Key Takeaways
- • Citywire's private office roundtable in London featured four investment professionals from Islandbridge Capital, Wren Investment Office, Lincoln Private Investment Office and Hundle, who argued that hedge funds are entering a 'golden age' because of rising single-stock dispersion.
- • Panelists said stock-bond correlations have moved toward positive territory, eroding the diversification benefit of bonds and pushing allocators to seek other return streams.
- • Participants warned that hedge funds will lag during strong equity rallies, but that they should protect portfolios when markets fall, and that clients must be prepared for that trade-off.
- • Panelists said headline indices such as the S&P 500, MSCI Emerging Markets and KOSPI are highly concentrated, and some firms hold S&P 500 equal-weight exposure to reduce mega-cap tech risk.
- • Panelists argued that 'uncorrelated' must be measured against the client's actual portfolio, not against a broad market index.
Summary
Citywire published a short video from its private office roundtable held at Citywire Studios London, in which analysts discussed asset allocation in the current market and the difficulty of explaining hedge fund exposure to clients. The participants were Alastair Dibden, portfolio manager at Islandbridge Capital; Luke Heywood-Jones, senior investment analyst at Wren Investment Office; Angus Holmes, associate portfolio manager at Lincoln Private Investment Office; and Arundhati Srivastava, investment associate at Hundle.
The discussion began with the challenge of clients who have grown up with a traditional 60/40 portfolio. One panelist said correlations between stocks and bonds have moved toward positive, which removes the diversification benefit investors have relied on. Explaining that shift, and why portfolios are being repositioned, was described as the central communication task for advisers.
Panelists acknowledged that hedge funds carry complexity and that clients must understand the exposures involved. They said there will be periods when equities outperform and hedge funds disappoint, but that the strategy's purpose is to provide protection when markets fall. A key point raised was that 'uncorrelated' claims made by funds are measured against traditional equity indices, whereas what matters to a client is correlation with the rest of its own holdings. One panelist warned that a portfolio of mutually correlated holdings carries as much risk as being correlated with the market.
On market structure, the panelists said dispersion is rising beneath the surface of major indices, with substantial rotation and limited headline volatility. One participant said this environment lets hedge funds exploit large moves after earnings releases more effectively than long-only funds, and therefore described the current period as a 'golden age for hedge funds.' Another noted a wide gap between single-stock volatility and index-level volatility, which the managers said creates opportunities and risks they are working to structure through building blocks such as equal-weight index exposure.
The panel also addressed concentration. One participant said the Magnificent Seven, once treated as a single tech trade, has performed in a dispersed way year to date, while semiconductor infrastructure has emerged as its successor. Even positive earnings reports can fail to lift shares when forward expectations fall short of a high bar, the panelist said. Emerging market and South Korean indices were also described as concentrated in a few stocks, including TSMC, with KOSPI characterised as a two-stock index. The panelists said these concentrations mean some upside may be surrendered in exchange for a more defensive way to take equity risk.
The discussion began with the challenge of clients who have grown up with a traditional 60/40 portfolio. One panelist said correlations between stocks and bonds have moved toward positive, which removes the diversification benefit investors have relied on. Explaining that shift, and why portfolios are being repositioned, was described as the central communication task for advisers.
Panelists acknowledged that hedge funds carry complexity and that clients must understand the exposures involved. They said there will be periods when equities outperform and hedge funds disappoint, but that the strategy's purpose is to provide protection when markets fall. A key point raised was that 'uncorrelated' claims made by funds are measured against traditional equity indices, whereas what matters to a client is correlation with the rest of its own holdings. One panelist warned that a portfolio of mutually correlated holdings carries as much risk as being correlated with the market.
On market structure, the panelists said dispersion is rising beneath the surface of major indices, with substantial rotation and limited headline volatility. One participant said this environment lets hedge funds exploit large moves after earnings releases more effectively than long-only funds, and therefore described the current period as a 'golden age for hedge funds.' Another noted a wide gap between single-stock volatility and index-level volatility, which the managers said creates opportunities and risks they are working to structure through building blocks such as equal-weight index exposure.
The panel also addressed concentration. One participant said the Magnificent Seven, once treated as a single tech trade, has performed in a dispersed way year to date, while semiconductor infrastructure has emerged as its successor. Even positive earnings reports can fail to lift shares when forward expectations fall short of a high bar, the panelist said. Emerging market and South Korean indices were also described as concentrated in a few stocks, including TSMC, with KOSPI characterised as a two-stock index. The panelists said these concentrations mean some upside may be surrendered in exchange for a more defensive way to take equity risk.
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