Option A: Establishing a distinct hybrid category within the hedge fund allocation
Long/short directional strategies play an important role in many allocators’ tool kits. For example, they may help enhance performance in a volatile market, which is generally conducive to long/short alpha generation, and their ability to modulate beta exposure may contribute to overall portfolio resilience. Given their unique attributes, hybrid strategies may warrant a stand-alone category within a diversified hedge fund allocation. These strategies may have the flexibility to benefit from arbitrage opportunities across structural winners and losers, both via long/short and public/private positions. Additionally, hybrid strategies typically have the ability to be opportunistic and take into account relative valuations when deploying capital into public or private investments. Thus, they may have a higher level of idiosyncratic risk versus other directional long/short strategies.
From a governance perspective, the evergreen nature of hybrid strategies may lessen the due diligence and resource requirements, allowing staffs to lean into private markets without needing to manage capital calls and fundraising cycles. Importantly, allocators need to consider the liquidity profile of hybrid strategies, which may use “side pockets” to segregate the less-liquid private investments from the more-liquid public investments. There should be a clear understanding of the expected steady-state level between public and private exposures, to help assess whether there will be sufficient liquidity to support liabilities and spending needs. Allocators should also consider tracking liquidity at the total portfolio level, monitoring aggregate private market exposure no matter where the allocation resides.