Investing

Going Alternative

Alternative investments, such as hedge funds, are used by Russell to increase our investment funds' diversification, reduce risk and protect against downturns in traditional investment markets ...

At Russell we are constantly at work improving our investment funds - actively demonstrating our belief in the importance of diversification across multiple asset classes and multiple strategies. For us, diversification extends beyond traditional investments and encompasses our long-standing commitment to the 'alternative investment' industry.

There are three main types of alternative investments:

• Private equity: investment in private companies, from start-up companies to ownership transfers of large mature companies. Private equity differs from publicly listed equity in its long term nature and relative illiquidity. Typical holding periods are up to seven years.
  
  
• Real estate: direct investment in real estate, including industrial, office, retail and residential property developments, and infrastructure.
  
  
• Hedge funds: invest in the traditional asset classes using strategies that are more flexible and responsive than conventional funds. Hedge funds don't rely on general market movements for the majority of their returns. Instead, their performance mostly depends on the skills of the manager.

Russell analysts undertake research in all key alternative markets. Currently, Russell has about A$15 billion invested in alternative investment funds globally.

Why use alternative investments in super?

One of the most attractive alternative investment opportunities is hedge funds, which are becoming an important area of investment for superannuation funds.

Hedge funds provide a valuable additional level of diversification as they have different risk and return characteristics from the assets traditionally invested in by super funds. Hedge funds still invest in these traditional asset classes, but they employ different trading strategies to generate returns in a way that doesn't follow normal market ups and downs. This gives hedge funds the potential to produce returns when other markets are falling.

Because hedge fund returns bear little relationship to movements in traditional markets, hedge funds provide a useful risk-reducing benefit in a wider portfolio of conventional share, property and fixed interest investments.

Alternative investments in Russell SuperSolution

Russell began researching hedge funds in the United States in 1986, when the industry was in its infancy. We started our first multi-manager hedge fund program in 1987. From mid-2004, Russell's Australian clients have had access to hedge fund investments through the Russell Alternative Strategies Fund.* This fund is specifically designed to produce consistent returns for investors over the long term.

In June 2004, Russell SuperSolution invested three per cent of the Balanced and Growth investment options into the Russell Alternative Strategies Fund.

The hedge fund strategy we follow is designed to produce a return similar to shares but with a level of volatility similar to fixed interest. It is a defensive investment allocation (ie. one that aims to reduce risk rather than speculatively boost returns).

Our ongoing monitoring of this strategy shows that the hedge fund allocation doesn't rely on general market movements for the majority of its returns. Thus, the strategy is working in line with our research expectations - reducing risk and making a small positive impact on overall returns.

How is risk controlled?

Given bad headlines in the early years of hedge funds, when several funds crashed spectacularly, many investors are understandably wary of hedge funds. These funds were aggressive and did not have good risk controls in place. Russell brings its years of experience in researching managers and invests across a range of strategies in a risk controlled manner.

We diversify, diversify and diversify. The Russell Alternative Strategies Fund invests with thirty of the world's best hedge fund managers, each of which operates within tight risk controls set by Russell. We then go through a comprehensive selection process to identify the most experienced and skillful managers. All selected hedge fund managers are monitored closely to assess their performance over time. Risk is further reduced by combining hedge fund managers that employ different investment strategies.

And, remember, alternative strategies make up just three per cent of the Growth and Balanced investment options. Both these options are further diversified by investing in the traditional asset types.

* To take advantage of the risk-reducing, return enhancing qualities of alternative investments, you can invest in the Growth or Balanced investment options. Log in and look at the investment section.

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