Inevitable innovations

11Oct06

While we have focused on the effects hedge funds can have on the capital markets one area we have not touched on is how the popularity of hedge funds has trickled down into more traditional areas of investment management.

Anuj Gangahar at the FT.com discusses the influential role Calpers plays in the investment industry. Given their asset base in excess of $200 billion we guess that should not be all that surprising. According to this report Calpers continues to seek out novel investment techniques. One area where they apparently is focusing is on so-called 120/20 strategies.

Put simply, a so-called 120/20 strategy allows an otherwise conventional equity manager to sell short individual stocks worth up to 20 per cent of its portfolio value and invest the proceeds in additional long share purchases.

This approach allows the portfolio manager greater latitude to implement their views on relative securities prices. At the moment quantitative managers have pushed hardest in marketing the product because their models lend themselves more easily to this sort of structure.

There is no free lunch here. The greater leverage and flexibility also allow for greater underperformance against a traditional benchmark, if the strategy were to go awry. However institutional investors who are always on the look out for alpha-generating opportunities may find this middle ground between traditional portfolio management and hedge funds attractive.

Just as institutional investors become more comfortable with alternative investment techniques on a more limited scale the same thing is occurring in the world of mutual funds. James Picerno (of the Capital Spectator blog) has an article in the October 2006 edition of Wealth Manager magazine (registration required) on a new fund group that is making hedge fund investing easier for the general public.

Picerno reports on the goings on at Geronimo Financial that has launched three “absolute return” open-end mutual funds. There are a number of interesting, technical aspects to what they are doing. We recommend the entire article to explore these issues, but we will leave you with a sound bite to whet your appetite.

It’s too soon to pass judgment on a fund with less than a year of history, but Geronimo Multi-Strategy is clearly an intriguing newcomer that could ultimately set a new standard for publicly traded alternative investments.

While we cannot endorse any particular fund or fund company it is heartening to see that there still is a measure of innovation left in the mutual fund area. The spread of alternative investment techniques is in a sense a historical inevitability. The only question is how far and wide they infiltrate what were traditional bastions of investment management.

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