Research has shown that over the past few years, severe volatility spikes have become more frequent. Institutional investors know that volatility is a double-edged sword of opportunity and challenge that requires portfolios to be positioned offensively and defensively at the same time – and without excessive correlation.
A comparatively new hedge fund may have figured out how to be a big-time contributor to these goals, without being confined to a particular niche or burdened with some of the lingering old bugaboos about alts – like a lack of satisfactory transparency, for example.
Hedonova, a hedge fund that functions a bit like a mutual fund for alternatives, may be redefining the alts experience for both institutional and retail investors. For starters, the diversification of the fund is remarkable, with assets targeted globally to start-ups, real estate, equipment finance, litigation finance, agronomy, art, peer-to-peer lending, collectibles, and wine, along with listed equities, crypto, NFTs – and student loans.
“We lend top students capital to finance their tuition,” says Alexander Cavendish. “We only back students from Top 50 universities and upskilling schools, and to decrease the default risk we focus on areas like computer science, data science, artificial intelligence, nursing, pediatrics, and dentistry, as a few examples.”
To date, the fund has performed as co-founders Alex Cavendish, the firm’s CEO, and Suman Bannerjee, CIO, envisioned.
“Each asset class is carefully selected and serves a specific purpose along with adding value to the fund,” says Bannerjee, CIO, Hedonova. “For example, wine and art prove to be great assets at the times of uncertainty as demand rises and is fulfilled across borders and continents. Music royalties are a great source of income, even in times of market contraction – people don’t stop listening to music because the markets are down.”
Litigation finance and equipment financing require in-depth research before making an investment decision, and that is knowledge Hedonova has in-house – due in no little part to Bannerjee’s past experience as head of supply chain and equipment financing at SocGen. The overall goal is to even out the shortcomings of all the asset classes across the fund. A key in accomplishing that balancing act is identifying early-phase opportunities that allow Bannerjee’s team to seize the moment as markets fluctuate.
The asset mix also covers various time horizons. Wine, for example, has a horizon of approximately five to seven years – not significantly different from the typical terms of hedge funds and private equity funds. The share of wine in the Hedonova fund is currently 2 %, but many other assets in the fund have shorter time horizons. Litigation, for example, has a horizon of less than 36 months. And, as an open-ended vehicle, Hedonova keeps significant cash assets that give investors the liquidity they cherish during wild market swings.
A rigorous investment process
Before welcoming external investors in 2021, Hedonova spent nearly a year testing and setting up compliance structures. While drafting the investment strategy, the team tested the strategy on the past market conditions where possible.
Now that the fund is up and running, the investment process starts with Bannerjee and his team of financial engineers carefully observing market trends and the behavior of market participants. After multiple discussions and brain storming sessions, the investment opportunity is ready for due diligence. With team members positioned across the Americas, Europe, and Asia, local insights about and help inform investment decisions from a global perspective.
Still, as any seasoned investor will tell you, there is nuance to every decision. “Sometimes it’s not possible to follow the traditional approach,” says Bannerjee. “Sometimes, a decision comes down to how quick we can identify the market behavior and pivot our investments accordingly to hedge against uncertainty. We like to say that our investment strategy is science with a healthy dose of art. It’s not only a data analysis game – it’s also about being ready when the timing is right.”
Not surprisingly, the recent dip in cryptocurrencies did affect the fund, but in a “negative” way only in comparison to the previous performance of cryptocurrencies in the fund.
“We invest in cryptocurrecy using structured notes, capital protected instruments that get locked in but absolve any risk to capital,” says Bannerjee.
Investing in cryptocurrencies does involve a perception shift, Bannerjee notes. “Many institutional investors will need to unlearn certain theories that held – and still hold – in traditional stock markets. Investing in cryptocurrencies involves a slightly different approach which is best achieved if a fund has expertise in the space, as we do.”
However, Bannerjee has a proposal for institutional investors who remain skeptical about crypto. “You can start with very small allocations,” he says. “With time, you will become more comfortable and familiar with the new asset class. It is a trend which should not be ignored – demonstrated by the rate with which institutional investors worldwide are adopting it.”