As part of this news service's look at alternative investments, we interview the manager of a Credit Suisse team running quantitative strategies in the hedge fund space.

Markets have recently been volatile and with some wealth managers taking some risk off the table, thoughts are turning towards widening the number of tools in the investment bag.

Hedge funds have been an important part of the “alternative investments” space for years, although these funds, so practitioners say, are not really an asset class at all. Rather, hedge funds give users more ways of playing a market, like a golfer with a full set of clubs for example, rather than just a putter with a five iron and a driver. The $3.24 trillion hedge fund industry (source: Hedge Fund Research) covers both judgement-based, qualitative approaches and quantitative ones, with the latter attempting to strip out emotion as much as possible to diversify sources of return.

High and ultra-high net worth individual investors and family offices have been drawn into the hedge funds space, not always happily. (Returns in recent years have been uneven, prompting fee compression.)

The death of hedge funds has been much exaggerated, however. Wealth management players such as family offices, given their time horizons and greater freedom than say, government pension plans, continue to tap into hedge funds. They can tolerate the occasional illiquidity and won’t necessarily panic at the first time of trouble.

Yung-Shin Kung, who manages the US-registered Credit Suisse Multialternative Strategy fund, part of the Quantitative Investment Strategies Group (QIS) at Credit Suisse, says that family offices and similar wealth management institutions might employ his approach. At its centre, he judges whether a market is at an inflection point of moving into or out of one type of market period or another. QIS manages over $800 million in multi-asset, multi-factor investment portfolios and about $1.5 billion overall.

“At the core, our objectives are very simple. We seek to provide our clients with a means of improving their portfolios by offering diversification to the stock and bond exposures they typically hold. We strive to do this as `efficiently’ as possible – in other words, we focus on maximizing the expected return generated per unit of risk taken,” he told this publication.

Multialternative Strategy is a process-driven multistrategy program seeking to maximize performance while taking limited directional exposure to stock and bond markets. Seeking to increase expected returns and reduce drawdown risks, the program combines elements of global asset allocation, alternative risk premia capture, and hedge fund trading investment styles to allocate to a diverse strategy set, consistently considerate of the prevailing macroeconomic environment.

“We seek to invest in a broad range of systematic investment strategies across all major markets (equity, fixed income, commodity, and currency).  Generally, the strategies are designed to be either market neutral or flexibly and dynamically long or short market risk,” Yung-Shin Kung said.

He said merger arbitrage is a type of market-neutral strategy that his firm employs in portfolios. Some other examples of portfolio strategies it commonly uses may include:equities DM [developed market] trend, equity DM value, commodity value, rates US volatility carry, and rates carry. The Institutional Share Class, which can only be purchased by Investment Professionals, has a net expense of 94 bps.

Risks and rewards
Hedge fund sector performance in recent months has been robust. The HFRI Fund Weighted Composite Index®, produced by Chicago-based HFR, gained 7.44 per cent in the first half of 2019, the strongest 1H gain since 2009, it said.

Yung-Shin Kung described how the strategy is aimed at capital flow and how it is driven in three ways: “bullish”; “risk reduction” and “risk on/risk off”. The strategy considers which scenario appears to be most in evidence and, when put alongside other factors, decides what to do. A trick is to work out how close or how far one might be in moving from one scenario to another.

“We view asset price changes as a reflection of capital flow dynamics. The market rotates through distinct, quantitatively defined regimes which may be reasonably described by their underpinning flow dynamics – expansionary or bullish; contractionary or bearish; or transitory or risk-on/risk-off,” he said.

“There is, generally speaking, a pretty high degree of risk-seeking behavior now in all markets. We are seeing more private deals and longer lock-ups,” he added.

Hedge funds have had their challenges in recent years but, after a shakeout, appear to be as much a part of the wealth management toolbox as they were a decade or more ago.