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Shift Now Underway in How Capital is Allocated

The largest institutional investors in the world are increasingly looking for investments that generate positive "contractual" cash flows, as opposed to mark-to-market paper gains, according to both panelists and attendees at the Skybridge Alternatives Investor Summit.

Stack of U.S. hundred-dollar bills
Stack of U.S. hundred-dollar bills

Greg Zuckerman of the Wall Street Journal moderated a panel with the misleading title "A Balancing Act: Current Trends in Alternative Asset Allocation." I say misleading because of phrase "balancing act" implies a tight rope walker carefully stepping forward.

But the panelists were not hesitantly tapping toes on a wire — they were very confident in their desire to move away from "global macro" and toward cash flow producing fixed income investments.

"We're looking at strategies that throw off cash flow ... substantive gains," said Skybridge Capital managing partner Ray Nolte.

"We're trying to get away from macro and mark to market gains," Mark Okada, co-founder and chief investment officer of Highland Capital Management, L.P. said.

In practical terms, this means shifting out of equity focused strategies and toward fixed income. Think commercial mortgage backed securities (CMBS), high yield bonds, and other arrangements where, as Okada said, "I know what I'll be paid, [and] when..."

Of course, these kind of changes are relative. No one is talking about moving all funds from one strategy to another. They are discussing how capital is being allocated right now.

After years in which trauma in the global macro-economy drove many investors toward so-called "global macro" strategies, there is now apparently a shift underway. And it is being felt on the ground level, by folks whose job it is to raise capital for hedge fund managers.

"Right now, it's a tough environment for equity managers. You can raise money if you are absolutely demolishing the benchmarks. If you returned 25 percent in an equity strategy last year while the S&P was up a couple of points, you can raise money, otherwise, everyone just wants fixed income, CMBS," one guy who works in "capital introductions" (basically, selling hedge fund investments to institutional investors) at a major prime brokerage explained.

He hadn't even been at the panel. "Allocators are terrified of the vol in equities," the cap intro guy said.

This too echoed the words of one of the panelists. "We've had a tremendous and intolerable volatility in equities," Kenneth Heiz, president of Hedge Fund Research said.

Is it any wonder, then, that trading volume has remained so low in stocks?