GLOBAL - Amvescap-owned Invesco is hoping to launch a new hedge fund strategy by year-end as the race for higher yields among investors hots up.
Invesco is getting ready to pounce on what it sees as a growing institutional appetite for higher volatility hedge fund products.
Brett Bastin, head of product development, absolute return strategies at Invesco, said: “There's a growing recognition that the kind of implied volatility that we have seen in the equity markets should drive a resetting of investor expectations of the level of volatility that they are willing to budget in their portfolios.”
Bastin says that the new offering is likely to be based on a long-standing strategy run from the firm’s New York office, which consists of a 35 strong-team led by Donald Young: “Over ten years ago [the team] began offering an equity market neutral product which is investing in large-cap US equities.
”[It has] a relatively low tracking error, is well diversified and rigidly market neutral.”
The neutrality extends across beta, industry, sector and style biases, with no one holding exceeding 2% of the total portfolio.
The existing fund has a target yield of 4% over cash, with a 5% tracking error and has attracted around US$1bn in institutional money to date.
But Bastin explains that the proposed new strategy, which will potentially by marketed to institutional investors, including funds of hedge funds, in the US, UK, Europe and the Middle East.
”We will relax the constraints which make the existing strategy a relatively conservative market neutral product in such a way that will target an 8% return over cash, or approximately a 10% total return with a 10% tracking error.”
Invesco says it has based its research largely on the models underlying its existing portfolios.
“The research for the proposed new strategy looks at relaxing certain of the constraints on the existing market neutral strategy. We will allow a larger net sector exposure, a larger style exposure and larger exposure to any single stock,” adds Bastin.
”The back tests are even more optimistic but right now the parameters around the design of the new market neutral product will remain as they are.”
The minimum institutional subscription is US$10m: “But we could accommodate a level much below that if we establish an offshore fund – which is in the early stages of consideration right now.”
According to Bastin, several US and non-US pension funds have expressed an early interest in the strategy.
But talk of the new strategy comes amid growing debate regarding the virtues of single strategy hedge funds against their fund of fund counterparts.
Recently, an investment officer at a large Austrian pension fund criticised the hedge fund industry for its lack of transparency and the potential conflict of interests between hedge fund of funds and index provider.
Bastin thinks that pension funds should look beyond fund of funds which seem to have become the “default solution” to this type of investment.
“A fund of hedge funds may have a strong due diligence capability, or a recognised brand but theyare rarely able to provide transparency into the investments processes of the underlying funds. It’s a total black box.”
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