Andrew McCulloch

Andrew McCulloch joined Albourne in 2007 and is a senior portfolio analyst, partner and head of the U.S. region leading the Connecticut office. Andrew oversees the portfolio construction, manager selection and risk management advice provided to a wide range of sophisticated family offices, foundations, endowments, insurance companies and public/private pension plans across liquid and illiquid alternative strategies. He has played a key role in several Albourne initiatives, including the development of the group’s total portfolio-wide risk aggregation services and Albourne’s strategy forecasts, and he is an active member of the firm’s AI leadership group. Prior to moving to the Connecticut office, Andrew spent two years in Albourne’s San Francisco office managing West Coast client relationships. Andrew earned a B.A. in economics from the University of Wisconsin–Madison and is a CAIA charterholder.

CIO: What actionable thing have you learned over the course of your career that has proven itself this year?

McCulloch: Early in my career, I learned how important it is for investment programs to have a governance structure that promotes alignment among all key stakeholders, including beneficiaries, board members and investment staff. While prolonged bull markets can conceal the value of good governance, we have seen evidence of a gap growing between those with more effective and less effective decisionmaking processes. I believe this disparity will only grow as the outlook becomes more uncertain.

For instance, more recently we’ve seen investors strive to enhance the risk/return profile of their portfolio by improving capital efficiency. Unfortunately, these efforts are often hindered by agency risk; investment staff may avoid a higher-volatility opportunity or a new portfolio structure that may have been most appropriate, doing so because of concerns that their career may not withstand the associated ebbs and flows of performance.

Investment programs that are willing to have an active and honest dialogue about appropriate governance and incentive structures can benefit from an enhanced ability to be dynamic in decisionmaking, make better use of their finite resources, maximize the impact of portfolio construction, better leverage their partnerships and, ultimately, create a better outcome for their beneficiaries.

CIO: What issues do you expect to dominate financial decisionmaking and the economy in the next 18 months to three years?

McCulloch: With several dozen machine learning models in production and AI assistance integrated into our business processes, artificial intelligence continues to be a game-changer for the industry.

Among other competing issues, I believe the downstream effects of this higher-rate environment are also tremendously impactful. Increased pressure from financing costs, the rise of private credit and the misalignment in fee structures have come to the fore.

Regarding the misalignment in fee structures, higher rates have made it even more important for investors to ensure that their terms encourage managers to take sufficient risk, not to collect fees on the risk-free rate. As it stands, the lack of any kind of risk-free rate hurdle in most fee structures causes [roughly] an additional 100-bps fee drag per annum—clearly indefensible. To date, investors have typically acted alone when negotiating and have struggled to engage GPs around this issue. We believe presenting a unified voice empowers all investors when raising this issue with managers, and so we championed an open letter supporting the adoption of hurdles. The Open Letter on Cash Hurdles has been signed by more than 50 organizations representing hundreds of billions of investor alternatives capital. We will continue to push for better alignment.

CIO: What changes are you making to your asset allocation advice, given the current state of monetary policy, geopolitics and the impact of inflation and rising interest rates?

McCulloch: Active alternative strategies—both public and private—are more important than ever, as we face inflated valuations, changes in monetary policy and heightened geopolitical risk. We continue emphasizing the benefits of diversification and a total portfolio approach that considers liquidity, drawdown and other measures beyond just risk and return.

Private equity, despite the current phase of lower distributions and increased capital calls, is expected to continue to be a core return driver within institutional portfolios. This general lack of liquidity from established private equity programs has supported demand for more liquid private credit strategies, given their yield characteristics and higher return expectations. Meanwhile, infrastructure and other areas of real assets maintain some appeal due to their inflation sensitivity and opportunities within the broad energy transition theme, including decarbonization, digital infrastructure and increased power demand.

Arbitrage-focused relative value strategies and variable exposure global macro strategies remain attractive in asset allocation frameworks because of their diversification potential, with a preference for implementations that offer better capital efficiency. On the return-seeking side, we’ve seen more investors try to lower tracking error versus policy benchmarks by incorporating higher market exposure versions of existing equity long/short offerings within wider portfolios.