As Sunsuper increases its allocation to hedge funds and alternative strategies it is cutting out intermediaries and looking for new co-investment partners.
If you’re going to invest in hedge funds and alternatives, says Sunsuper portfolio manager for hedge funds and alternative strategies Bruce Tomlinson, either do it properly by taking the direct approach or simply don’t bother.
Tomlinson joined Sunsuper in 2007, after 12 years with AMP Capital, to establish the Brisbane-based industry fund’s hedge fund and alternative strategies program.
Today Sunsuper has a total of $45 billion in funds under management, with $2 billion of that in the hedge fund and alternatives strategies. Tomlinson tips that the funds under management in the hedge fund and alternative strategies to grow to $3 billion by 2020.
He believes it is no longer sustainable for larger funds to take an armchair approach to hedge funds and alternatives, and has progressively moved away from reliance on intermediaries. “While it may have been more appropriate 10 years ago, we no longer think that giving up control is the right approach,” he says.
The time spent with feet on the ground, actively researching global market opportunities, has made the hedge fund and alternatives strategy a strong contributor to Sunsuper’s overall investment returns, as well helping to bring down investment fees.
“I’m a big believer in the direct approach, and working assets hard through active management,” says Tomlinson who recently returned from assessing real estate assets and non-performing loans in mainland China. “This approach has seen us make 25-plus new investments in the last year, including nine co-investments, and over 15 fund allocations, commitments or redemptions.”
New direct opportunities
Sunsuper has around 5 per cent of its total assets in hedge funds and alternative strategies, and Tomlinson says it has reached the point where his team is now adequately resourced to undertake the work themselves. This has reduced reliance on domestically-based consultants’ more limited view of the world, he says.
“Rather than waiting for opportunities to be marketed to you here in Australia, you need to get a lot closer to managers overseas,” he says. “For example, by maintaining relationships with credit managers, in areas such as direct lending, distressed, reinsurance and asset-backed, we’re better positioned to capitalise on future opportunities.”
What’s mirrored Tomlinson’s decision to ramp up the direct approach over the past five years is a greater interest in co-investments. While reluctant to talk specifics, he is looking for managers with high conviction idiosyncratic positions, who are willing to take additional capital from Sunsuper on more favourable terms.
He’s more focused on investments with medium-term duration, and while opportunities in the hedge fund space could be shorter term, private and direct investments are generally longer. “We’re moving away from more liquid hedge funds and developing our specialist credit program where there are better opportunities and better alignment, such as lower fees,” he says.
Looking ahead, Tomlinson predicts that, as the hedge funds and alternatives strategy he oversees swells to $3 billion in the next three years, Sunsuper will both increase its allocations with existing managers and pursue more co-investments. “I’m confident this strategy will help us deliver 7-10 per cent net,” he says.
“There are also opportunities in developed markets to earn good returns in bank replacement credit strategies,” he says. “These include asset-backed lending in real estate and infrastructure, among other areas.”
Sunsuper portfolio manager Bruce Tomlinson will participate in a panel, titled ‘Blending alternatives to create an absolute return’, at the upcoming Investment Magazine Absolute Returns Conference. For more information about the conference, to be held in Sydney on September 14, 2017, please visit the event website or contact Emma Brodie via [email protected] or +61 2 9227 5708.
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