HF Investment Philosophy
Pavilion believes there are substantial opportunities to add value through the careful selection of hedge funds and in the customized construction of portfolios of hedge funds.
We believe that hedge fund returns can be broken down into five components:
|Alpha +||Pure manager skill. Alpha is difficult to produce consistently and top managers often have capacity constraints.|
|Alternative Beta(s) +||Passive exposure to sources of systematic risk other than cash, equity or fixed income markets. Managers must offer competitively priced sources of Alternative Beta. Investors should not pay full hedge fund fees plus fund of hedge fund fees for some of the more accessible sources of Alternative Beta.|
|Traditional Beta(s) +||Passive exposures to cash, equity and fixed income markets. Pavilion seeks managers with low correlations to traditional betas particularly during periods of market stress.|
|Leverage Premium +||Levered portion of a portfolio in excess of the borrowing rate. Leverage can be appropriate for some styles but needs to be managed carefully in order to mitigate magnified losses on the downside.|
|Liquidity Premium||Premium of liquid assets relative to illiquid assets. Managers investing in illiquid assets must have fund and financing terms appropriate to the strategy.|
Understanding these components is the key to delivering customized solutions.