The hedge fund universe has long been a misunderstood corner of the investment landscape, particularly among Australian private wealth investors. But Tim Cheung, chief executive of Mantis Funds, believes that alternatives, and hedge funds in particular, are entering a new era of relevance, one defined by precision, purpose and, above all, alignment.
“For us, absolute returns really means absolutely positive returns,” Cheung says. “A lot of investors have cash-plus or CPI-plus objectives, and they’re asking how to access that. On the liquid alternative side, you’re talking about pure alpha. Skill that is uncorrelated and repeatable. That’s what we’re trying to isolate.”
This focus on alpha and manager quality is central to Cheung’s approach. In a market flooded with strategies claiming to be ‘alternative’, his team filters potential investments through a rigorous, multi-layered lens, beginning with the most fundamental of questions: is the strategy legitimate?
“When you’re investing in something new, especially in alternatives, threshold question number one is: is it a fraud?” he says. “It sounds extreme, but in our experience, around three out of every hundred managers on which we do diligence don’t pass that bar. Less-than-salubrious characters do find their way into the system.”
Beyond legitimacy, Cheung looks for what he calls “genuine love of the craft.”.Investing is hard, he notes, and success requires more than intelligence, it requires intrinsic motivation. “My former boss at a large hedge fund in New York once shut down the fund, and the press release read: ‘Investing is hard.’ We got mocked for it, but it’s true,” he recalls. “We want managers who love what they do.”
Yet the most difficult challenge, especially in the Australian context, is alignment. “The industry talks about alignment all the time,” Cheung says. “But true alignment, superhuman alignment, is rare. We’re talking about the structures that govern fees, carry, co-investment, and ultimately, who gets paid what and when.”
The misalignment is especially stark when viewed through a local lens. “We’ve got investors who want to pay 4 per cent of returns as a fee, so if the manager makes 20 per cent, they want to pay 80 basis points. Meanwhile, tier-one investors in the best global hedge funds are paying 50 per cent. “That’s five-zero. The manager makes $20, and the client pays $10,” he says. “That level of alignment is not something many Australian wealth clients are used to, or willing to stomach.”
Still, Cheung insists that hedge funds have a legitimate role to play in core portfolio construction, if they can be accessed in the right format. “There is a hedge fund strategy that should be part of everything we do for our clients,” he says. “But packaging and delivery matter. Liquidity, transparency, even language, all play a role in bridging the gap.”
He acknowledges the psychological scars still lingering from the global financial crisis. “We constantly hear from investors who say, ‘I tried that before the GFC, it ‘gated,’ I’m never touching it again,’” Cheung says. “And to those people, I say: let’s approach this like forensic analysts. Let’s look at what others are doing today, tier-one institutions, endowments, pensions, and let’s ask: what are we missing?”
That forensic approach is key to rebuilding trust. Rather than rely on old assumptions, Cheung urges advisers to re-examine the strategies through a contemporary lens. “The role of people like us is to bridge that informational and emotional gap,” he says. “We’re not here to push product. We’re here to help advisers understand what these strategies are and are not.”
Education, in his view, is still the greatest hurdle. “Even when an adviser understands the strategy, the next question is: how do I explain this to my client?” Cheung says. “That’s where we have to step in, with communication tools, with portfolio context, and with structures that are actually usable.”
Ultimately, Cheung’s message is one of cautious optimism. Alternatives, and hedge funds in particular, may never be universally loved in the retail market, but they don’t have to be. “If we can bring institutional-grade strategies into the wealth space with the right alignment, structure and support, that’s a game-changer,” he says. “It’s not about everyone buying-in: it’s about the right investors getting access to the right solutions.”