By Barb Shegog
How one company is making hedge funds an easier sell for the corporate cash portfolio.
When looking at the corporate cash portfolio, one sector rarely seen in the investment portfolio is hedge funds. There are several obstacles to investment and many reasons that corporate investors feel that hedge funds are not appropriate for the investment portfolio. A recent survey of the NeuGroup Treasury Investment Manager’s Peer Group (TIMPG) showed only 12 percent of the group invested in hedge funds, yet 30 percent had investigated hedge funds and for one reason or another did not invest in them.
What is standing in their way? A few of the obstructions are the perceived illiquidity of over one year, the difficulty in obtaining transparency in a private market and gaining operational aspects such as consolidated accounting. But one company is helping companies get around these issues. Florida-based Crystal Capital Partners has developed a system that can help investors overcome some of the hurdles and make an allocation to hedge funds possible.
Based upon the institutional quality hedge funds that are available from Crystal Capital, there is ample evidence to demonstrate using its tools that the available hedge funds will increase returns while providing low volatility, low correlation returns to almost any corporate treasurer’s portfolio.
ASKING THE RIGHT QUESTIONS
Some of the basic questions in terms of investing in hedge funds include finding out how much liquidity a corporate treasury is required to hold. Also, does the portfolio have to have the same liquidity? And would it make sense to include a small percentage of investments that have low volatility and some illiquidity (liquidity of less than one year), in order to increase returns (especially given extremely low current money-market rates)?
Most corporate investors are familiar with a money market portal, and Crystal Capital provides a similar experience that enables investors to build their own hedge fund of funds that can be specifically tailored to the corporations’ risk tolerance and liquidity needs. Crystal Capital has been in the hedge fund business for more than 20 years, investing and creating fund-of-funds. Along the way, it built the tools to allow investment in some of the institutional hedge funds, perform research, do analytical work, run optimization scenarios and provide reporting.
The system (portal) also provides a warehouse for research reports and data. Investing in hedge funds in this manner has proven to be a very popular choice as Crystal Capital’s recent years growth can be attributed to providing this infrastructure to clients. The firm’s system also can help companies overcome some of the other hedge fund investment hurdles, like liquidity/volatility, minimum size constraints, lack of hedge fund research bandwidth or resources, and insufficient data to make the case to management for the investment and then monitor the investment.
LIQUIDITY/VOLATILITY
Crystal Capital’s range of hedge fund investments provides for the ability to choose liquidity/volatility tolerance and it allows for the analysis to be incorporated into an existing portfolio so that the net effect of adding hedge funds can be analyzed. There are multiple brand name funds that allow for less than one year liquidity and, at a portfolio level, increase returns while lowering overall volatility.
MINIMUM SIZE CONSTRAINTS
By investing through the Crystal Capital Partner’s portal an investor can use Crystal’s combined assets to gain access to hedge funds that have minimum sizes that, individually, exceed the investor’s hedge fund budget. Through Crystal it is possible to invest in multiple funds, creating a diversified portfolio with a $1 million investment, even though many of the available funds individually have $5mm or above investment minimums. The minimum investment constraint has made hedge fund investment a non-starter even for larger corporations, as often the corporate cash investor will only invest a very small segment of the entire portfolio to hedge funds. Now options are available.
RESEARCH AND RESOURCES
Many corporate investors do not have the time or expertise to evaluate the intricacies of hedge funds, or it does not make sense to allocate a portion of their time to a smaller piece of the total portfolio. Before investing in the funds, Crystal Capital’s portal will provide the information needed to gain comfort around the investment, including a detailed analysis of the hedge fund portfolio as well as in-depth research and analytics on each fund.
Research and analytics are both quantitative and qualitative including: monthly data, correlation analysis, benchmarking to 150 available indices, portfolio analysis, return and volatility, and an in-depth quantitative research report which includes details about strategy, management, liquidity, etc. The analytics can be used on an individual fund, hedge fund portfolio or investment portfolio basis enabling a corporate treasurer to immediately see the impact of adding a hedge fund portfolio to an overall investment portfolio while also understanding all of the individual return components. Once an investment is made, the analytics are available on an ongoing basis for reporting and monitoring.
The Crystal portal includes customized consolidated reporting which enables a corporate treasurer to “click a button” and obtain a consolidated monthly report on all hedge fund positions and consolidated portfolio performance to provide senior management with updated information that is easy to understand and discuss.
Corporate treasurers can gain comfort regarding the timeliness and robustness of the research as over 10 percent of Crystal’s approximately $700 million assets under management is Crystal partner’s capital. Having skin in the game gives their recommendations a bit more credibility.
Fees an Issue, Too
While hedge funds are looking to >get into the corporate space, at least one big institutional investor is abandoning them altogether: big California pension fund Calpers.
New investment chief Ted Eliopoulos said in a statement that while hedge funds were “certainly a viable strategy for some…at the end of the day, when judged against their complexity, cost and the lack of ability to scale at Calpers’ size,” using hedge funds doesn’t “merit a continued role.”
Hedge funds are expensive, Mr. Eliopoulos said: Calpers has reported it paid out $135 million in hedge funds fees during the year ending June 30, 2014, up from $115 million in 2012.
There’s really no telling whether this will be a trend or a one-off event. Funds can be expensive, but they can also deliver outsized returns, too.
THE FINAL OBSTACLE
It does not take very long for corporate cash investors to get the “don’t even think about it” answer to their question on hedge funds. Well, this portal might sway the answer at least to “well maybe we can think about it.” After presenting a detailed risk analysis, showing simulated returns, with your benchmark and a piece of the fund, even the most closed-minded might be swayed. Especially once you dig into the toolkit to demonstrate the volatility of the investment and can show risk metrics and return simulations before and after investment.
Certainly hedge funds are not the most common and not at the top of the list of typical investments for a corporate cash investor. Standing in the way is appropriateness, operational issues, and perception. Crystal Capital’s portal can assist with operational snags and certainly help change perceptions. This leaves appropriateness on your plate; two out of three isn’t bad.