Alternatives play an oversized role in many institutional portfolios today, and in doing so can sometimes inadvertently become an obstacle to one of the challenges they are meant to solve –diversification. But one alternative fund takes an innovative approach to diversification, and in the process has developed a vibrant and largely uncorrelated opportunity.
The portfolio created by hedge fund Hedonova combines more than 12 alternative asset classes – including wine, art, collectibles, litigation finance, and agronomy – into one fund.
“While setting up our fund, we wanted to cover a wide range of assets to provide investors an access to exotic asset classes in one fund,” says Alexander Cavendish, CEO at Hedonova.
In addition, the fund embraces the expanding space at the intersection of institutional and retail investing.
“Many of the opportunities in our fund are generally inaccessible to accredited investors looking to invest on their own, says Cavendish. “There are specialized platforms focused on a single asset class that act as brokers allowing investors to take exposure. But that’s cumbersome. Investors are left to take decisions in opaque asset classes.”
That’s not to say institutional investors don’t appreciate the fund. Hedonova has raised capital from the likes of Microsoft, the Royal House of Oman, and The Burman Family office in India. The consistency of returns, low volatility, and diversification of the fund appeal to any investor.
However, with Hedonova’s fund in their portfolio, institutional allocators don’t need to employ in-house experts in niche areas covered by the fund. And, unlike many other alternative funds that are trackable on a monthly or quarterly basis, institutional investors appreciate transparency that sees the Hedonova fund tracked daily along with daily NAV updates. Moreover, with liquidity high on the list of investor needs in this period of prolonged volatility, Hedonova’s fund satisfies that requirement as well.
“We’ve designed Hedonova to act like an open-ended mutual fund that investors can plug into as well as get liquidity,” says Cavendish. “And our wide mix of knowledge in alternative assets that institutional investors might not have in-house – wine, music royalties, carbon credits, art, etc. – is difficult to duplicate when you consider the combination of expertise and access.”
Breaking norms to create access
Hedonova was born when its co-founders had a realization while trying to access a particular investment. Pre-Hedonova, Cavendish, the firm’s CEO, and Suman Bannerjee, CIO, were working at U.S.-based hedge fund. They targeted a chain of Indian dental clinics for investment but encountered too many obstacles in attempting to make the allocation.
“It occurred to us that trying to access alternative investments was far more challenging for retail investors than we realized,” says Cavendish. “That’s when he decided to bridge the access gap by starting the fund.”
Recognizing opportunity came naturally to the two co-founders. Bannerjee started his journey as an associate at Société Générale, where he rose to vice president in equipment and supply chain financing. Along the way he refined his investment acumen, and that is why, for example, the Hedonova fund includes equipment financing. The firm leases equipment from companies such as Boeing and Samsung to profitable or venture-backed companies in asset-heavy industries, with low debt and return on assets of over 25% – not to mention tax benefits from depreciation.
Although Hedonova has broken norms in terms of access, it hasn’t done so at the expense of “traditional” investment fundamentals. Due diligence and risk management remain are embedded in the firm’s investment process.
“Where we broke the norm was in effectively communicating the need for alternative investments in almost any portfolio no matter the size,” says Cavendish. “Our investor relations team did a superb job of telling that story and onboarding investors, and the past performance data of the fund demonstrates the concept is strong.”
Built for the moment now – and moving forward
Each generation feels it faces “unprecedented” challenges to some degree, and the investment landscape today is stoking that perception among asset managers and allocators. Hedonova’s approach to diversification is weathering the two-headed monster of inflation and potential recession, however.
“We invest in multiple physical assets that themselves appreciate during periods of high inflation,” says Bannerjee. “In 2021 and 2022, inflation rose while the S&P 500 fell by approximately 15%. In the same environment, our fund outperformed S&P 500 by a good margin. We were able to do so by selecting the right assets and right time for investment. Specific assets, such as art and wine are structured to provide a hedge against inflation and safeguard the investments.”
In pursuit of potential opportunities and diversification, Bannerjee’s investment team at Hedonova puts years of collective experience to work around the globe.
A holistic look at the fund reveals 55% of its assets are in the U.S. with the other 45% globally dispersed.
“Of the 45% of assets that are internationally focused, we concentrate on three areas – Europe’s Nordic region, Israel, India and Indonesia,” says Bannerjee. “Our portfolio investments are global because it helps us manage risk to a large extent. Not even two years of pandemic changed that. Our investments range from cocoa farms in Africa to data centers in India and the Philippines, from paintings in Japan to wine in France.”
Hedonova investment team members have daily conversations with external economists and industry experts, and carefully track market trends and market participants’ behavior to spot early-phase opportunities.
“We start with relatively small initial investments, and when we have sufficient data and research to indicate we should gradually increase our investments, we do,” says Bannerjee. “While merging asset classes into the portfolio, we continuously monitor correlations within the asset classes to comply with a pre-defined maximum allocation to the class.”
The hard work of Hedonova’s team across continents is gaining notice. Investors from more than 50 countries have now allocated to the fund.