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Super funds bet against Warren Buffett

Dan Purves




By allocating to alternatives, super funds have gone down the opposite route to that of Warren Buffett in his bet against alternatives; and they have not been winning, says a Frontier Advisors senior consultant.

The allocation to some types of alternatives have not been additive to super funds over the long term, in part because they were more closely correlated with equity markets than originally thought, said Greg Barr, senior consultant at Frontier Advisors.

In 2007, Buffet made a million dollar bet with fund manager Protégé Partners, that a big indexed fund could win out against the average of five funds of hedge funds, over a 10 year period, once fees and other expenses were accounted for. Eight years into the bet, Buffett is well ahead of Protégé Partners, with the hedge fund side only outperforming in two of the years.

“We all think we invest like Buffett, but in fact we’ve gone down this allocation to alternatives,” said Barr.

“And why? It is quite simple; we are looking for diversification of portfolios. We are looking for a better way to manage the downside risk and alternative exposure is like the ‘magic pudding’ with growth-like returns, lower risks and low or negative correlation to equities.”

Many super funds have doubled their exposure to alternatives from 2007 to 2016, with the average allocation currently being between 10 and 11 per cent.

While Frontier’s research into the aggregate data for this year shows that those super funds with a higher allocation have done better than those with a lower allocation, once infrastructure and private equity assets are stripped out, that relationship is reversed.

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    “Michael Summers, the head of alternatives consulting, when he saw the topic I was doing asked whether I was trying to do him out of a job,” quipped Barr. “But that’s not the case. What this shows is that alternatives are really an important part of the portfolio, but you’ve got to make sure that you are putting the right thing in.”

    “The ‘magic pudding’ of having high returns, low-risk and low correlation to equity markets is really very hard to find and to achieve, so we need to look at alternatives in a different way.”

    He added the way for institutional investors to look at this was by dividing up alternatives to make sure the characteristics of the strategy were looked at. For example, those that were return-seeking, those the were diversifiers, and those that were opportunistic.