In a recent Talking Points note entitled Why Bother with Alternative Investments?, Morningstar senior research analyst Julian Robertson said the traditionally opaque alternatives sector can make post-FOFA obligations difficult to meet.
“Hedge fund managers naturally want to protect their intellectual property, but without greater disclosure they face an uphill battle to convince investors to commit their capital to them,” Mr Robertson said.
“Even with greater disclosure, many strategies in this space use complex investment processes and invest in instruments such as derivatives,” he said.
“Inherent leverage when using derivative instruments, their often fast-moving nature and multiple layers to the investment processes make these products particularly difficult to understand.”
These complexities are further complicated by the comparatively limited alternatives funds available in Australia, Mr Robertson said, adding that he does not believe alternatives are viable for lower-risk portfolios.
“High-grade bonds and cash are more appropriate for diversifying these portfolios, given the lower volatility of these assets, stable returns primarily from income and generally uncorrelated nature to other asset classes,” he said.
Looking to equities, Mr Robertson noted that the falling Aussie dollar would open up opportunities to investors in international equities, as the foreign currency exposure reduces the overall portfolio risk.
“Investing in unhedged international shares is one of the best ways of diversifying equity risk,” he said.
“Accessing foreign currencies through unhedged international shares is not complicated and the negative correlation benefits and potential excess returns are essentially for free.”
