Thames River Warrior Fund: Thames River Capital Holdings

A belief in producing consistent double-digit returns lies at the heart of the Warrior fund of hedge fund portfolio. Hedge Funds Review discovers what makes it so successful.

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“What we do works and we can prove it over a significant period of time,” declares Ken Kinsey-Quick, head of multi-alternatives at Thames River Capital. He is also co-portfolio manager with Alex Kuiper of the Thames River Warrior Fund, an opportunistic fund of hedge funds with a focus on rising stars and emerging managers. “What we try to do is make money, to make double-digit returns. If we can do that consistently over time, we’ll out perform all asset classes,” says Kinsey-Quick.

With a grin he does point out that the only person to make steady 1% a month returns was Bernie Madoff. “We undershoot, overshoot our target. Up to 2008 we never had a negative year,” he admits. “We can outperforman over time, but it’s not going to be a smooth run. But it’s really about how we do achieve the positive performance,” says Kinsey-Quick.

Warrior experienced a 15.41% fall in 2008 and shot up to 17.36% in 2009. In 2007 the fund had a positive 27.4% return. Pointing to these figures, he makes the point that the fund can and does perform over time.

Kinsey-Quick is proud of the track record and believes this is due in large part to a “very experienced team”. The average age is around 40 and with that comes a great deal of experience.

Kinsey-Quick joined Thames River Capital in 2003. With over 15 years of experience in hedge funds, he has an established track record. Before joining Thames River he was chief investment officer at Coronation International in London. At the end of 1999 he founded Redwood Investment, later acquired by Coronation Fund Managers. Prior to that he spent six years as an investment manager at Ifabanque (part of Permal Group), and was co-manager of Haussmann Holdings Fund. He was also involved in the founding and management of the Challenger funds.

Kuiper has just as impressive a pedigree. He joined Thames River in September 2001, coming from JP Morgan where he developed tactical software for the risk management system used by its exotic fixed-income derivatives desk to hedge complex derivative portfolios. Before that he worked in various positions in the finance and information technology industries after a brief period training as a second lieutenant in the Royal Marines.

Kinsey-Quick puts a lot of emphasis on the due diligence process and believes the due diligence manager, Stan Chaudhry, is one of the best in the business, joining Thames River in 2005 after 10 years at Deloitte & Touché where he specialised in due diligence. “You often hear him talking on the phone to managers about how they should set up the business,” notes Kinsey-Quick.

The team assembled for the Warrior fund is one of its unique selling points, believes Kinsey-Quick. The depth of experience of the team and a good work environment he says are at the heart of the fund’s success.

Another differentiation is the investment philosophy, strategy and process. Kinsey-Quick believes Warrior is “very opportunistic”. This, he says, plays a big part in the investment strategy. Not only does the fund invest in some of the best-known names in the industry, including Paulson as well as Thames-affiliated Nevsky, Warrior has no fear of seeking out new talent.

He believes this is a big plus for the Warrior fund of hedge funds. “New hedge fund strategies get a first-mover advantage,” he notes. They can often generate double-digit returns before the strategy becomes crowded. Innovation and opportunities, says Kinsey-Quick, go hand in hand. He says the fund seeks out forward-looking qualities in managers. He believes this is where these new funds will make their money over the next 12–18 months.

The strategy allocation of the portfolio is broad. Most favourable at present are equity long/short and multi-strategy funds. Credit and macro also have high allocations, but over 10% of the strategy allocation is to “others” which include some cutting-edge strategies.

Merely mortal
The idea, says Kinsey-Quick, is to be forward looking in concepts while protecting the downside.  “Managers are all human. They make mistakes. A good fund manager may have gone through rough periods and lost a lot of assets. We’ll still look at them again when they are out of the rough patch. People who have made good results are likely to make good returns again.”

This is why he believes Warrior has a high turnover rate in its portfolio. About a third of the funds are switched each year, which implies that every three years there is a fresh portfolio. However, Kinsey-Quick says some managers have been in the portfolio for a “very long time” while others are only briefly included. “We have rising star bias,” he says. Warrior is looking for the next superstar and wants to get in at the beginning. Once a fund hits $1 billion in assets under management (AUM), Kinsey-Quick often looks to exit. “Our sweet spot is in the sub-$1 billion range,” he confirms.

Warrior is also happy to help managers who are just starting out. “Start-up managers are focused. They are focused on the ‘best idea’. We’ll seed them,” Kinsey-Quick says.

The allocation can be 100% of the fund’s AUM, he says, but this depends on how liquid the underlying positions are. If, for example, the fund is investing in the top 100 UK companies “who cares about redemption?”, but if the fund is focused on distressed, there will be a bit more caution. “We’ll be cagey about those investments. It all depends on the liquidity they offer,” Kinsey-Quick confirms.

He admits that some of the smaller funds in the portfolio often use Thames River as a reference. “We have seen managers use us as a reference and we always say ‘yes’. Next thing we know, our great rising star has risen to superstar. That can be frustrating,” he admits, although Warrior has probably exited with a good profit.

Identifying the rising stars is not that easy, says Kinsey-Quick. After 17 years in the game, he believes he has one of the best networks. A lot of managers come directly to Thames River and are attracted also by the seeding programme. “There are not that many around and you come to know about them at the beginning or pre-launch. It is rare not to hear of a superstar and not be in at the beginning,” he says.

For Kinsey-Quick, what makes a good manager is an easy question. For him it is simply experience. The main characteristics he is looking for starts with experience, even if it is not directly related to hedge funds. “He could have been in the market for 10 years as a long-only manager. We don’t mind if he then says he is interested in long/short,” says Kinsey-Quick.

Managers need to be disciplined. “Risk is the biggest killer in fund management. Getting positions swinging the wrong way happens. If a position goes against you, doubling up is not the right reaction. That can be a real killer,” he notes.

Listening to the manager is also important. Are they passionate about what they do? “It is rare that someone who is passionate about what they do is not good at it. This applies in any walk of life. Generally they are very good at what they do. It’s a very powerful combination of factors: experience, discipline and passion,” Kinsey-Quick concludes.

So far the formula seems to be working well. “We have never invested in a manager that has blown up.”  But he is philosophical: “You must take the risk to get the return.”

One of the more esoteric new strategies Warrior is attracted to is litigation financing. Kinsey-Quick concedes it “may be too illiquid for us at the moment” but he finds it “very interesting” with returns depending on the outcome of a court case. This is diversification that does not depend on any market.

“The whole idea of a fund of hedge funds is to mix a cocktail of different risks that are not correlated to each other,” he says.

This theory did not quite work in 2008 when every asset class went south together. However, that is where the ‘best ideas’ and new strategy funds within the portfolio can help protect capital.

Some of the new strategies Warrior has been interested in include insurance and electricity trading as well as weather derivatives and shipping finance. All these strategies, points out Kinsey-Quick, are generally uncorrelated to equity markets. “Yes we are taking a risk, but you need to do that to get a return. If the risk is not correlated, then that’s attractive.”

The biggest problem Kinsey-Quick sees with hedge funds is actually their internal management. Most hedge funds he believes are dysfunctional. “This is a big issue. Most hedge fund managers are not usually good managers of people. We monitor this carefully.”

An alarm bell will ring if staff turnover is high. “If a company is smart it will look after its people and make sure they are well remunerated. To find smart people is difficult,” he says.

Sometimes a big team is not necessarily a good thing. “The quality of the DNA goes down the bigger the team gets and there is usually a correlation between the size of the team and performance,” he notes.

Kinsey-Quick and his team visits the fund managers and teams for all its underlying funds, no matter where they are located. He points out that one fund manager, focused on Africa, is based in Mauritius. Another he is looking at is in Argentina. “From Argentina to Zambia, we’ll go and see them. It’s easy to get on a jet and go wherever they are.”

Keeping watch
Once invested Warrior keeps a close eye on the fund. No matter how thorough the due diligence, things go wrong and Kinsey-Quick says it is essential to continue to monitor funds. But he does admit “if a manager wants to screw up, he will do it despite monitoring. The idea is to do your homework up front.”

The bottom line for Kinsey-Quick is evaluating the integrity of the manager. “Can you rely on him in a big way in the future? You need to get a feel for this.”

If a manager is keeping him awake at night, then the trust has gone and it is better to close the position, Kinsey-Quick cautions.

It is usually hubris that foreshadows the downfall of a fund, he believes. Ridiculous terms are one red flag for Kinsey-Quick. If a fund starts imposing terms that are only in the fine print he gets worried. “Funds need to be up front and open about what they are charging. It is about evaluating their integrity,” he says.

Kinsey-Quick likes to keep close to managers to get a “flavour of the coal face” and see how they perform in the “heart of battle”. He will not dismiss a manager because he side-pocketed in 2008. What is important to him is understanding why this was done and knowing that investors were treated fairly. He agrees it is best to avoid side pockets but if that was the right move by the investment manager and if the restructuring was carried out with care and attention to the investors, Kinsey-Quick is willing to give the fund another look.

At present there are two Warrior funds. In July these will be merged and Kinsey-Quick expects to then have just over $1 billion in the strategy. It will be interesting to see if his own investors apply the $1 billion rule, although Kinsey-Quick says he believes the fund can handle at least $1.5 billion before closing to investment.


Quick fund facts: Thames River Warrior Fund

Name of fund: Thames River Warrior Fund
Fund manager(s): Ken Kinsey-Quick and Alex Kuiper
Management company: Thames River Capital Holdings
Investment adviser: Thames River Capital LLP
Contact: 51 Berkeley Square, London W1J 5BB (+44 (0)20 7360 1200; fax: +44 (0)20 7360 1300; trc@thamesriver.co.uk; www.thamesriver.co.uk)
Assets under management: $520 million (estimated at July 1, 2010 when Warrior II becomes a feeder into Warrior)
Group assets under management: $12.6 billion (at March 31, 2010); funds of alternative funds $1.4 billion; alternative funds $3.8 billion; Ucits III/traditional $7.8 billion; multi-traditional $700 million
Share classes: US dollar (base), euro, sterling, Norwegian krone (all hedged)
Minimum investment: $/€/£10,000; Nkr 100,000
Strategy: opportunistic multi-manager
Fund objective: to achieve absolute returns by investing opportunistically in a portfolio of directional and non-directional investment managers
Return target over a cycle: 10%+ a year
Volatility tolerance: 5%–10% standard deviation
Drawdown target: less than 10%
Custodians: HSBC Private Bank (CI) and JP Morgan Hedge Fund Services
Administrator: Northern Trust International Fund Administration Services (Ireland)
Domicile: Cayman Islands
Listing: Channel Islands Stock Exchange
Initial charge: up to 5%
Management fee (yearly): 1.5%
Performance fee (yearly): 10% with a high water mark
Dealing: monthly
Redemptions: monthly with 100 days’ notice
Redemption fee: 1% (three months)

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