08.12.2011
By Terry Flanagan

Hedge Fund Replicators Combat Markets

“Hedge fund replication began to emerge three or four years ago—that’s when the products began to be developed,” said Greg Peterson, director of Research at Ballentine Partners, a multi-family office and investment advisory firm. The firm manages money for families with assets of $20 million or more.

The firm specializes in bringing hedge fund-oriented strategies to mutual fund platforms. Hedge funds may have divergent strategies to the broad equity market and the negative correlation is highly sought after in a time of a plummeting stock market.

Largely speaking, the reputation of the hedge fund industry holistically may have been battered through the financial crisis of 2008. “People need to tread carefully now because those that flocked to sub standard hedge funds in the past got hurt,” said Peterson.

Yet, top tier managers have consistently performed well, and the difficulties accessing them still remains. “Minimums are high, so accessing top tier is not for the average investor,” noted Peterson.

Via a mutual fund platform, investors can access uncorrelated strategies to the equities market for a lower fee.

Even traditional ways of navigating through the downdraft of the market can’t be relied on, according to Peterson, who advocates hedge fund replicators more useful.

“You can get diversity through hedge fund strategies and maintain liquidity—that’s why we came up with alternatives, but in a public space,” Peterson told Markets Media. For him, the investor flock to treasuries is somewhat of a “bubble.”

“Despite the rally in bonds, we don’t like the interest rate risk, if rates go up,” he said.

Ballentine is offering a wide range of fund strategies, from market-neutral, to quantitative-based funds but Peterson noted the firm does not currently employ derivatives for hedging tactics, despite the rise in popularity for managing tail risk.

“We find derivatives expensive if you pay the premium for them and the market doesn’t experience a significant 30 percent or more downdraft,” he said.

The last two weeks have presented a downdraft of roughly 15 percent, according to Peterson, and there hasn’t been any “red flags” in regards to a mutual fund sell-off. Still, a two week period of volatility presents difficulties in measuring outflows, commented Peterson.

“We’re in a period of high volatility so hedging strategies are supposed to address that issue. They don’t go up as much in good markets, but they certainly don’t go down as much in negative markets,” Peterson said.

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