

Mr. Dowling said BAAM is focused on finding the best up-and-coming hedge fund managers.

"I think you get paid for helping managers go into business and viewing it as a partnership vs. just being a client," he said.

Mr. Jaensubhakij, meanwhile, noted that BAAM is one of GIC's partners.

"Being able to be on top of so many funds and firms and so on, we can't do it without deep partnerships," he said.