Best overall group: Edmond de Rothschild Capital Holdings

Liquidity crisis growing likely in credit funds, says CEO Rick Sopher

Rick Sopher, Edmond de Rothschild Capital Holdings

Hedge Funds Review European Fund of Hedge Funds Awards 2015

“We have got the definitive first fund of hedge funds (FoHF). Nobody else can say that,” says Rick Sopher, chief executive of Edmond de Rothschild Capital Holdings and chair of Leveraged Capital Holdings (LCH) Investments. The FoHF LCH, which manages about $1 billion of assets, was launched in 1969.

The company won best group at the Hedge Funds Review European Fund of Hedge Funds Awards. Sopher, who won the award for lifetime achievement, talks up the firm's experience and intimate knowledge of managers, and suggests a traditional approach to selecting hedge funds has reaped rewards.

The investment committee at LCH that chooses managers has had two chairmen over 46 years. Sitting on it are seven professional investors with a combined length of 166 years in the hedge fund industry. These seven – Sopher calls them "grown-ups" – go in to visit the managers, unlike the case with some rival FoHFs where the investment committee plays a more passive role.

"That's tremendously valuable," he says. "It contrasts with the normal system, where the head guy goes off, sees a manager he likes, comes back and – if he's got an investment committee – he just tables a few bits of paper and they don't have enough material to argue about [it]."

Sopher's background is in due diligence. Before joining Edmond de Rothschild in 1993, he was a partner at BDO Stoy Hayward responsible for corporate finance investigations. Under his leadership, the FoHF strives to achieve zero loss from operational risks and it has avoided all major hedge fund blow-ups. He remarks gleefully that it's very hard to pull the wool over his eyes.

He recalls going to see Weavering Capital, a fund that collapsed in 2009. Its founder Magnus Peterson was found guilty of fraud in January this year. Sopher took his investment committee to its offices near Berkeley Square "to sniff out the place".

"There was all this private activity going on in the same office run by the founders: that was a big red flag," he says. The different floors, one for proprietary own-money activity, one supposedly for the hedge fund, didn't seem quite separated. "Within five metres of walking out the building, we just looked at each other and we knew you just had to run as far as you could, and that was 10 years before they blew up."

The FoHF is bearish about credit strategies, having taken its money out of anything long credit two years ago. It is now short credit spreads, using some specialist managers. "A lot of money has flowed into the high-yielding area. Some of those investors have stretched to go into areas they wouldn't normally have gone into," Sopher says.

He worries that if there was a high-profile series of defaults, investors would rush to the door. Given the lack of market-making depth in credit, that might end disastrously, he thinks.

With regulators fretting about this kind of panicked exit, is liquidity mismatch a problem? Liquidity mismatches are a permanent but unattractive feature of the asset management industry, he thinks. "It's an unattractive feature… because from time to time that mismatch goes wrong, and we are in a period of above-average mismatch. Credit and fixed income is normally a more dangerous area."

Sopher is more upbeat about managed-futures strategies, which are experimenting with machine learning to get more out of big data. But he is cautious about piling capital in this direction. "The background theory is we would like to do a lot more… but we are being very selective about how we're deploying capital with managers who are relying on those machines, because in addition to having a good machine, they need a good brain and experience to attach that to. One only sees from time to time the two coming together," he says.

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