Surge in passive strategies will be boon - Hedge fund executive Okada

September 8, 2016 3:07 PM EDT

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By Lawrence Delevingne

SAN FRANCISCO (Reuters) - Money moving from hedge funds and other active investment managers to low-cost passive strategies will ultimately be a boon for professional money managers, according to Mark Okada, co-founder of Highland Capital Management.

“All of this chasing of beta and passive management, et cetera, is just setting up for the next opportunity for alpha for active management,” Okada, also Highland's chief investment officer, said on Thursday at the Alpha Hedge West conference in San Francisco.

Beta refers to overall market gains, whereas alpha refers to the extra returns from a manager's investment skill.

Okada said Highland, an approximately $17 billion credit specialist based in Dallas, has produced strong returns in 2016, underscoring the value of investing in so-called alternative credit funds.

The $947 million Highland Global Allocation fund, a hedge fund-like mutual fund that invests in both stocks and bonds, is up 20.6 percent this year through Sept. 7, according to Morningstar data.

The average credit-focused hedge fund, according to the benchmark Hedge Fund Intelligence Americas Credit Index, is up 5.88 percent this year through August. That compares to a 4.22 percent gain by the iShares Barclays Aggregate Bond Fund.

Okada said that bond prices are relatively high, indicating there were few obviously cheap assets on which to bet. Okada noted two exceptions: private credit, which is essentially direct loans to businesses, and debt related to collateralized loan obligations.

“There are lots of ways to express credit exposure and I think it’s still very interesting,” he said. “But let’s face it, after being up 15, 16 percent for the year you are supposed to be taking some gains.”

Okada said he expected moderate economic growth to continue in the United States, ensuring business demand for private credit. He also said interest rates were unlikely to increase dramatically, helping support the price of bonds.

Okada was optimistic in the face of mounting gloom in the industry after several years of returns near or below low-cost index funds.

“Regardless of what rates do, we’ll mean-revert around active management,” he said, referring to how prices and returns ultimately move back to their historical average. “I think that 2017 and 2018 will be great times to be in the hedge fund and the alternative credit space.”

(Editing by Jeffrey Benkoe)

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