Investment Management

A Favorable Climate for Alternatives

Hedge fund trading and risk capabilities are seen as primed for market uncertainties

Friday, May 24, 2019

By Juliette Fairley


Investor interest in private equity and the need to diversify and hedge risk in volatile markets are working to the advantage of hedge funds, according to speakers at a recent New York Alternative Investment Roundtable event.

“Investors have to move more into private equities . . . and to get real return you have to take a little more risk in credit, which is usually private credit,” said Susan Webb, president and chief investment officer of Appomattox Advisory, a woman‐owned firm with $2.5 billion of assets under management. “In the macro environment, if you can get a good manager, you can make a lot of money because of more volatility and more rate moves.”

Webb participated in a “Wall Street Women” panel organized around International Women's Day.

Volatility was a recurring theme in the discussion. Volatility was particularly pronounced last December, attributable to program trading and causing “a problem for a lot of investors,” said Lisa Vioni, founding partner and CEO of Hedge Connection.

“Those who are trading, especially long/short equity, don't know how to really manage that risk, because the program trading that has become much more prolific in the hedge fund space has disrupted the way we traditionally look at value,” Vioni said. “It's a disruption that, without understanding technical analysis, will cause fundamental traders to experience much bigger swings and more volatility.”

“New Ways to Hedge”

Matt Chancey, a Tampa, Florida, financial adviser, pointed out that there are more investment products and strategies available today to navigate volatility and preserve capital than there were a decade ago.

“Unfortunately, since we haven't experienced a drop of the magnitude we had during the global financial crisis, we aren't sure what will happen in the event of large‐scale volatility,” Chancey said.

“Technology and innovation have created new ways to hedge, such as adding illiquid alternatives, which is also a diversifier, but there is a premium for being invested in illiquid alternative investments that cannot be reallocated,” he added. “The illiquidity premium is the benefit that investors receive for sacrificing liquidity in favor of allocating capital in a non‐traded investment.”

“Leverage works great when markets are going up, but when lenders panic and call their loans, and if you have to sell an asset into a panicked marketplace, you could get hammered,” Chancey said. “Historically, it's being over‐leveraged in the fixed‐income space, or using other people's money to enhance the yield, that hurts in bad markets.”


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