Flexibility and a pragmatic approach puts Kairos Investment Management in a strong position for the future

HFREPA17 - Kairos
Some of the key members of the investment team at Kairos Investment Management, with Stefano Prosperi (far left) and Fabio Bariletti (second right)

After suffering a loss of more than 40% of assets under management (AUM) during the financial crisis, Kairos Investment Management has recovered and – employing a virtually unchanged team – is building on the foundations previously put in place by taking a considered approach to future growth

The Greek god Kairos is the personification of opportunity, luck and favourable moments. He is bald save for a lock of hair on his forehead, so he can only be grasped from the front. Once he passes, he is impossible to catch – symbolising the briefness of the opportunity to make something possible.

That elusive moment, an indeterminate period when something special can happen, is an apt description of the way Kairos Investment Management – the single manager alternative and multi-manager funds arm of Kairos Partners – operates.

The fortunes of the firm have mirrored those of the European hedge fund industry over the past 20 years. Founded in 1999, Kairos has survived the ups and downs – particularly the downs – that accompanied the financial crisis and its aftermath.

It experienced the early, giddy years when hedge fund portfolio managers were treated as rock stars, as well as the severe loss of AUM during the financial crisis and the decimation of the European fund of hedge funds industry. 

In the aftermath of the crisis, the hedge fund world has become increasingly institutionalised – beleaguered by regulation and compliance – but it is now emerging as a stronger, albeit smaller, industry in Europe.

Bouncing back

Kairos’ fortunes since the onset of the crisis have not been unusual. It took a hit in the early years – in 2008 Kairos was running around $10 billion. It suffered a loss of more than 40% of AUM over 2008 and 2009, mainly due to investor redemptions. Kairos Investment Management chief executive officer (CEO) Fabio Bariletti and co-CEO Stefano Prosperi are proud of having never gating or restricted redemptions during the crisis and, more tellingly, have retained the staff and portfolio managers from that period. 

Today, the operation comprises around 180 people – with many new recruits working in the back office, due diligence and compliance – and assets have grown to around $13 billion, as of November 2017. Bariletti and Prosperi accept that the firm’s history with hedge funds may have been mixed, but are confident and optimistic about the future of the industry. 

Kairos now runs a variety of strategies in different vehicles – reflecting the changes in the industry overall, with more emphasis on transparency, liquidity and onshore fund structures. Within European equities the firm runs long/short Ucits and hedge strategies, as well as a long-only Ucits products. Italian equities are in long/short Ucits, benchmark Ucits and managed account formats. 

In the European fixed-income area, the firm runs total-return Ucits with a hedged global multi-manager strategy. The bulk of assets are in the two equity areas and European fixed income.

A strategic partnership

Part of the reason for Kairos’ comeback was the formation of a strategic partnership with Swiss private banking group Julius Baer in 2012. According to Bariletti, the partnership has enhanced Kairos’ business model as an investment boutique within Italy and across Europe. The private bank has also opened the door for Kairos to attract both retail and institutional investors.

“We’re able to provide investment solutions that [Julius Baer] call sell to clients,” explains Bariletti. “We’ve been strong in terms of distribution in Europe and Japan. With Julius Baer we now have access almost everywhere, particularly in growth countries in Asia. As the third‑largest Swiss private bank, Julius Baer can really help distribute funds in places where we have not previously been present,” he adds.

He believes this is important as wealth management moves more into asset management. “As this happens, the only way to keep margin is to offer your own products. It will be more difficult for asset managers without distribution networks to sell funds. With Julius Baer we have a huge distribution to add to our own. That’s a powerful combination,” he says. The connection has also helped the firm gain a foothold in Switzerland, Hong Kong and Singapore.

The company’s investor base remains primarily in Europe and Asia, and Bariletti concedes that it mostly comprises high-net-worth individuals and family offices. The institutional investor segment has been growing faster over the past few years, though Bariletti expects the balance to flip within the next five years. This change will partly be due to Kairos becoming more international, as well as stronger distribution in new areas.

While institutional sales have always been strong for Kairos, the firm believes it is now particularly attractive for investors looking for a manager in a specific niche. Active managers are having a hard time, according to Bariletti: “It’s hard for them to get growth – there are issues when they pass a certain size. If they are very big, the best way to grow is by offering passive products. If you’re in the middle, it’s really hard to grow as you are no longer niche but are, at the same time, competing against larger asset managers that can offer cheaper products.” 

Kairos, on the other hand, is still operating in the niche area. “We offer more interesting products,” says Bariletti. “If we raise $1.5 billion more in AUM in 2018 it will be enough. Growing at 10% per year is achievable and we can still offer products that are interesting.”

Prosperi believes the firm’s continued growth is based on its array of complementary strategies. Rather than having managers compete against each other, they are able to help each other. He also believes this, alongside the Julius Baer brand, will allow Kairos to continue attracting talented managers and analysts. 

Kairos believes the secret is to stick to what it knows. “We’re about quality rather than volume. We know our products are niche and we can’t raise unlimited amounts,” says Prosperi. 

“We’ve grown a lot since 2009. At the same time 10 years ago, we already had the structures in place to run $10 billion, and that was when we had fewer strategies and products,” says Bariletti. 

Pragmatic growth

A lot has changed since 2008, when Kairos was running only two hedge fund products. Though the firm did not put up gates or restrict redemptions, its AUM severely declined – however, it retained its staff. 

“We kept the talent here, so we were prepared for the growth phase. Now, if we keep growing, we will adjust our structure accordingly. I don’t see any real change in how we operate,” Bariletti explains.

The growth plan of 10–15% per year is, he believes, “easy to digest” as well as achievable. The idea is to add one new strategy every year. “We want to grow but at a reasonable level and integrate new teams along the way. We won’t become a supermarket,” he adds.

“Our growth is evenly spread. We don’t have one blockbuster fund or one strategy. We’ve grown all four lines. That’s important,” says Prosperi. “Our goal post-2008 was not to rely on just one or two strategies but to be truly diversified. No fund manager runs more than 15% of the total AUM and we have a variety of products that perform at different times and in different markets.”

Over the past five years, Kairos has grown in size and AUM, becoming more ‘institutionalised’. Many new staff are involved in due‑diligence operations, far more so than in 2012. “It may feel that we’ve grown fast and had big growth, but in fact it’s been gradual for us and easy to absorb and adjust,” reiterates Bariletti.

One piece of European Union regulation hitting asset managers in 2018 that may change the market significantly for Kairos and others is the second Markets in Financial Instruments Directive (Mifid II), which aims to make financial markets more fair, transparent, efficient and integrated, as well as strengthen investor protection.

Despite these lofty ambitions, Bariletti fears the rules may make it more difficult – particularly for small managers – to sell funds in Europe. “First, it will become harder for asset managers without proper distribution networks to sell products. In a way, Mifid II was created to make managers and distributors more independent, but in reality – particularly for continental Europe – the opposite will happen,” he says.

A lot of managers currently sell products through a variety of sources. If they lose these concessions and have to sell only their own products, there will be less room for fund managers without their own internal distributions. 

Bariletti is concerned active managers will be hit by the directive and that the end result may be a market that is less efficient and offers fewer choices for investors. 

Conclusion

Despite the challenges that continue to confront the alternatives sector, and particularly active managers such as Kairos, the firm is confident of its future. Over the next five years, Bariletti expects Kairos to add three or four new strategies. “There will be no dramatic changes. We will continue to deliver performance and that is what is most important. We constantly update our offering. We realised the industry was evolving – funds of funds today are different than 10 years ago.”

The plan is to continue to focus on how the business is run and not chase assets. “We will continue to grow at a careful pace,” says Bariletti. “I’m an incredibly optimistic person. In my experience, looking at other hedge funds, the reason for failure was often that they grew too large too fast – that makes a difference to performance. That is something we are going to avoid.”

Thinking again of the Greek god, Kairos, Bariletti stresses that timing continues to be important for the firm. “What keeps us awake at night are the things we should be doing and are not yet doing. We will grow but with the right kind of timing. We will defend our ethos and hopefully keep our performance as we expand.”

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