UBS Betting on Hedge Funds as Cure for Low Sovereign Returnsby and
Haefele says days of double-digit hedge fund returns are over
UBS clients also told to invest in private equity, real estate
UBS Group AG is advising its wealthiest clients to stick with hedge funds even after the $2.9 trillion industry had its worst start to a year since 2008.
While the days of “double-digit and triple-digit returns” for hedge funds are over, they still generate enough to satisfy yield-hungry clients who face negative interest rates, said Mark Haefele, global chief investment officer of UBS Wealth Management.
“Their performance in the first half hasn’t been impressive but they provide diversification,” he said in an interview with Bloomberg. “They still provide a better risk-reward or different risk-reward than other parts like sovereign bonds.”
UBS in April boosted its recommended allocation to hedge funds to 20 percent from 18 percent, saying the strategy will provide stability from volatile markets. The move comes as a net $15 billion was pulled from the global hedge-fund industry in the the first quarter and as some of world’s largest institutions including MetLife Inc. said they will scale back their holdings.
Hedge funds may lose about a quarter of their assets in the next year as performance slumps Blackstone Group LP’s billionaire president, Tony James, predicted last week. The HFRI Fund Weighted Composite Index declined 0.6 percent in the first quarter, its worst start to a year since 2008.
Developed market bonds, by contrast, have rallied as the European Central Bank and the Bank of Japan expanded stimulus measures and the U.S. Federal Reserve held off raising interest rates. The Bloomberg Global Developed Sovereign Bond Index has gained 8.3 percent this year, while its yield fell to 0.67 percent, near a record low.
Haefele, who sits on the UBS pension board, said the bank had also been creating so-called endowment-style portfolios to encourage clients to invest in more private equity and real estate to “harvest the illiquidity premium.”
The bank’s asset-management unit, which oversees 628 billion Swiss francs ($634 billion), has about 16 percent invested in alternative assets, including 41 billion francs in hedge funds and 52 billion francs in real estate.