Bringing hedge fund strategies to the masses, at a cheaper cost and better liquidity, has been the target for many asset managers of late, including Franklin Templeton.
The £571bn asset manager bought hedge fund specialist K2 Advisors in 2012 in a bid to build out its alternatives expertise. Following that acquisition, on 16 October last year Franklin launched the Franklin K2 Alternatives Strategies fund, a multi-manager fund that invests in different hedge fund strategies.
There are two big differences between the fund and the hedge funds in which it invests: it does not charge the usual 20 per cent performance fee of hedge funds and it also offers daily liquidity.
The fund is run by K2 founder and veteran hedge fund investor David Saunders, who works on the fund from the US alongside Brooks Ritchey and Robert Christian.
The European version of the fund is run in the same way as the US version, which was launched two years ago, with all the fund holdings being the same bar one manager – York Capital Management, as it already had a Ucits fund.
However, the Franklin K2 Alternatives Strategies fund is run slightly differently to traditional multi-manager strategies. Instead of allocating money to different managers to run, Franklin retains the assets with managers running their segment of the money. But all assets settle, clear and reside with Franklin and K2.
This means Saunders can get daily oversight of holdings across the manager strategies he allocates to, it also gives him the ability to increase or decrease allocations to different managers on a daily basis, and gives end investors daily liquidity, he says.
“We found that a lot of managers are taking their legacy portfolio and taking the liquid and illiquid assets and placing them in a vehicle,” he says of other managers promising daily liquidity.
“If we experience some abrupt market volatility then some of those structures are going to get tested around their ability to provide liquidity if there is a rush to the exit,” says Saunders.
The Franklin K2 Alternatives Strategies fund has fairly broad guidelines on the amount it can have in its four different hedge fund strategies, spreading the assets between global macro, relative value, long-short equity and event-driven.
Over the past year, the fund has cut its equity holdings, as Saunders gets increasingly uncomfortable with valuations in the US.
The fund has reduced its long-short equity exposure from 40 per cent when it launched to around 34 per cent now, having gradually reduced it over that period.
At the same time Saunders has ramped up his global macro allocation from virtually 0 per cent at launch to 17 per cent now.
“We look at global macro as a hedge to equity market risk, as a downside protection. As we have gotten progressively more concerned about some of the US equity valuations we’ve been taking down equity market risk and increasing the global macro portion,” he says.
Despite these shifts Saunders is keen to keep the number of managers in his portfolio low. He currently has 11, which although low still equates to 1,600 positions in the fund. Generally fund of fund portfolios have 25 to 30 managers, he says, but this just ends up diluting each manager’ skill and position.
“They don’t have daily liquidity to shift the portfolio around, and have less frequency and transparency … so they are diluting managers to 2, 3 or 4 per cent positions,” he says.
The control of assets and transparency of the Franklin K2 fund’s setup “enables us to take greater comfort with fewer managers,” he adds.
The fund has outperformed over the past year. It has returned 6.6 per cent since inception to the end of July, compared to a 1.2 per cent fall for the HFRX Global Hedge Fund index.
The fund has amassed £759m in assets in the year since its launch, but Saunders says education is the key to building more assets as the fund is more complex than a traditional retail fund.
“Education is a big focus for us,” he says. “We see as investors learn more about it and get up to speed and educated they are going to be drawn to these products.”