Credit Suisse banks on rich shifting into hedge funds
Leading Swiss group's alternative investment unit expects wealthy investors to switch out of bonds after a year of negative performance
Jeanny Yu and Ray Chan
Credit Suisse, one of the world's largest private banks, is expecting a good year for its alternative investment business as the super-rich increase their exposure to hedge funds in light of record low returns for bonds.
Last year was the first time the market saw negative total returns on many safe-haven bonds such as US treasuries and German bunds. In comparison, hedge funds had their best performance since 2010, posting a return of 10 per cent on average.
Michael Levin, the head of alternatives for private banking at Credit Suisse in the Asia-Pacific, told the South China Morning Pos t many ultra-rich individuals were considering cutting investment grade bond exposure and buying into hedge funds.
"Asia-based investors who may have been under-allocated or not allocated in hedge funds are increasingly rethinking their hedge fund exposure," Levin said. "Both Asian and global investors are seeking to invest in hedge funds as a risk-reducing [strategy] for their portfolio, rather than risk-seeking.
"The inclination for investors in Asia to invest in hedge funds was … to see hedge funds as a risk-reducing proposition and a portfolio diversifier as they need to generate a fixed-income replacement strategy."
Total hedge fund assets globally surged to another record high in the first quarter, marking the seventh consecutive quarterly record, according to Hedge Fund Research. But returns from this asset class are less spectacular: a hedge-fund index tracked by HFR shows a 0.27 per cent loss year-to-date.
Levin said investors were still flocking to hedge funds not because they were seeking "absolute returns", rather they wanted "asymmetric returns" - an investment strategy that maximises upside potential while capping downside risks.
"A lot has changed since 2008. There was a misconception of what hedge funds delivered and that the term 'absolute return' was perceived by people to mean 'make money in all environments'. I think 2008 exposed the reality of hedge funds and helped redefine what the objective is - which is to deliver asymmetric return," Levin said. "I think investors should have very realistic expectations of what hedge funds can deliver."
Credit Suisse is one the biggest global alternatives managers, overseeing 76.4 billion Swiss francs (HK$660 billion) of alternative investments at the end of last year, including hedge funds and private equities, its annual report shows.
Event-driven strategies, which seek to exploit pricing inefficiencies that may occur before or after a corporate event - such as a bankruptcy, merger, acquisition or spin-off - were what prevailed now, Levin said.
"We have clear indications of the desire of many companies to leverage their capital base in this environment towards inorganic growth in the form of mergers and acquisitions, spin-offs," he said.
"Those create company-specific catalysts and capture a spread by being able to access the likelihood of those deals concluding at a premium to current prices.
"All of these activities … create investment opportunities that are not relying on the direction of the underlying markets and create potential for returns and diversification for investors' portfolio that are very difficult to access individually."