It is well known that issues of fees, complexity and illiquidity are reasons often used to dismiss investment portfolios that include hedge fund strategies. In this article we want to share how the positioning and design of our Multi-Strategy Hedge Fund has been built specifically to tackle these key drawbacks head on, and why we believe the strategy has an important role to play in Nikko AM’s diversified funds.
N.B. Each of the Nikko AM Conservative, Balanced and Growth funds have exposure to the Nikko AM Multi-Strategy Fund. The Multi-Strategy Fund as a single fund is not available directly to the retail investor.
To start with, there is no performance fee. However, the fund’s total expense ratio (“TER” i.e., its fixed fee) of 1.95% is still clearly expensive relative to other sectors, being roughly twice the price of equities and 3-5 times the price of bond funds. Nevertheless, given that its weight within the diversified funds is 5-10%, its overall contribution to cost is 0.10%-0.20% which is tolerable, especially for the differentiated benefits the fund brings. Moreover, if this strategy wasn’t being used the money would still have to be invested elsewhere. This means, the cost benefit in removing it from the funds would only be 0.07%-0.12%, which in the context of overall costs and benefits is not the barrier that many make it out to be. Therefore, the allocation of Multi-Strategy, with no performance fees within our diversified funds, is one solution to managing the high fees involved with hedge funds.
More significantly, we acknowledge that it is extremely difficult to provide clarity around what all the underlying investments are at any point of time due to the complexity of hedge funds. It’s for this reason that we use JP Morgan Alternative Asset Management’s (JPMAAM) fund as the vehicle for accessing this strategy. They have an immensely experienced team who work with underlying hedge fund managers to build bespoke portfolios that are constantly under review and monitoring. At this point, what we’re looking for is confidence in the people and team at JPMAAM. We trust them to create a portfolio that provides the characteristics we require and to effectively manage the various underlying strategies within the desired portfolio. We hold regular updates with JPMAAM to observe how they are actively assessing the whole portfolio and hold discussions around their processes for managing risk and how they work with the underlying managers. These all contribute to gaining confidence in what the Multi-Strategy Hedge Fund offers. A fitting analogy for this relationship is to imagine taking your car to a garage; you know in broad terms what they are fixing and changing, but ultimately there’s trust that the mechanic is doing a good job even if you don’t know every bolt, bush, and washer they’ve worked on.
We use a daily priced, daily liquid UCITS structure, which enables the full liquidity desired in KiwiSaver. Most hedge funds are unable to offer this and instead offer a once-a-month valuation, creating that rigid look and behaviour of the fund. However, we believe it’s important to have daily valuations and flexibility for the fund’s mobility as part of its role in a diversified portfolio. Achieving this is a key solution to tackling the illiquidity often found within hedge funds whilst adding even more diversity to our diversified funds.
To learn more about the role of the Multi-Strategy Hedge Fund in our Diversified funds, have a read of our article here.