Sometimes, a pitch goes completely wrong....

The other day I had a pitch to a professional investor about our Global Alternative Smart Alpha Multi-Manager Hedge Fund strategy.

In a nutshell:

Global Diversified Smart Alpha is an actively managed diversified Multi-Manager/Multi-Strategy hedge fund investment program. The strategy strives to produce positive absolute returns, regardless of financial and commodity market direction, by investing in a diversified set of global developed markets across equity, fixed income, foreign exchange, volatility, arbitrage, and commodity asset classes. The goal of the strategy is to protect investors from stock market declines, combined with “crisis alpha” (generation of positive returns during periods of high financial stress). The strategic objectives have been achieved with a unique blend of carefully selected investment managers and strategies targeting an uncorrelated set of opportunities. Since January 1st, 2018, Global Alternative Smart Alpha has provided proper risk diversification due to its low/negative beta and low/negative correlation versus equities, bonds, and the global hedge fund industry in general plus – and this is very important – due to low pairwise correlation across investments managers in the portfolio.

Annualized return (01.01.2018 – 30.04.2023): +11.22%

Yearly Returns vs. MSCI World Equity Index

Annualized Volatility (01.01.2018 – 30.04.2023): 4.83

The potential investor commented on this by saying, "But that's not very spectacular." I asked him what exactly he meant by that. He replied: "well, 10% - 11% return per year is very poor for hedge funds. I have seen hedge funds which returned of over 20% in 2022, for example". I replied that we also had individual funds in our portfolio which achieved well over 20%. However, the investment objective of our product is different - as mentioned at the beginning (i.e. true risk diversification due to its low/negative beta and low/negative correlation versus equities, bonds and the global hedge fund industry in general plus – and this is very important – due to low pairwise correlation across investments managers in the portfolio. Then I remarked if he had noticed that we have not had a negative year since launch and have delivered a very consistent performance overall.

I asked him which fund profile he would prefer:

Fund A:

Year 1: +25%

Year 2: -18%

Year 3: +16%

or

Fund B:

Year 1: +10%

Year 2: +13%

Year 3: + 11%

His answer came as if shot out of a cannon, "that is perfectly clear, Fund A, because its performance is much more spectacular (note the term spectacular) than that of Fund B". I asked him if he was sure that his total return after 3 years with fund A was higher than with fund B. He looked at me a bit funny and questioning whereupon I suggested we calculate the total return of both funds.

Results:

Fund A: Total return +18.9%

Fund B: Total return +38%

I said, now you see why it is so important to manage the downside and primarily avoid large drawdowns and hence to me +38% look more spectacular than +18.9%! I amended that successful hedge fund mangers have proven that consistent risk management is essential. A careful selection and a sound portfolio- and risk management process are important to achieve an attractive, risk-adjusted return.

I asked him if he would be interested in learning more about our process and why we also pay a lot of attention to the unsystematic risk of a fund. He replied by saying: “no, not really, because he would still prefer investing in hedge funds delivering higher returns”…..

That was the point for me where I seriously doubted myself and asked myself what could have gone wrong here.

?PS: This "professional" investor was a CIO of an organization managing several 100 million of client assets.