As of this piece’s publication, it’s been a bad couple weeks for hedge funds in short positions; specifically, it was
a historically terrible rout for some funds who were caught in short positions on brick-and-mortar retail,
cinema, and legacy tech equities with extremely high short interest.[1] But despite monumental
losses in a number of particular funds, hedge funds are going to keep on doing what they were originally invented to
do: produce uncorrelated returns with the flexibility to express long or short investment theses.^[2]
Given that, if we are to expect widespread ESG adoption across the hedge fund industry, there needs to be a wider
embrace of shorting from an ESG perspective.

The lion’s share of assets managed worldwide with an ESG focus are driven by investment screens: According to the
Global Sustainable Investment Alliance’s biennial Global Sustainable Investment Review, assets managed through
negative or exclusionary screens accounted for $19.8 trillion of the total $30.7 trillion sustainably managed assets
worldwide in 2018.^[3] In other words, a large majority of sustainably or responsibly managed
assets are long-only, with securities that are selected (or rejected) based on how well they score on ESG metrics.
While the 2020 GSIA Global Sustainable Investment Review has yet to be released, we expect a similar breakdown of
assets.

For ESG to truly reach its maturity as a developing strategy, some investors—particularly hedge funds—need to
consider incorporating ESG shorting into their portfolios. Broadly, ESG investors expect that in the long run
securities well-rated by ESG metrics will outperform, while poorly rated ones will underperform. But by restricting
the scope of ESG investing to long positions, we limit the ability of investors to express profitable
bearish attitudes towards stocks with unpriced ESG risks. It also precludes investors from
hedging against downside risk on an ESG basis. Lastly, ESG shorting has the potential to
enact positive transitions through debt and equity markets. As demonstrated by the highly publicized short battle
over Valeant Pharmaceuticals (now Bausch Health), such pressure can prompt meaningful change.^[4]

Capturing the Upside and the Downside of ESG

From an absolute return investor’s perspective, ESG shorting is critical because it allows them to
capture both the upside and the downside of their investments while incorporating ESG
factors. For example, many ESG investors point to increasingly stringent global climate
initiatives, arguing that these changes will eventually create headwinds for the oil and gas industry. Should they
not be able to capture positive returns from this thesis? Due to the plummeting cost of renewables alone, it’s easy
to imagine a somewhat near future where some energy producers who rely exclusively on extracting fossil fuels
struggle to compete: In this scenario, some firms will transition to survive, many will consolidate, and some even
go under, drowning in stranded toxic assets such as extraction and refining facilities.<^>[5]

According to a study by Financial Times Lex, if governments worldwide implemented stricter climate measures
to limit the rise in temperatures to 1.5° Celsius above pre-industrial levels for the rest of this
century, it would amount to around $900 billion in stranded assets. At the time, this
equaled about a third of the market value of large oil and gas firms.^[6] Investors always go
where they can make money, so it’s not hard to imagine that investors may want to take short positions in this
circumstance, whether it’s to make money, do “the right thing,” or a mix of both.

ESG Hedging against Downside Risk

Unlike positive alpha, which is harder to consistently link to an isolated ESG factor, researchers have proven that
worse ESG ratings correlate with increased default risk. According to a working paper published by researchers at
the University of Giessen, “ESG score reduces firm risk, both for U.S. firms and for European firms.”^[7] Their analysis of 1-year and 5-year CDS spreads and distance-to-default also found
that “ESG efforts significantly reduce market-based default risks in the U.S. sample.” In the U.S. market
particularly, increased ESG activity (i.e., social responsibility efforts) correlates with reduced default risk.
Hence, going long on higher ESG scorers can lower risk, while going short on poor ESG scorers could
potentially shield against downside risk.

Firms with a track record of ESG issues, especially scandals and governance issues, have been shown to correlate with
negative alpha. Simon Glossner of the University of Virginia constructed a “value-weighted U.S. portfolio of
controversial firms with a known history of ESG incidents,” and found that it had a “a four-factor alpha of negative
3.5% per year,” even after controlling for other risk factors, industries, and firm characteristics.^[8]

There are clear risks in ignoring the governance portion of ESG. Scandals, cover-ups, and fines are perhaps the
easiest place to see the financial impact: It took over two full years for Volkswagen’s share price to recover after
its diesel emissions test cheating scandal; Wells Fargo paid billions to settle its fake accounts scandal, but its
reputational damage was the real cost; and Enron’s falsified earnings led a meteoric rise to a $70 billion market
cap and dramatic fall to bankruptcy. Prominent short-seller Jim Chanos made a name for himself by shorting Enron the
whole way down, netting his fund $500 million. Of course, uncovering such scandals is easier said than done, but
paying attention to governance factors—particularly, a lack of transparency and accounting issues—is often the place
to start.

Creating Positive Change by Shorting

Short positions can also be utilized to pressure executive boards to make strategic changes. While short position
holders have no voting authority, management still pays attention to them, even if it is out of ire: “Managers of
firms don’t like people who short sell their stock, especially if the short sellers are accusing the firms of fraud
and even more especially when the fraud accusations are true,” says economist Owen Lamont.^[9]

While it’s hardly a surefire strategy for friendly engagements with management, sometimes it works, especially in
cases where the short sellers put reputational pressure the firm by uncovering issues management would rather hide.
Short sellers played a key role in publicizing the nature of Valeant’s drug pricing policy, which lead to Senate
hearings where Valeant stood accused of price gouging sick and vulnerable people, followed by the ousting of CEO
Michael Pearson.

“Socially responsible short selling could even be used to uncover ‘greenwashing’
by supposedly well-rated ESG firms that are misleading investors about their environmental impact.”

Even if these short sellers weren’t necessarily coming from an “ESG perspective,” the results were the same, and it’s
easy to imagine how these tactics could be used to pressure ESG bad actors (e.g., polluters, labor exploiters, etc.)
to correct course. Socially responsible short selling could even be used to uncover “greenwashing” by supposedly
well-rated ESG firms that are misleading investors about their environmental impact.

Conclusion

ESG has long been the domain of long-only investors. In fact, there’s even some disagreement on whether taking a
short position at all is compatible with ESG principles. However, shorting can be a viable strategy for achieving
the goals of ESG investors: lessening carbon footprints, uncovering lapses in proper governance, and raising the
cost of capital for ESG laggards, to name a few. Another goal of ESG investors is to encourage widespread ESG
adoption across all asset classes, including hedge funds—it’s Principle 4 of the UN Principles for Responsible
Investment. It would be a disservice to the wider project of socially responsible and sustainable investing to
exclude the bearish side of the market.

Contact the Author

Andrew Koski, Senior Analyst | andrew.koski@hfr.com

Learn more about HFR Investments at: hfr-investments.com
or reach out toinvestments@hfr.com

A downloadable copy of this article may be found here.

Disclaimer: This article does not constitute an offer, or a solicitation of an offer,
to buy or sell any securities, and is intended for informational purposes only. Any offer of an HFR Fund will be
made solely by a Confidential Offering Memorandum, and then only to qualified purchasers. This document is
confidential and is intended solely for the information of the person to whom it was delivered. It is not to be
redistributed to any third parties without the prior written consent of HFR Investments, LLC (“HFR”).

Opinions, estimates, forecasts, and statements of financial market trends are based on current market conditions
constitute judgment, may prove inaccurate, and are subject to change without notice. Our views, strategies, and
examples may not be suitable for all investors. References to specific strategies are for informational purposes
only, and is not investment advice, and should not be interpreted as a recommendation.

A Confidential Offering Memorandum will set forth the terms of an investment in a fund, including risk factors,
conflicts of interest, fees and expenses, and tax‐related information. Such material must be reviewed prior to any
determination to invest in any of HFR’s funds. ©2020 HFR Investments, LLC, all rights reserved. HFR®, HFRI®, HFRX®,
HFRq®, HFRU, and HEDGE FUND RESEARCH are the trademarks of Hedge Fund Research, Inc.

[1]According
to Ortex, short sellers have lost $70.87 billion from their positions in U.S. equities as of January 28, 2021.

[2] Other hedgies made
hundreds of millions riding the short squeeze alongside retail investors.

[3] 2018 Global Sustainable Investment Review

[4] Of course, in this
case, the shorts need to produce positive meaningful change (e.g., pressuring a carbon intensive energy
producer to transition towards renewables).

[5]CEOs of the U.S. behemoths
Exxon Mobil and Chevron have reportedly discussed a merger.

[6] Alan Livsey, “Lex
in depth: the $900bn cost of ‘stranded energy assets’,” Financial Times, February 3 2020.

[7] Christina E.
Bannier, Yannik Bofinger, and Björn Rock, “Doing safe by doing good: ESG investing and corporate social
responsibility in the U.S. and Europe,” CFS Working Paper Series, No. 621, Goethe University Frankfurt, Center for
Financial Studies, April 29, 2019.

[8] Simon Glossner,
“The Price of Ignoring ESG Risks,” May 18, 2018.

[9] Owen A. Lamont,
“Short Sale Constraints and Overpricing,” in Short Selling: Strategies, Risks, and Rewards, edited by Frank
J. Fabozzi, 2004, pp. 183-4.

The post The Socially Responsible Short appeared first on HFR Investments.

Traditionally, co-investments are thought of exclusively in context of private equity and debt funds, but that
limited thinking will cause hedge fund managers and investors to miss out on a number of opportunities.

In terms of private funds, equity or debt, a co-investment is a minority investment made alongside the manager for a
more concentrated single exposure to enhance returns, – at least, that’s the idea. This model also keeps fees down,
as the investment is usually a one-time event and continued strategy implementation isn’t required.

For hedge fund managers the idea is the same, but instead of investing directly as part of a private investment,
hedge funds can also use public securities to make their investments.

A recent survey on Co-Investments was issued by Hedge Fund Research, Inc. to hedge fund managers inquiring
about their co-investment offerings. To the first question, “Do you offer co-investments?” 24% of
managers responded “yes” – a figure much higher than we anticipated.

There is already significant co-investment activity taking place, with strong potential for growth. This is probably
due to multiple of reasons, with the predominate being:

1) Knowledge – Managers and investors are now more aware of co-investments and consider them a
viable option.

2) Structuring – These deals have become easier and easier to put together due to platforms and
outsourced structuring services.

When looking back at the last 20 to 30 years, I don’t believe that the deal flow and opportunities have grown, but,
rather, managers and investors have become more sophisticated. They understand co-investments are an option and are
taking advantage.

I think the continued conversation about co-investments offered by hedge fund managers will propel the idea to become
a more common and readily available investment approach in the coming years.

It’s Time to Start Somewhere

As a manager, it’s apparent your colleagues are starting to adopt these strategies and adding additional value for
their investors – so why wouldn’t you?

All things equal, allocators will tend to go with the manager that can offer more value. Offering co-investments just
might be that value that puts you over the edge.

It doesn’t take a large $250M dollar deal for a co-investment to make sense, you can start small. Of the survey
respondents that offer co-investments, 60% said that a typical deal size is less $25M, and 85% say it is less than
$50M.

To me, if you find an investment opportunity you love and plan to add it to your fund, why not think about making an
additional investment outside the fund and present it to your investors. You’ve already done the work, you’re
confident it will perform, and you have investors that trust you – seems like a win, win, win.

This additional value offered to investors creates a new revenue streams to your business: the revenue generated from
management fees, although nominal, and performance fees. For a high conviction investment, it’s almost all
upside.

And as the survey shows, even small deals are worth it. So, if you’ve been thinking about it but have been putting it
off, now’s the time to add additional value for your LPs.

Open Yourself to Opportunities

For Investors, the opportunities are out there, and the first place to go is directly to your current hedge fund
managers. Have a discussion with them and inform them that you would be interested in co-investments if the
opportunity ever came along.

Having these discussions early will allow managers to think about how to take advantage of opportunities as they go
through their investment process. They’ll look at deals with you in mind.

No matter the asset class you’re looking for, hedge fund managers have you covered. As expected, public equity
co-investments are the most common but beyond that there is a relatively even distribution across the remaining
types, including private offerings:

Co-investments from hedge fund managers may be even more opportunistic and flexible than in the private markets.

Ready to Pounce

This is all well and good, but there is still a key issue with co-investments that both managers and investors need
to overcome: These investments usually based on a single, short-lived idea that might not be available in a few
short weeks or months.

For a co-investment to happen, a manager must find the idea, the investors, and then complete the deal all before the
opportunity vanishes. It’s easier said than done. If you’re waiting until the investment ideas appear, you’re
already too late.

How does anyone combat a time crunch? Planning? Communication? Probably a little bit of both. First, planning on the
side of the manager will allow them to act when the opportunity present itself. And second, there needs to be
continued communication between LP and GP. I don’t mean the investor and the IR team, I mean regular conversations
between the investment team and decision makers at the allocators.

When considering such a time-sensitive tactical strategy, direct lines of communication between the partners are
critical to successful co-investing.

Contact the Author | Gregory Neal, Director of Investments | investments@hfr.com

Learn more about HFR Investments at: hfr-investments.com
or reach out to investments@hfr.com

A downloadable, PDF copy of the article can be foundHERE.

Disclaimer: This article does not constitute an offer, or a solicitation of an offer,
to buy or sell any securities, and is intended for informational purposes only. Any offer of an HFR Fund will be
made solely by a Confidential Offering Memorandum, and then only to qualified purchasers. This document is
confidential and is intended solely for the information of the person to whom it was delivered. It is not to be
redistributed to any third parties without the prior written consent of HFR Investments, LLC (“HFR”).

Opinions, estimates, forecasts, and statements of financial market trends are based on current market conditions
constitute judgment, may prove inaccurate, and are subject to change without notice. Our views, strategies, and
examples may not be suitable for all investors. References to specific strategies are for informational purposes
only, and is not investment advice, and should not be interpreted as a recommendation.

A Confidential Offering Memorandum will set forth the terms of an investment in a fund, including risk factors,
conflicts of interest, fees and expenses, and tax‐related information. Such material must be reviewed prior to any
determination to invest in any of HFR’s funds.

©2020 HFR Investments, LLC, all rights reserved. HFR®, HFRI®, HFRX®, HFRq®, HFRU, and HEDGE FUND RESEARCH are
the trademarks of Hedge Fund Research, Inc.

The post Hedge Funds & Co-Investments appeared first on HFR Investments.

In Tactical
Hedge Fund Allocation (part 1), we discussed using a tactical allocation strategy to increase
diversification during uncertain times such as the recent nationwide shutdown. We now want to address the flipside
of tactical allocation – opportunistic hedge fund allocation and strategies.

As the U.S. and the rest of the world is beginning to reopen, the future is fraught with ambiguity. No one can tell
you what’s coming next – The World Uncertainty Index, created by two senior officials at the International
Monetary Fund, is at its highest level in history, with a 52% (as of 3/31/20) increase from this time last year.

With this increased level of uncertainty there must be opportunity, and at the risk of sounding overly simple, the
first step in investing in these opportunities is finding an attractive set of investments.

Finding Unique Opportunities

New investment ideas can come from numerous sources, but we find that managers on the ground, closest to the action,
usually have the best insights. In order to find what you are looking for, it will require many conversations with
your current managers, prospect managers, and even completely new managers.

As we speak to managers each day it becomes more and more clear that there are many mispricings across equity and
fixed income markets. Now it’s just a matter of choosing the opportunity and manager that is right for you.

What We Are Seeing

We’re seeing dislocation across several markets, but I want to specifically highlight the “Fallen
Angels” or corporate bonds that were downgraded from investment grade to high yield during Q1 through to
today.

Many of the attractive high yield opportunities prior to the global pandemic were companies
in challenged industries such as retail and energy, and prospects were limited to good companies with sub-optimal
asset or bad balance sheets. However, during the month of March the situation entirely changed, permeating virtually
all corporate industries.

We also saw the percentage of the High Yield Index constituents trading at distressed prices (>1,000 bps credit
spread) increased from 8.1% to 32.0% during the first quarter.

Numerous Fallen Angels are among that 32% – Going from investment grade to junk and a spread of greater than 1,000
bps in such a short time seems unlikely. In such a short time period this feels more like emotional trading and
mispricings in the market. I’m sure some bonds are priced correctly, but I think if you can find a manager that
knows the space well, they will be able to take advantage of these large mispricings.

You’ve now spent the time having the conversations and researching the ideas; you’re reasonably sure you’ve found an
appealing opportunity set. What do you do next?

Make the Investment

You need to find a way to invest. If the idea came from a manager that you’re already working with and know well.
This makes the allocation process as easy as it can be.

But what if the investment is with a new manager you’ve done limited research on, or an unknown manager altogether?
How do we ensure access to the opportunity before it disappears? How do we make the allocation in a way that
increases control and mitigates risk?

I see three main ways to access opportunistic investments:

Direct Allocation

Most institutional investors understand what is required when making a direct allocation to an existing fund. This
may be the best option for some, but I think in most cases it includes additional complexity and investment
strategies and exposures that will not fit within your portfolio.

Separately Managed Accounts

The second option is to use separately managed accounts or SMAs. Using an SMA structure allows you to access the
opportunities as well as increase control over other exposures existing in the manager’s portfolio.

Co-Investments

The last option is partnering with the manager and investing in a co-investment structure. This formation gives you
direct access to the investments you want, without the exposure to the rest of the manager’s portfolio.

We’re living in uncertain times, with historically low interest rates and reduced return expectations over the next
ten years. To me, seizing opportunity is more important than ever. Who knows when the next one will come along?
Tactically allocating to opportunistic hedge fund investment ideas will allow you to realize those opportunities
quickly and efficiently.

A downloadable, PDF copy of the article can be foundHERE.

Share this article on social media!

Disclaimer: This article does not constitute an offer, or a solicitation of an offer,
to buy or sell any securities, and is intended for informational purposes only. Any offer of an HFR Fund will be
made solely by a Confidential Offering Memorandum, and then only to qualified purchasers. This document is
confidential and is intended solely for the information of the person to whom it was delivered. It is not to be
redistributed to any third parties without the prior written consent of HFR Investments, LLC (“HFR”).

Opinions, estimates, forecasts, and statements of financial market trends are based on current market conditions
constitute judgment, may prove inaccurate, and are subject to change without notice. Our views, strategies, and
examples may not be suitable for all investors. References to specific strategies are for informational purposes
only, and is not investment advice, and should not be interpreted as a recommendation.

A Confidential Offering Memorandum will set forth the terms of an investment in a fund, including risk factors,
conflicts of interest, fees and expenses, and tax‐related information. Such material must be reviewed prior to any
determination to invest in any of HFR’s funds.

©2020 HFR Investments, LLC, all rights reserved. HFR®, HFRI®, HFRX®, HFRq®, HFRU, and HEDGE FUND RESEARCH are
the trademarks of Hedge Fund Research, Inc.

The post Tactical Hedge Fund Allocation: Part 2 appeared first on HFR Investments.

(1 of 2)

In uncertain times, like we’re experiencing today, humans look for one of two things: security or opportunity. Since
most allocators are human, seeking out security or opportunity can be a crucial decision when making
investments.

If hedge funds are an important part of your portfolio, then tactically shifting your asset allocation toward hedge
funds can provide enhanced security through diversification. Or it can create unique opportunities, by allocating to
managers that are taking advantage of the current market environment.

When we talk about security, what we’re really talking about is the diversification provided
by hedge fund investments. However, since hedge funds are complex investments, quickly adding new managers is not in
the cards for most allocators.

So how do we access the diversification we’re looking for?

A great place to start might be with a broad-based investable hedge fund index that provides access to the
risk/return profile of the overall hedge fund universe. Investing in indices reduces the manager risks associated
with allocating to single hedge funds, along with the burdensome and costly due diligence process of underwriting
multiple managers.

Ultimately, what we’re looking for in this environment is access and speed. Increasing your exposure to hedge fund
strategies has never been easier.

Another way allocators handle uncertainty is to look for opportunities caused by that very
uncertainty. When looking through the lens of tactical allocation, this might look like a larger bet on one or two
specialty managers that can execute on a specific attractive opportunity set.

However, unless you already have a predetermined lineup of funds, this process could take from six months to a year
or more to properly underwrite and make your first allocation. Put another way, the
opportunity has most likely passed you by.

A tale of two outcomes: COVID-19

If you pay attention to the financial media, as most of us do, you see two main theories for where the economy is
going in the coming months.

The first, which I believe to be wishful thinking, is once the government gives the all clear, the economy will go
back to normal relatively quickly. The other, however, is a grim scenario, which predicts the world descending into
a depression that could take a decade or more to recover.

I would guess that the outcome lies somewhere in the middle, but the range of possible outcomes is still wide and
relatively unclear. This puts us right back to where we started – Are you searching for security through
diversification? For opportunity? Or maybe, for a bit of both.

Diversification

As I mentioned earlier a broad-based investable hedge fund index could be a solution when tactically allocating to
hedge funds. At HFR, we have numerous investable versions of our indices that serve several needs.

While I cannot say for sure how an index may perform in the future, I can show you the downside protection provided
by the HFRX Global Index during the global financial crisis and over the past several months of uncertainty caused
by COVID-19.

Up/Down Capture – Jan 2007 to Dec 2009

Up/Down Capture – Jun 2019 to Mar 2020

Imagine what it might look like to tactically supplement your hedge fund portfolio. What could that mean for your
returns? What could it mean for your peace of mind? Are you willing to possibly give up a little on the upside for
downside protection during uncertainty?

NEXT TIME: Opportunistic Manager Selection

Stay tuned for the next edition of Tactical Hedge Fund Allocation, which will cover
tactically allocating to managers to take advantage of attractive market dislocations.

By: Gregory Neal Director of Investments and Business Development, HFR
Investments, LLC, investments@hfr.com

A downloadable, PDF copy of the article can be found HERE.

Disclaimer: This article does not constitute an offer, or a solicitation of an offer,
to buy or sell any securities, and is intended for informational purposes only. Any offer of an HFR Fund will be
made solely by a Confidential Offering Memorandum, and then only to qualified purchasers. This document is
confidential and is intended solely for the information of the person to whom it was delivered. It is not to be
redistributed to any third parties without the prior written consent of HFR Investments, LLC (“HFR”).

The HFRX Global Hedge Fund Index is designed to be representative of the overall composition of the hedge fund
universe. It is comprised of all eligible hedge fund strategies; including but not limited to convertible arbitrage,
distressed securities, equity hedge, equity market neutral, event driven, macro, merger arbitrage, and relative
value arbitrage. The strategies are asset weighted based on the distribution of assets in the hedge fund
industry.The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure
global developed market equity performance. The 3 month US dollar LIBOR interest rate is the interest
rate at which a panel of selected banks borrow US dollar funds from one another with a maturity of three
months.The HFRI Fund of Funds Composite sets forth the performance of Hedge Fund Research, Inc.’s hedge
fund index, an equally weighted performance summary of over 800 constituent fund of funds.

Indices are not investable themselves, and thus do not include the deduction of fees and other expenses
associated with an investment in a fund. When reviewing the performance of any fund to a broad‐based index,
investors should consider the material differences between indices and funds. Index information is provided merely
as an indication of the performance of various capital markets. The performance and tax consequences of an
investment in the securities represented by an Index, on the one hand, and an investment in the fund, on the other
hand, are materially different.

Opinions, estimates, forecasts, and statements of financial market trends are based on current market conditions
constitute judgment, may prove inaccurate, and are subject to change without notice. Our views, strategies, and
examples may not be suitable for all investors. References to specific strategies are for informational purposes
only, and is not investment advice, and should not be interpreted as a recommendation.

A Confidential Offering Memorandum will set forth the terms of an investment in a fund, including risk factors,
conflicts of interest, fees and expenses, and tax‐related information. Such material must be reviewed prior to any
determination to invest in any of HFR’s funds.

©2020 HFR Investments, LLC, all rights reserved. HFR®, HFRI®, HFRX®, HFRq®, HFRU, and HEDGE FUND RESEARCH are
the trademarks of Hedge Fund Research, Inc.

The post Tactical Hedge Fund Allocation appeared first on HFR Investments.

COVID destruction brings a shift to Hedge Funds

These times are certainly challenging for everyone. As we find ourselves impatiently waiting to go back to normalcy,
the woes of COVID-19 have resulted in fear gauge levels beyond what we have seen since the 2008 housing market
crash. As we see every day in the media, the spread of the virus has had a profound impact not only on our health
and economy, but our state of mind. Media reports have suggested that the virus has killed thousands of people so
far in the U.S. with the expectation that we have not reached our peak. And although we are not quite there yet, the
U.S. has shown great resilience through its history of crises.

In terms of the market, the turmoil of COVID-19 has: (1) affected all supply chains, (2) prompted the Fed to cut the
Fed Funds rate twice in March (now @ zero), and (3) pushed the Fed to initiate a $700 billion quantitative easing
program and Congress to pass a $2 trillion government stimulus package. Bleak unemployment forecasts are expected to
pummel the economy further. At the same time, a price war between oil producing countries has dropped oil prices to
$20 a barrel – a first in 20 years. A complete bloodbath.

We are seeing levels in the VIX higher than they’ve been since 2008 – a 300% YTD change (VIX currently @ 56), 10-year
yield falling to 0.68% flattening the curve, and retraction of the equity markets (S&P @ 2,584 close as of
3/31/2020) down 20% YTD. It is unclear if a COVID-19 vaccine (potentially Chloroquine and Hydroxychloroquine) will
be available this year, and if so, in massive quantities to be effective – very unlikely. We would hope for a
V-shape recovery, but we are under the belief that a L-shape recession would not be a surprise.

In this bear market selloff, portfolios that were overweighted equity have seen most performance vanish. We can
certainly anticipate a long recovery in the equity space, and even more so with dividend cuts through the end of the
year. However, we also see potential in alpha generating and capital protecting strategies going forward. So, we
believe this is an opportunistic time to reallocate capital back into hedge funds.

Hedge funds have been generally under allocated the past ten years, and we expect to see a comeback as hedge fund
managers have experience trading through a volatile market and over various market cycles. We have spoken with our
hedge fund managers who so far have been able to navigate the uncertain landscape and believe there are many
opportunities with motivated sellers, higher discounts, volatile spreads, great price dislocations, and other
high-conviction trades.

While institutions reevaluate their single manager holdings, a swift strategy shift can be made to an investable
hedge fund index such as the HFRX. The HFRX Indices are one of the longest-lived family of investable indices in the
market – funded since 2003. Institutions can use either of the three investable segments: (1) Liquid Alternative
UCITS Constituents, (2) Hedge Fund Constituents, or 3) SMA’s. Information on the HFRX benchmarks can be found at http://www.hfrx.com.

Index tracking vehicles are cost-efficient, can be used for liquidity needs, and a smart way to increase hedge fund exposures in your total portfolio with global, strategy, or sub-strategy index allocations.

With overall markets declining in double digits, the HFRX Global Index had declines in the single digits, and Macro
Systematic/CTA Index was in positive territory through March and YTD.

In these times, we think it’s important to reevaluate risk factors, liquidity, and performance to achieve your
institution’s investment goals. It’s also a perfect time to review your existing cash overlay strategy that can meet
your short-term cash needs but continue to provide relative outperformance.

The political apparatus has started to implement many tools for a softer landing of the economy, but the real
question persists if balance sheets have the wherewithal to shoulder a long deep slowdown if one is to occur. We, as
always, will continuously monitor and evaluate the state of the overall market, but we believe that the good times
have rolled off, and it is now time for everyone to roll up their sleeves.

Michael Arenibar, President
HFR Investments, LLC
marenibar@hfr.com

A downloadable copy may be retrieved here.

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HFR traditionally known for its hedge fund databases, indexes and historically as a fund of hedge fund firm that has
been embraced as endowments, foundations and pension funds initially dived headfirst into the absolute return space
more than a two decades ago.

“It is a great opportunity and we are very excited about what we are doing,” said Gregory Neal, director of
investments and business development at HFR Investments, and a nearly nine-year veteran of the overall firm.

Moving away from a commingled fund of hedge fund model, HFR officials led by founder Joseph Nicholas had already
shifted into the popular UCITS arena through a partnership with Aberdeen Standard Investments (ASI) back in
September.

This endeavor centers on the data side of the business as Aberdeen has incorporated a monthly priced strategy
designed to track the popular HFRI 500 index, which is comprised of 500 hedge funds across a broad range of
strategies. The investment strategy allows investors access to HFR’s investable index family with 30 underlying
investable hedge fund strategies and sub-strategies giving investors the opportunity to choose those most suited to
their needs.

Last September’s launch was preceded by the successful launch of the ASI HFRI-I Liquid Alternatives strategy, which
tracks the performance of an index of roughly 180 UCITS hedge funds, which following launch in February 2019 grew
quickly to $650 million in assets under management.

The newly branded HFR Investments carries a smaller AUM of around $250 million and is hitting on some core areas of
interests for investors – Minority and Women-owned Business Enterprise (MWBE) designation, ESG-oriented offerings,
bespoke offerings, manager of manager offerings and managed accounts.

Manager of manager offerings will likely be similar to other specialists that worked in the institutional investor
space and will allocate to long-only emerging and minority managers with a diverse strategy set.
The official
MWBE designation is expected to go through soon and is due to the work of Michael Arenibar, president of HFR
Investments and an executive with more than 14 years’ experience at HFR, including as chief compliance officer at
the Chicagobased firm.

According to Neal, Arenibar was initially looking to launch an ESG-focused company, but the focus has broadened
alongside the opportunity set for serving investors interested in hedge funds and long-only strategies with a niche
focus such as ESG, emerging manager strategies and minority-owned focused offerings.

Since 2005, HFR has created roughly 250 managed accounts for clients, the majority of which took place over a 10-year
period.After 2015, the cost of opening up these accounts rose, but for firms that can offer investors scale it eases
the process of allocating to separately managed accounts.

Neal is heading up the managed account side and views this as a perfect time for both HFR and new clients to
diversify their portfolios both from the manager perspective (hiring emerging managers and MWBE firms) and from the
strategy perspective in adding ESG-oriented strategies.

A digital copy of the article can be found here.

Susan Barreto, Editor

Susan is an award-winning journalist who has worked for a number of global financial publications including Pensions
& Investments, HFM Week, Absolute Return, InvestHedge and Lipper HedgeWorld. Much of her career has been
covering the global finance industry with an institutional investment focus covering pensions, endowments,
foundations and family offices for more than two decades. She has covered hedge fund strategies most recently as
Editor-at-Large for HFM Global.

Alternatives Watchis a daily news platform that covers the rapidly evolving world of alternative
investments geared toward institutional investors. We cover investor mandate activity as well as manager news across
private markets including hedge fund, private equity, private credit, infrastructure and real estate. With thousands
of investment strategies to choose from with billions of dollars up for grabs, our aim is to give the most accurate
and timely snapshot of the most innovative and entrepreneurial segment of asset management.

The post (HFR in the Media) “HFR hits the reset button for a new era in hedge fund investing” by Susan Barreto, Alternatives Watch appeared first on HFR Investments.