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Asset Owners Cautiously Pursue Volatility Strategies

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Skilled hedge fund managers can demonstrate they can go both long and short volatility. Volatility specialists thrive on uncertainty. They are excited when things blow up. These hedge funds are waiting for another “Lehman” event aka black swan. Institutional investors have been analyzing relative value hedge funds and funds that have a long volatility strategy for quite some time. A number of prominent public investors and endowments are seeking to carve out volatility management strategies as a separate asset class. Skeptics cite volatility is not yet an asset class. This class contends that volatility is purely a statistical measure of dispersal of returns, not an asset class, but a derivative of other asset classes.

It is nearly impossible to contain downside risk while not surrendering upside potential.

Sovereign funds that have low levels of portfolio leverage, high liquidity and long investment horizons may not want to buy equity tail-risk insurance. Allocating capital to volatility managers or embracing dedicated tail-risk hedging strategies can be costly and challenging to execute. As market risk increases, the costs of tail-hedging increases. These “insurance” costs are a drag on portfolio performance. Some sovereign funds like the China Investment Corporation (CIC) have rejected tail-risk hedging strategies after conducting studies, but would consider allocating capital in separate accounts to volatility managers. On average, tail-risk strategies performed poorly since 2009, while many public investors regained traction after the major market downturn of 2007.

APFC Sells $1.4 Billion Stake in Simpson Housing

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The Alaska Permanent Fund Corporation (APFC) embarked on a major shift in its real estate portfolio by selling a 50% ownership stake in Denver-based Simpson Housing LLLP for US$ 1.4 billion. Simpson Housing had made up roughly 24.7% of APFC’s US$ 5.6 billion real estate portfolio. The other owner of Simpson Housing is that State of Michigan Retirement Systems.[ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

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ISIF Invests in Cybersecurity Firm Vectra

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The Ireland Strategic Investment Fund (ISIF) committed €10 million to Vectra Networks, Inc., a San Jose, U.S.-based cybersecurity company. The investment capital will assist Vectra in creating a research and development center in Dublin.

ISIF is part of a larger funding round of €30 million. These other investors include Khosla Ventures, Accel Partners, DAG Ventures, AI Ventures, AME Cloud Ventures and Wipro Ventures.

Kevin Dillon, who is the former Head of Microsoft Ireland and a Managing Partner at Atlantic Bridge, will join the board of directors at Vectra.

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NZ Super Generates 19.8% Return for 2017 Calendar Year

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The New Zealand Superannuation Fund (NZ Super) generated a 19.8% annual return for the 2017 calendar year. The return was calculated after costs and before New Zealand tax. Catherine Savage, Chair of the Guardians of New Zealand Superannuation, commented in a press release that, “We remain focused on identifying attractive active investments in New Zealand, with recent highlights including a $100m investment in New Zealand insurer Fidelity Life.”

Savage concluded, “Returns are likely to normalise and over the long term we expect the Fund will deliver average returns of approximately 8% a year, based on current portfolio settings.”

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