How a SWF Picks a Hedge Fund – The Inside Track

(November 14, 2012) – Alternative asset managers targeting sovereign wealth fund (SWF) money have to be much more than alpha-generators, a former CIO has revealed.

Scott Kalb, who recently completed a term as CIO of the Korean Investment Corporation (KIC), said in a backstage interview with sector specialist Opalesque TV this month that picking any manager involved a long and detailed process, but when dealing with alternatives firms, investors had to be especially careful.

Kalb said: “You’re not in public markets, you’re investing as an LP and so you have an LP-GP relationship. You have to set up a process that’s looking at things like track record, staffing, management. You have to look at not only past performance but also strategy, systems, risk management – you have to look at everythingsoup-to-nuts and vet the process completely. It usually takes three-to-six months to select a manager, so it’s a long process. You have to make sure you see them on the ground and make a thorough evaluation.”

Before joining the KIC, Kalb worked for several investment banks, asset and alternative managers in the global markets. The SWF was founded in 2005 and has around $43 billion in assets.

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The diversity in SWFs means there is little similarity in the asset allocation strategies among the group. However the size of the assets and usual sophistication of the investment committee means most will have some allocation to alternative assets.

“My belief is that if you are going to invest in hedge funds, for example, you may as well start from the top down rather than bottom-up and that is I believe in working with large, well-known, well-established firms,” Kalb said. “I don’t mind if they have lots of assets under management, I have found that even managers with lots of assets under management can continue to perform very well.”

Over the past 18 months there has been a shift within the investor community, with a surge of assets being allocated to larger hedge fund managers.

“Some people believe that smaller, more nimble managers can get you better returns, but I think in the alternative space, it’s not just about returns,” said Kalb. “Returns are a requirement – it’s what gets you in the game. Besides that, a lot of what you need to see is around the quality of the platform, the people, the infrastructure – you need a deep team to be comfortable to invest in them.”

Kalb said the days of a “couple of guys” running money in a simple set up were over.

“These days what you need is a partnership so you want to invest with firms that are not only going to make returns for you, but are going to be able to provide you with information and software, who are going to be able to help you to understand what is going on in the markets and help you to be a better investor.”

To watch the full interview, click here.

One of the largest and fastest growing economies on the planet is about to get new leaders – what will this mean for the rest of us – and our assets?

(November 14, 2012) — Political changes in one of the world’s largest economies could shake up the performance of some assets held in institutional portfolios, analysts at Societe Generale have warned.

This week, the Communist Party of China is set to confirm its new leadership – the outgoing President Hu Jintao has said the congress had “replaced older leaders with younger ones.” The process, which happens every ten years, will see new leaders face the relative slowdown in the country’s economy, which had become a point of concern in financial markets earlier this year.

Over the 10-year tenure of the previous leadership, China achieved GDP growth of over 10%, on average, each year while maintaining low interest rates. Analysts at Societe Generale said this environment had changed and the new leadership needed a new growth model.

Analysts said: “Reforms to rebalance the Chinese economy from an investment-led exporting model towards consumption should contribute to a moderate rise in commodity prices in the mid-term, in the absence of massive investment stimulus measures.”

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They added that as China has become the main importer for many commodities, the country remained the most significant pricing factor in numerous commodities markets.

A survey by Bank of America Merrill Lynch this week showed investors were concerned about this asset class and had slightly reduced their holding over the past month.

Outside of commodities and other exports and output, the Chinese consumer could also be a powerful stimulant to equities markets.

Societe Generale analysts said: “Provided that new Chinese leaders implement the necessary reforms to boost household consumption, the consumer discretionary sector should continue to catch up in China.”

However, the French bank’s team cautioned investors against Chinese banking stocks as the sector faced downside risk due its exposure to potential deterioration in property prices.

The team added that the outgoing Chinese president had said the nation should seek to double economic growth and per-capita income for both rural and urban populations by 2020, from where it had been in 2010.

A problem the new leadership is likely to have to face, according to the Societe Generale team, is a growing feeling of inequality and corruption in the country that has already led to significant unrest.

The new leadership is to be unveiled tomorrow.