Morningstar Advisor - June/July 2013 - (Page 16)
10 Questions
Sophisticated Strategies for the Masses
Henry P. Davis
Managing Director, Arden Asset Management LLC, a manager of portfolios of hedge funds, and President/CEO of Arden Investment Series Trust.
Davis will be speaking at the Morningstar Investment Conference, June 12–14, Chicago.
Interviewed May 14.
1 Why invest in alternative investments?
Alternatives provide differentiated or
“alternative” return streams from traditional
investments. Alternatives may
enhance portfolio efficiency and
diversification, resulting in more
attractive portfolio characteristics (e.g., higher
risk-adjusted returns and lower overall risk).
2 What is the biggest misconception investors have
about alternatives?
One significant misconception
investors have about alternatives concerns their riskiness.
One often hears references to hedge fund
managers “making bets,” “gambling,” and so
forth, whereas in reality many if not most
managers follow disciplined strategies that are
designed to reduce risks associated with
riskier assets. For example, certain hedge-fund
strategies such as Equity Event employ
process-driven methodologies with hedges
designed to mitigate risk.
3 Sophisticated alternative strategies are becoming
more available to advisors and retail investors through
mutual funds. Is this development a good thing?
Yes, I’d say it’s a great thing. It’s all
about leveling the playing field by providing
individual investors access to strategies
previously only available to institutions and the
very wealthy. It means more choice, more
options for building portfolios, thereby
increasing the likelihood of meeting one’s
investment objectives in an environment
of lower overall expected returns. I look
forward to the day when my kids will be able to
make diversified hedge fund investments in
their 401(k) plans.
16 Morningstar Advisor June/July 2013
4 What’s the biggest drawback of this trend?
Some hedge fund strategies do
not fit in a daily liquidity mutual
fund structure owing to the less-liquid
nature of some of their underlying holdings.
5 Would you be interested in managing
a mutual fund?
Yes. In fact, we have launched Arden
Alternative Strategies I ARDNX, a multimanager
mutual fund that invests in hedge fund
strategies, and we are launching additional
alternative mutual funds in the near future.
Arden has 20 years of experience managing
hedge fund portfolios for pension plans
and other institutional investors and believe we
can use our capabilities to create portfolios
with attractive diversification properties in a
daily liquidity format.
6 What’s the most important attribute that you look
for when selecting a manager?
Integrity, discipline, and
judgment all tie for most important
attributes in a manager. A close second would
be “seasoning,” meaning a manager
who has survived and thrived in the face of
difficulties and challenging market conditions.
7 What’s the biggest challenge to investing in
today’s climate?
The biggest challenge for investing today is the
“financial repression” that has
been created by artificially low interest rates
that places savers and particularly fixed-income
investors at a disadvantage relative to
borrowers. Fixed-income investors face
significant risks in the event interest rates rise
from current historically low levels.
8 What is the biggest investing mistake you made?
Probably underestimating the
severity of the liquidity squeeze
that negatively impacted a number of hedge
fund strategies during the global financial
crisis in 2008. Yet, in a way, this paved the way
for alternative mutual funds, as the demand
for hedge fund strategies available in a daily
liquidity format increased significantly and
remains high to this day.
9 What did you learn from it?
In periods of extreme risk
aversion, everyone seems
to follow the same playbook
of cutting positions/exposures and buying
T-bills/raising cash. Liquidity is a precious thing
in a time of crisis. Less-liquid hedge fund
strategies were vulnerable, but the more-liquid
strategies fared well.
10 What has influenced you the most as an investor?
Extreme market events such
as stock market crashes
have influenced me the most as an investor.
In each of the events of 1987 (crash), 1994 (rate
shock), 1998 (Russia/Long-Term Capital
Management), and 2008 (financial crisis/crash),
important lessons were learned. Learning
how to avoid large drawdowns is the key to
compounding high rates of return over
time. One of the reasons I was attracted to
hedge funds in the first place is their ability to
mitigate risk in adverse markets.
Table of Contents for the Digital Edition of Morningstar Advisor - June/July 2013
Morningstar Advisor - June/July 2013
Contents
Contributors
Letter From the Editor
Not Your Values
How Do You Use Alternatives for Clients?
Working to Build a Niche
How to Put Buffett’s Investing Philosophy into Practice
Sophisticated Strategies for the Masses
Investments á la Carte
Investment Briefs
The Percentile Trap
Defense Firms Will Stay Aloft
Beware the Lure of Diversification
Using Alternatives in Practice
Managed Futures and Cash Rates
The World Is Getting Grayer
Waiting to Pull Up Anchor
The Price of Managing Volatility
Let’s Get Back to Basics
Our Favorite Mutual Funds
50 Most-Popular Equity ETFs
Undervalued Stocks With Wide Moats
Mutual Fund Urban Myths
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