I understand that HFs are not benched to SPX
However, in markets like these where indices go up every year 10-30%, retail names like PLTR go up 100-200%, tech goes up 50-100%, what is the real value prop of a hedge fund?
Yes I get it’s UNCORRELATED but a) SMs are clearly not b) MMs have alternatives in private credit for 10% non equity returns. So what is the value prop of a HF?
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is it really a bull market when only 7 companies contribute to 50% of S&P 500 growth🤔
The answer is that it is extremely difficult to time the market. So the safe bet for any asset allocator is to focus on the long run returns, which results in a strategic asset allocation (SAA).
The basic idea behind an SAA is that we take the long term price history of multiple asset classes to engineer/optimize a long run oriented portfolio. By sticking to these allocation weights through multiple market cycles, we can expect to achieve a specified level of return on the efficient frontier over time due to the averaging out of bull and bear markets.
Therefore, despite a bull market, the institution will still allocate to HFs because of the SAA and the emphasis on long run returns.
You have to know that for any pension fund, endowment, or any other institutions, they are extremely risk adverse with long term sticky capital. So sticking to a SAA and riding out the bull and bear markets is the most optimal way for them to manage their capital and meet their obligations. Of course they also want to outperform, which is why they outsource to a multitude of specialized active managers to beat their asset class benchmarks.
Of course some institutional allocators may run tactical asset allocation (TAA) to take advantage of short term trends or dislocations. However, the TAA are minor deviations from the SAA weights so that only a couple of bps is risked at any given time.
Do you find enough "worthy" active managers to allocate your assets to?
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