PRS Group, a Miami-based hedge fund of funds manager with over USD1 billion under management, is actively hedging exposure to certain fund strategies to help it meet volatility and return targets. Ravi Cheruvu, risk manager, explained the firm uses a strategy it dubs factor hedging, in which it considers factors affecting the returns of each manager and hedges against them across its portfolio. Cheruvu said PRS talks to the managers regularly and uses information the funds provide. "It's more like an art," he said, noting it's not a precise hedge.
PRS uses futures to hedge most asset classes, but buys and sells credit-default swaps to hedge credit components in the portfolios. Cheruvu noted it is mostly a buyer of credit index protection on its flagship fund of funds, which is a diversified portfolio including global macro, convertible arbitrage and event-driven funds. He declined to name counterparties, but said PRS uses major investment banks. The group may look into using other over-the-counter instruments in the future, particularly for its own convertible arbitrage and global macro funds, although Cheruvu did not comment on what would persuade PRS to take the plunge.
