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Investing in Hedge Funds

Hedge funds seek returns with low correlation to equities and/or fixed income while providing some capital protection in volatile markets. The conventional wisdom regarding asset allocation to hedge funds is that investors assume that because hedge funds are perceived to have a low correlation to traditional investments, the risk within a portfolio can be reduced. Unfortunately, this is not true for about 2/3 of the hedge fund universe.

The average correlation values of the hedge fund and fund-of-hedge fund industry against equities are between 0.6 - 0.8. In addition, most hedge funds often reduce Sharpe Ratio and Sortino Ratio within a portfolio. In our view, many hedge funds investors make the mistake of gearing their strategy to achieving the highest possible Sharpe ratio (risk-adjusted return). However, in our opinion, the Sharpe ratio alone is a poor measure, because it ignores both correlations and skewness (the measure of the symmetry of a distribution of returns).

In addition, lots of hedge funds investors have a great focus on the size of a fund (assets under management) rather than on its performance. As a hedge fund investor, we think that one should primarily care about the performance of a fund and other characteristics such as correlation and beta to traditional asset classes, liquidity, return profile, downside protection, etc. rather than on their asset gathering success.

We at RML Advisory believe that most investors benefit from largely undiscovered, independent investment talent that work exclusively in the interest of their investors and deliver distinctive, superior risk-adjusted returns while at the same time have low correlation to long-only equities and/or fixed-income investments.

The RML Global Alternative Smart Alpha Investment Program is a diversified, risk-controlled multi-manager hedge fund investment solution. We aim to provide absolute returns while maintaining very low correlation to long-only equities and fixed income investments. Within our high-conviction portfolio we apply a Core-/Non-Core approach. The core of the portfolio (approx. 70%) consists of low correlating strategies with a market neutral bias (Relative Value, Systematic Fixed- Income, CTAs, GM Value,/Multi-Strategy, Volatility Arbitrage). The "None Core" positions (approx. 30%) consist of more directional strategies (Global Macro,Multi-Strategy, Systematic Trading).

Since internal trading starting end of December 2017, our strategy provided:

  • an annualized return of 11.31%

  • an annualized standard deviation of 4.26%

  • 84% winning months

  • Sharpe Ratio of 2.55

  • Sortino Ratio of above 8%

  • Max. Drawdown of 2.56% (September 2020)

  • Correlation vs. equities (MSCI World) of 0.05

  • Correlation vs. Fixed Income (Bloomberg Barclays US Agg. Bond index) of -0.08

  • Correlation vs. Hedge Funds (HFRX Absolute Return Hedge Fund Index) of -0.25

For more information, please feel free to reach out to us.

+41 44 521 10 56

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