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All weather takes longer outlook for hedge returns

New fund of hedge funds manager Hilltop Fund Management has pitched itself as an alternative to the funds of hedge funds it criticises as over-diversified and disappointing in performance terms.

The firm has just launched its all weather fund of funds, which will contain 15 to 20 hedge funds. Hilltop thinks this is the optimum number for maintaining diversity without diluting returns and says portfolios containing more than 50 funds underlying funds are expensive quasi-trackers
with too much market risk.

All weather’s holdings will be uncorrelated to each other and the portfolio will be constructed on a bottom up basis, with a focus on finding talented managers who run smaller funds. Hilltop says many mainstream funds of hedge funds place too much emphasis on top-down asset allocation, where the manager tries to predict which strategies will perform well over the next few months. Hilltop believes this often fails because managers do not have the liquidity in portfolios to reflect changes of opinion.

Hilltop has a performance fee structure where the firm does not get a fee until year three. It believes one year is not long enough to assess a manager’s skill and thinks it is unfair for managers who have one good year to take a fee but not pay it back if the next year’s performance is poor. Hilltop’s hurdle rate increases in line with how long an investor has been in the all weather fund.

Founding partner and portfolio manager Rory Hills says: “We think one year creates the wrong sort of time horizon in incentivising staff. It is all about what can we do this year and that is not in line with the longer time horizon of investors.”

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