The growth in internal management is changing how asset consultants interact with clients, and the current market volatility means timely information can be vital to performance, Cambridge Associates chief executive officer Sandy Urie tells Top1000funds.com’s Sam Riley.
Cambridge – which prides itself on being a research focused firm, with a speciality in alternative assets such as hedge funds and private equity – has opened up its internal databases to clients.
Research Navigator, as it has been dubbed by Cambridge, tracks all of the firm’s due diligence comments on private equity, venture capital and real asset managers, as well as hedge fund managers.
Included in the database are due diligence reports, analytics, meeting notes, alerts on products and managers, white papers and general research.
The database includes information on more than 9000 private-market funds and 2500 hedge fund products, and is available for a fixed fee.
Cambridge plans to expand the database to include long-only managers, so it can provide the full spectrum of its research on managers and products.
Urie says it is an example of how Cambridge is adapting to meet the changing investment environment, where internal management is on the rise and a fund’s professional staff do not want to wait until the next quarter for information.
“These are two tools where we have essentially taken what we have used internally over quite a number of years and created platforms that clients can use to start at a higher level with their due diligence,” Urie says.
When it comes to alternative asset investment, due diligence is something that has occupied the mind of Urie both at Cambridge and on a broader policy level when she was a member and vice-chair of the Investors’ Committee of the US President’s Working Group on Financial Markets, a position she held for three years.
The focus of the working group was on defining best practices in alternative assets, including due diligence and ongoing oversight.
Urie says that hedge funds got a bad rap in the wake of the global financial crisis (GFC), with a few high-profile blow ups obscuring the fact that, on the whole, hedge funds performed better than equity markets when those markets tumbled.
“Leverage is more the culprit and the cause of some of this, if you like, ‘bad reputation’,” Urie says.
“But, in fact, there are many hedge fund managers who can operate quite effectively and quite successfully in the types of markets we are in right now.”
Cambridge says that about 90 per cent of its clients did not experience the kind of liquidity problems that plagued other investors during the financial crisis.
But Urie warns that while investors are showing increasing interest in hedge funds as the outlook for equity markets remains uncertain, it is a demanding asset class requiring exhaustive due diligence and constant oversight.
“You don’t have to be in hedge funds, but if you do choose to do it, don’t go into it assuming it will be as easy as hiring a large-cap value manager – it is a very different process,” she says.
“You can’t just look at the investment strategy and the people and the alignment of interests, but you also need to be looking at the back office, compliance, the valuation committee, administrators, accountants, prime brokerage. So this all needs to part of the due diligence that is done up front, and then you have to do it continuously.”
Urie says that, while its US-based clients’ interest in hedge funds has remained constant after the turmoil of 2008 – its endowment clients, with assets of more than $1 billion, typically have a 25 per cent allocation to hedge funds – interest is growing from its international client base.
Cambridge has approximately 900 clients in 30 countries, and offices throughout the US and in London, Singapore, Sydney. In September it launched a Beijing office.
Urie advises clients that if they have more than $30 million to invest in hedge funds, they should be going direct rather than through a fund-of-funds product.
“People need to think about how to construct a diversified hedge fund allocation and approach it almost as if you have a mini portfolio within a portfolio,” Urie says.
“Investors also need to ask ‘where does it fit within the overall portfolio?’ Your long/short managers are really growth engines within your portfolio and your multi-strategy market-neutral managers are really diversifying, risk-mitigating managers, and they are not there really to provide return, but to narrow the range of volatility in the overall portfolio.”
More broadly, Urie says they are seeing funds not abandoning traditional asset classes but thinking more deeply about what role each of those asset classes should play in the overall investment strategy.
“I do think investors, when you talk about trends, are thinking along these lines of what are the growth assets in my portfolio and how much exposure do I want from growth in a given point in time?” she says.
“What do I want in the inflation bucket and how do I feel about where we are in the more macro- economic world in terms of inflation risk? What do I need in terms of deflationary risk and insurance against that possible event? Finally, what do I want in that diversifying bucket to mitigate volatility?”
While some investors have sought some form of insurance for fat-tail risk events, Urie says the cost of such insurance makes it more common for investors to use this overlay of role categorisation as a far more cost-effective alternative form of insurance.
Cambridge is advising its clients to take a broadly defensive position until the effects of deleveraging in the world economy starts to subside.
“We are still advocating high-quality, defensive positioning, and lower beta exposure as we work through this,” Urie says
“So, I don’t think there is the table thumping opportunity you may have seen in 2008 with credit.”
Valuation drives much of the research Cambridge conducts, with monthly reports on whether different asset classes and strategies are over-valued, fairly valued or under-valued, Urie says.
In its latest report inflation-linked fixed interest assets such as global inflation-linked bonds, US inflation-linked bonds, US treasuries and UK gilts were judged to be “very overvalued”.
“Valuation doesn’t say when something will move back to a fairly-valued state but it does give you a sense of what the risk is in the pricing,” Urie says.
“So we tend to focus a lot of our research on pricing across multiple asset classes.”
Urie says they are seeing investors moving to increase their holdings of cash and reduce their exposures to some fixed income assets.
There are currently no assets that Cambridge deems “very undervalued”.