Cream of the crop

Hedge Funds Review's European Hedge Fund of Funds Awards 2005 assembled Europe's best funds of funds, and more entrants than ever before. On 8 December, the winners were announced. The envelope please...

Funds of hedge funds have continued to provide their investors with double-digit returns in 2006, justifying their status as the main funnel into single hedge funds, and holding around 40% of the industry assets. The top players in the segment show no sign of losing their stauts as offering access to top managers and maintaining their healthy performance.

THE JUDGING

The judging process to find Europe's best funds of fund and fund of fund groups was undertaken by Phil Irvine from London's Liability Solutions, Fredrik Nerbrand from HSBC Private Bank, Tushar Patel from HFIM and Adrian Fairbourn, in his capacity as family officer advisor at Fund Advisors. They were joined by David Walker from Hedge Funds Review, and together judged nearly 150 applicants and more than 50 fund of funds groups.

While categories for returns looked primarily at performance and the risk taken to achieve that, using measures such as standard deviation, Sortino and Sharpe ratios and drawdowns, categories that relied less on hard data - such as best high-net-worth/retail group or institutional group, or best newcomer - also took into account the group's main client base, transparency, process, reporting and, of course, performance of the group.

On the quantitative side, three main measures discovered the top fund: Sharpe, Sortino and return/drawdown However, the best fund based purely on its combined ranking from these three metrics did not automatically win quant-based categories.

AND THE WINNERS ARE…

The first winner of the evening was charity ARK - Absolute Return for Kids, to whom attendees generously gave more than £20,000 to build on their work for children in need.

In the hedge fund industry, the first award honoured the best long-term performance by a fund of hedge funds over at least 10 years. Past winners included the biggest established players in Europe's hedge fund industry. The shortlist was peopled by impressive applicants again in 2004 but after much debate it was Stenham Advisors' Universal Portfolio that took the coveted long-term fund award, with a Sharpe of 1.74 September 1995-August 2005, and an average annualised return of 10.37% on volatility of 4.03%.

When ranked by combined Sharpe, Sortino and return/drawdown, Stenham Universal was closely followed by Gems Low Volatility Portfolio, Olympia Star Trust 1 and Pioneer Momentum All Weather Fund among the 16 entrants.

There were two awards for diversified funds, (where 'diversified' was defined as having exposure to more than two underlying strategies), over three years and one year on a risk-adjusted basis.

The former award was taken by Crédit Agricole Alternative Investment Products (the first of two awards they won), this time for their GreenWay Special Opportunities, which produced an return of 11.3% in the three years to August 2005, on an annualised volatility of just 3.35%. The category was fiercely competitive, with 40 funds included, and strong showings also from Stenham once more, Edmond de Rothschild's European Capital Holdings, IAM's AIS fund, as well as Permal AM (Global High Yield Holdings) and Russell Investments' Alternative Strategies Fund.

Even more diversified FoHFs (48) were in the running for the best diversified FoHF over one year on a risk-adjusted basis. The strong performers of Edmond de Rothschild's European Capital Holdings and GreenWay Special Opportunities were joined by other shortlisted entrants LaFayette, Crédit Agricole Alternative Investments Group, Liongate and Fund Advisors. Adrian Fairbourn stepped aside on this judging (as also with Melkart Diversified) due to a conflict of interest, as did Fredrik Nerbrand when HSBC funds were under the microscope.

However, the winner was London & Capital's European Fund of Hedge Funds, whose 10.47% in the 12 months to September and excelling Sharpe of 3.38 impressed the judges. When ranked by the aggregate of Sharpe, Sortino and return/drawdown London & Capital's product, managed by Magnus Ollson, led its peers.

tHE SPECIALISTS

As the industry matures and some investors move to conduct asset allocation themselves, the next two awards honoured those who provided excelling funds exposed to two or just one underlying hedge fund strategy.

Over three years, the winner was Key Recovery, whose portfolio ranked first among its 30 competing peers on Sharpe, Sortino and return over drawdown in the three years to August 2005. GEMS Recovery Portfolio, HDF Eurovest and Stenham Growth were worthy competitors, ranking highly the three main metrics.

When the judges viewed the specialist fund applicants over just one year on a risk-adjusted basis, a quite different shortlist emerged. Crédit Agricole rated highly with two more funds (Distressed and High Yield Opportunities, and Select Asian), as well as excelling funds from Aurum, Harcourt Consultants and Notz, Stucki Group. However, it was Lombard Odier, Darier Hentsch & Cie who took the award with their Europe Equity Long/Short hedge fund.

The judges then moved to the newcomer award, noting the pace of new launches had not slowed in the year. In front of them were a list of 14 contendors, with Man Global Strategies Man Multi-Style, Melkart Diversified, Targa Equity from Tarchon CM and Signet Strategic Opportunities making the finalists list. As with other awards, judges (in this case Adrian Fairbourn from Fund Advisors, in view of Melkart) stepped aside where conflicts existed.

The remaining judges decided Targa Equity was the category winner not only for its returns, but also for its managers controlling volatility in the fund's early days.

structured products

The next two awards were new to the line-up for Hedge Funds Review's FoHF ceremony, namely the best leveraged and best capital-protected product. Judges looked keenly not only at the employment of leverage for the former, but also for control of volatility and downside risk by the manager. For the latter, a focus on returns was matched by how far fees could be said to have impacted on performance to investors.

In the leveraged category, Brummer & Partners AM's (Bermuda) Helios 2XL took the prize, a fund of in-house funds in the Brummer group. As with Key Recovery, Helios had the perfect score among its 16 category peers when ranked by return, Sharpe and return over worst month. Not surprisingly, in the capital-protected category, Man Global Strategies made a notable showing with seven entrants, along with Cross Border Capital, with two. It was the latter, however, whose Solar Japan Asia Class B fund won out. Man Global Strategies AP Enhanced and AP Stratum both ran close runners-up.

the RETAIL focus

The award for the best high-net-worth and retail fund provider drew together 21 of the European fund of hedge fund industry's best-known names, from IAM and Notz, Stucki Group, to HSBC Republic Investments, LODH & Cie, RBS AM and Stenham Advisors, to name but a few. A consistent and future commitment to the high-net-worth/retail audience had to be demonstrated, along with product and a process appropriate for the clientele. Stenham Advisors was seen as excelling in all these regards, and took the prize. Hedge Funds Review will continue to feature this award prominently, highlighting the ongoing importance of involvement in the industry by those who fostered its initial growth.

INSTITUTIONAL TOP DOGS

With the institutional involvement in hedge funds growing in 2005 - despite some rocky months from underlying portfolios - the judging panel turned to the 'Best European institutional hedge fund of funds product provider,' and to a shortlist of enviable skill. Again, the 25 entrants included many of the best-known names in the industry: Gottex, Crédit Agricole, FRM, Goldman Sachs, Man, Russell Investments and LaFayette to name a handful. It was Olympia Capital Management who took the silverwork, with a range of product and process to match for the institutional investors.

premier platforms

Given the increasing importance of hedge funds platforms, both as a base for investable indices and transparent basis for fund of fund managers to construct their own bespoke FoHFs, we asked the industry to vote for the best hedge fund platform provider. Set criteria were not imposed on voters - for they are the experts in evaluation, not us - and by a large majority they favoured Lyxor, part of the Société Générale group out of Paris.

Best Group

The final and arguably most coveted category was a who's who of Europe's fund of fund providers. Among the 29 applicants, Cedar Partners competed with CMA, with Coronation FM and Crédit Agricole, down the alphabet to GAM, GEMS Advisors, HSBC Republic and Key AM, to Liberty Ermitage, Man IP, RBS and Stenham. Each entrant's investment process was scrutinised, both pre- and post-investment in target funds, and the various groups' avoidance of problem funds as much as their selection of excellent underlying managers was taken into account.

In the end GAM, now part of the Julius Baer group, took the award, with judges noting the difficulty of the decision.

The judges would like to congratulate all those who made the shortlists for the various categories.

The strength of the entrants, award contenders and eventual winners reflects the strength of Europe's fund of hedge fund industry, a robustness and excellence that is expected to continue into 2006.

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