Rothschild's three key hedge fund strategies

Rothschild Private Banking & Unit Trust research team has highlighted the three key hedge fund strategies it expects to do well in 2011.

Barbara Vannotti-Holzrichter, head of fund research for Rothschild, said the firm was generally positive on hedge funds and most private client portfolios had an allocation to hedge funds.

She said hedge funds remained an attractive alternative, particularly to bonds and pointed out that Rothschild tends to favour a core-satellite approach, whereby core positions are a fund of hedge funds and broadly diversified single managers.

However, while core positions within the portfolio are allocated 5% to 10%, the satellite positions take up 2% to 5%. They tend to be  multi-manager funds with a focus on a single strategy, single managers with multiple investment strategies, or single managers with a single strategy.

Vannotti-Holzrichter expects the global macro or trading managers, equity/long short funds and event-driven strategies to do well over the next year. 'These are the three main strategies for us but we think the event-driven in particular may be the story for the next two to three years.'

Niche event-driven strategies

Vannotti-Holzrichter said event driven strategies are the area where Rothschild feels greatest opportunities lie. However, rather than focusing on traditional event-driven strategies, such as mergers and acquisitions (M&A), the private bank is looking at some of the more niche areas.

Vannotti-Holzrichter said: 'With event driven strategies M&A is one way but restructuring is another. Also, as the government is regulating businesses in the developed world, government intervention is an interesting angle.

'A lot of companies will want to set up operations elsewhere where there is less cost burdens and more freedom to move. This is a space where we are looking at the fund managers who can exploit this.

Vannotti-Holzrichter cited utility companies as an example of businesses which are looking to build operations in less regulated regions. 'If there is a very large business operation in a developed world, they've got much less room for growth, whereas in the developing world they have more flexibility over how they develop their offering and how much they charge.'

'We are looking for managers who have focused on these types of companies and buy a bunch of them.'

Global macro/trading strategies

Vannotti-Holzrichter said Rothschilds tends to play in the liquid space of the hedge fund universe and this is one of the advantages of global macro strategies.

She said: 'One of the things that has become very apparent during the liquidity crisis is that investors value liquidity. One of the great diversifiers and what we have seen over that same period is the value of some of those global macro and trading managers.

In the past, Rothschild family members have invested and seeded numerous high profile hedge funds, such as Bruce Kovner's Caxton Global fund, which is still held in private client portfolios.

'With government policies [and effects felt] across all markets, there are some dislocations which are happening and these traders can pick up on that.'

Equity long/short  

Rothschilds is positive on equities, Vannotti-Holzrichter and points out that many long/short tend to have a long equity bias, which means they tend to move with the markets.

'Because of that long equity bias, a good question is why are they attractive relative to equities per se? A lot of these guys are great value stock pickers, so if you have a dispersion of company returns, that is when a lot of these guys earn their keep.'