Hedge funds enable more dynamic approach to investing

It is now more important than ever for investors to pay greater attention to fixed income and market-neutral strategies due to the risk mitigating qualities they bring to a traditional portfolio. 

These strategies are generally uncorrelated to all other available asset classes, and consequently reduce portfolio volatility and drawdowns, Amplify Investment Partners’ head of investor relations Emma Pretorius says. In many cases, they also increase returns. 

Hedge funds can employ leverage which allows them to amplify their market exposure to more than the capital invested, she says. Hedge fund managers can also take short positions, either directly through securities or indexes, or through derivatives, enabling them to profit from declining markets or specific asset prices.

These strategies are generally not employed by traditional unit trust funds, which only use hedging strategies to protect positions held in their portfolio, but may not be in a net short position. “A hedge fund manager can take a more dynamic approach,” Pretorius says. “Instead of simply hedging against downside risk, they can utilise derivatives tied to the share’s performance to speculate on its price movements, allowing the manager to potentially profit from both upward and downwards trends without necessarily owning the underlying shares.”

Amplify, which has seven retail hedge funds with a range of strategy and risk profiles, specifically sees a need for fixed income and market neutral strategies in living annuity portfolios, where investors need to draw an income, as they can smooth the return profile and lessen the impact of large market drawdowns on client outcomes. 

Hedge funds can broadly use return-enhancing and risk-mitigating strategies. Return enhancers generally are more correlated to markets, and while they should give returns in excess of the market, they will not materially reduce the risk in a portfolio. Risk-mitigating strategies are generally uncorrelated to market indices and offer reduced portfolio volatility and drawdowns and, in some cases, increased compounded returns. However, when the market has a strong rally, risk-mitigating strategies will likely underperform. “The idea that a rising tide lifts all boats does not apply to these strategies, and there is a place for both in investor portfolios.”

As they are sometimes difficult to understand, and for a long time were out of reach for retail investors, hedge funds have generally been a niche investment. But this is changing. Pretorius says that retail hedge funds are aimed at everyone, and wider availability on various investment platforms means that the large minimum investments previously required no longer apply. 

“Investing through a platform also comes with greater liquidity, since platforms offer daily pricing and daily liquidity,” she says. 

In line with its overall strategy of selecting boutique, independent asset managers for their proven ability to generate superior risk-adjusted returns, Amplify’s funds are managed by several hedge fund specialists including Marble Rock Asset Managers, Terebinth Capital, Acumen Capital, Matrix Fund Managers, All Weather Capital, OysterCatcher Investments and Obsidian Capital. 

“Amplify essentially offers a one stop shop to investors in that we have four unique fixed income hedge fund strategies, a market neutral strategy, long/short equity strategy as well as a multi-asset strategy. In addition, our funds also cover the full risk spectrum, ranging from cautious to aggressive.”

Amplify’s managers are not only uncorrelated to the market, but also uncorrelated to each other, making them ideal for blending.