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Asset Allocator

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Selectors' top alternative assets under inspection; Golden gates open for discretionaries

Welcome to Asset Allocator, FT Specialist's newsletter for wealth managers, fund selectors and DFMs. We know you're bombarded with information, so each day we'll be sifting through the mass to bring you what you need to know, backed up by exclusive data and research. 

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Hedge help

Advisers and retail investors, like DFMs, have become increasingly unhappy with absolute return funds over the past 18 months. But the advantage discretionaries have is that they can go fishing in different pools more easily. 

With the quest for viable alternative assets showing no sign of abating, our fund selection database is pointing to an uptick in the number of wealth managers turning to hedge fund providers, rather than mainstream asset managers, as they seek to find the right kind of exposures.

The chart below lists the most popular hedge fund Ucits strategies in DFM models as things stand, as a proportion of all such funds in our database:

We’ve discussed the performance of some of these strategies before, and the odd one has fallen from favour since then. Unsurprisingly, Aspect Diversified Trends’ 10 per cent fall last October put paid to some backers’ support. But other funds that were caught out by the start of the sell-off, like Dunn WMA and Marshall Wace Tops, have retained support - bolstered by the way they managed to return to black during the dark days of December.

Since then, of course, it’s been pretty plain sailing for risk assets. Most hedgies have managed to adapted to those conditions reasonably well, though one new name in the chart - that run by Roger Ibbotson’s Zebra Capital - hasn’t done quite so well in rising markets. 

By contrast, Angel Oak's strategy has successfully managed to smooth out returns, and the relatively volatile AQR Managed Futures fund has leapt higher in the past few weeks in particular. 

For now, then, all is reasonably well. But for alternatives in general, it's a case of constantly having to prove their worth to buyers who've been burned before in the asset class. And there are new questions to address for some, particularly now the focus on liquidity mismatches has started to increase once more. We'll take a closer look at some of the possible issues for wealth managers next week.

Gold prospecting

It’s been a long time coming, but investors are starting to warm to gold again. The combination of geopolitical risks, easier monetary policy and the potential for dollar weakness have pushed the precious metal price to its highest level for almost six years. 

Overnight, bullion prices hit $1,400 per troy ounce for the first time since September 2013. After years of range-bound trading, a 10 per cent leap since the start of May has got backers’ hopes up once again. 

Gold ETFs and mining funds accordingly began to bounce at around the same point - despite the latter’s difficulties in keeping pace with their benchmarks these days. And as the latest price moves suggest, they’ve continued to flourish this month despite risk assets generally faring pretty well.

The big driver is clearly the Federal Reserve’s shifting policy stance. That, coupled with a dollar spot index that isn’t far off its highs, has fuelled expectations that the greenback will weaken in the coming months. DFMs will be wary, though, that there have been false fronts on this dawn before - particularly as looser Fed policy already looks to be all but priced in in other markets.

And while hedging costs mean the likes of US government debt hasn’t always proven as attractive to overseas buyers as it first appeared, the dollar does still yield more than most other currencies. That’s likely to stay the case even after a series of rate cuts, and some think this could limit the currency’s falls. A shift in the dollar’s performance would alter the picture for a lot of different assets in the second half of 2019, but there’s no guarantee yet that real change is on the way.

Half full

Gold’s rebound, along with the government bond bounce and equities’ latest move higher, mean returns are in the black almost wherever you look this year. So while 2018 was a year in which nothing worked, the first half of 2019 has been the opposite. 

Of the 4,000 funds in the UK retail universe, more than 97 per cent are in the black so far this year. Compare that with 2018, when more than 90 per cent made losses. But with investors still scarred by memories of the financial crisis - and with some post-crisis problems now reasserting themselves - the outlook for the second half of the year is as uncertain as it ever was. Add to that the reputational issues that the UK industry is now having to face down, and a tricky test awaits wealth managers in the final months of the decade.

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