The hedge fund industry has been in the news again with questions being raised about its ability to deliver absolute and uncorrelated returns. William Kelly, CEO, CAIA talks about the case of alternative investments in a telecon with Business Line. Excerpts:

Can you give a perspective on how the global hedge fund industry was in the last couple of years?

The global hedge fund industry has transformed significantly over the last 15 years. The industry started out quite small, at around $300 billion but that was long ago. Now it is over $3 trillion with more than 10,000 different hedge funds operating globally, using numerous strategies.

Post the global financial crisis, the US equity market has compounded by 15 per cent per annum. So, many investors have forgotten the volatility dampening features of hedge funds. But there has been a lot of change in the way the industry has operated over the last 10 years to bring out better value proposition for investors. These instruments can be especially useful if volatility in global markets increase.

There has been some concerns about inflows tapering down and hedge funds closing down, redemption talk etc. Is the industry going through a rough phase now?

The flows were negative last year and there was a pull back, but you need to take a step back to understand what happened.

We got a tremendous amount of central bank intervention that played out on the prices in equity markets and had unprecedented low interest rates. This resulted in very low volatility.

These factors have caused an unfair comparison between returns of traditional products and those of hedge funds.

But a global research on hedge fund returns showed that on a risk-adjusted basis, hedge funds outperformed equity in 2016. Comparing hedge funds to equity is not a fair benchmark. Hedge funds are about absolute returns. There needs to be better understanding about what their job is.

With asset classes getting more correlated in recent times, how do hedge funds make money/returns?

As I said earlier, the current environment is unprecedented. We have never seen this kind of interest rate environment; there is a 35-year bull market for bonds and the lack of volatility has squeezed out a lot of opportunities around hedge funds.

But volatility is cyclical. If you see the market, post-election, it’s down just 1 per cent since November, which is unheard of. So volatility is going to come back.

But CAIA is not in the business of promoting hedge funds. We educate about hedge funds; to make people look at the uncorrelated value propositions of the alternatives and help build a more balanced portfolio with more uncorrelated returns. This kind of market environment is not sustainable and is screaming for a correction.

Among hedge fund strategies, the event-driven ones worked well last year, but they also faced more redemptions. Which hedge fund strategy do you think will deliver over 2017?

I am not in the business of specifically following an indicative strategy.

But if you look at the hedge funds universe again, the average hedge funds was up by 7.5 per cent last year, the S&P 500 in the US was up 12 per cent.

If you compare the returns, you might be disappointed, but on a risk-adjusted basis, hedge funds did fine.

I don’t think the question is about picking the right strategy; I think it is about picking a lot of different strategies that help balance the portfolio.

Can you tell me a little bit about the CAIA degree and how relevant it is to India market?

The CAIA or the Chartered Alternative Investment Association tries to raise the bar in professionalism among those who are either managing or allocating money in the hedge funds space.

We cover the entire gamut of non-traditional assets — hedge funds, private equity, liquid assets, commodities, structured products etc.

So for someone looking for a well-balanced portfolio, our body of knowledge can help the manager do this is in a more informed and professional manner.

We have been doing this for about 15 years. We have around 9,000 members in 90 countries. We have around 150 people in our community in India.

Hedge fund Industry in India is quite small; the number of alternative investments funds in India has reached only a couple of hundreds.

But I think the opportunity is enormous in India.

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