After the frivolity of the dancers, a more sedate tone was struck by Jonathan Greene, publisher of Hedge Funds Review. “The past 12 months have been incredibly taxing for all of us in the industry,” he said in his opening remarks.
“In previous years a good reputation, a slick marketing presentation and solid past performance might have been enough to secure investment. The landscape has now changed. Your investors are demanding far more in terms of due diligence and reporting and there is significant pressure on fees,” continued Greene.
“Funds of hedge funds [FoHFs] still have an incredibly important role to play in the hedge fund industry as a whole. Without you, many investors would have far greater losses on their books and I salute every one of you that turned in positive performance numbers over the past 12 months,” he concluded, addressing the audience of over 200 people.
The judging panel for the awards chaired by Phil Irvine, PiRho Consulting, is impartial and unbiased. It looks to reward genuine performance and success. Also on this year’s judging panel were Tushar Patel from HFIM, Neil Campbell from Tullett Prebon and Margie Lindsay, editor of Hedge Funds Review (see article, page 21).
Previous recipients of the awards, the only ones celebrating success in the FoHF industry, have seen as much as a tenfold increase in their assets under management (AUM) in the 12 months after winning. This means being included on the shortlist alone should give managers increased awareness in the investor community and an enhanced reputation.
The judging process for the awards begins by running a screen across all entrants, selecting managers with a significant European presence, typically some investment or due diligence function.
Each FoHF is ranked against its peers by its annualised return, its Sharpe ratio and its annualised return over its worst month for the relevant period. These three rankings are added to produce an aggregate ranking and a longlist.
Other metrics such as volatility, total return, percentage of positive and negative months and age and size of fund are also generated and included in the statistics that the judges review.
The judges then discuss the various merits of each fund, from both a qualitative and quantitative perspective. Whether groups are of a sound basis and expert management that could be expected to continue producing, are also taken into account.
Announcing the awards and welcoming winners to the stage was Sandi Toksvig, a Danish-born English comedian, author and presenter on radio and television.
The event took pace at the Grosvenor House Hotel, London.
Best performing diversified FoHF over 10 years
WINNER Aurum Isis Fund (Aurum Funds)
Adam Sweidan, chief investment officer
No one particular strategy has dominated the performance of the Aurum Isis Fund over the past year, which speaks well to the fund’s ability to provide solid reliable returns in all markets.
“We have been encouraged by this spread of good returns,” says spokesperson Abigail Schofield. “The fund is not up because we have credit managers holding a lot of toxic assets in their portfolios and who have just ridden up the movement in credit markets or convertible bond markets. It has been an even and stable spread of performance coming from most of the strategies and the underlying managers.”
The Isis fund currently has around 33 holdings and is constructed to take advantage of that diverse range of alternative investment strategies, including arbitrage, credit, event-driven, fixed-income and macro strategies.
Macro allocation is the highest in the fund – around 25% – followed by event driven at 17.8%, fixed income at 15.6%, and multi-strategy and arbitrage at 14.3% and 11% respectively. Credit, systematic and CTA/managed futures themes make up the rest of the portfolio but are all weighted under 10%.
Performance has been evenly spread across the strategies. Credit plays benefitted from activity in the M&A market with the fund invested in several flexible niche managers in that part of the portfolio. Only the volatility arbitrage managers have underwhelmed in the period, but performance is expected to improve and the funds are being retained in the portfolio for the downside protection they bring to it.
Launched in April 1998, with a long-term investment horizon, the fund aims to provide investors with an annual return of 8%–10%, low volatility, capital preservation and low correlation to global equity indexes – the fund’s correlation to MSCI World Index is 0.28. Over its 11-year history it has delivered compound annual returns of 7.98% against a volatility of 3.41% since inception.
Fund manager and chief investment officer Adam Sweidan says the Aurum Isis is “all about preservation of capital”, partly achieved through the fund’s low correlation to the equity markets.
“Aurum Isis is not an aggressively trend-picking fund. It is not about jumping on the latest bandwagon, more about protecting capital with what we have found works,” adds Schofield. “The fund has a range of strategies in the portfolio because they all perform at different times. We adjust the manager depending on the macro-environment but it is never going to be a fund where you will see huge swings in allocation within the portfolio.”
The fund had assets under management of $515 million at June 30, 2009 and charges a 2% management fee plus a 15% performance fee over a 10% hurdle subject to a lifetime highwater mark.
During 2008/2009 Aurum did not gate or create side pockets for any of its funds. All redemptions were paid in full, on time and in cash.
A 12-strong research team, including nine investment research professionals and three operational due diligence professionals, undertake the research and make recommendations but no decision is made on the inclusion or exclusion of a hedge fund until Sweidan has met with the management of that fund.
This hands-on approach is important for the manager to gain an insight into what the managers are trying to achieve, their attitude to risk, their approach to managing money, their outlook on the global environment and the returns to be expected, adds Schofield.
“That is fundamentally important when putting a manager into a portfolio and you are thinking about position sizing and so forth. There are a lot of qualitative aspects as well as quantitative analysis in the construction of the portfolio and it is important Adam takes those qualitative aspects into account using his 20 years’ experience in the industry,” says Schofield.
Stenham Universal USD Class (Stenham Asset Management)
GAM Diversity II – USD Open (GAM)
Olympia Star 1 (Olympia Capital Management)
Permal Fixed Income Holdings (Permal Asset Management)
Nemrod Diversified Holdings (Rothschild Blackpoint)
Best performing diversified FoHF over 3 years
WINNER Culross Global Fund (Culross Global Management)
Nigel Blanshard, CEO
It is the thematic focus of the Culross Global Fund which differentiates it from its peers, according to the fund’s managers, Culross Global Management CEO Nigel Blanshard and director Chris Keen.
They point to the limited track record – under two years – of the very few funds in the market which also pursue a thematic approach and add they know of “no other funds employing a manager-selection process even closely similar to ours”.
Currently, Blanshard and Keen employ nine themes across the Culross Global Fund – a theme being defined as “the opportunity to profit from a favourable but as yet under-recognised change” – with a target range of 25–30 underlying funds.
At the beginning of the year, anticipating that a recession which included the combination of falling equity markets, a banking crisis and falling real estate markets would lead to an extended duration for the downturn, the Culross investment team adopted a bias “to emphasise caution in the overall stance of our portfolios”.
However, the team also flagged the possibility of attractive opportunities in credit and “the likelihood of a positive environment prevailing in a range of markets where arbitrage capital and expertise has been withdrawn.”
The dominant theme in the portfolio at the end of August was relative sovereign opportunities, with a 27% weighting, followed by arbitrage and cash at 12% and inflation/deflation uncertainty, global financial sector dislocation and energy market opportunities all weighted at 10%.
Other themes included Japanese corporate event opportunities, credit spreads in transition, Asian consumer power and European economic change.
Themes are expected to work for 12–24 months and if successful may evolve into second- or third-generation themes.
While the themes will change infrequently, say the managers, the weightings towards them are subject to monthly re-examination. The managers conduct scenario analysis that assesses the risks to the themes and then the risks in the managers, weighting them according to their probability and their potential impact on the portfolio’s control process.
Blanshard and Keen stress they “do not use VaR”, neither is risk assessment ‘switched on’ once a month or quarter. “Being aware of market activity each day makes us sensitive to portfolio risks on a continuous basis,” they say.
The second stage in the investment process is manager selection. Ideally each theme is covered by several managers employing different techniques to profit from the same theme. Culross optimises the combination of those managers who have qualified from its screening process to determine the best mix. This provides a second level of risk control.
At the manager level, Blanshard and Keen conduct continuous assessment of the managers following a four Ps process under the headings: People, Process, Performance and Paperwork.
Qualities the managers say they look for in a manager are typically, a high conviction investor with at least five years’ experience in the market, running a focused portfolio with assets under management of $100–$600 million, a minimal user of leverage and an advocate of liquidity for flexibility.
The managers add that the fund has a bias towards smaller funds because performance is usually better, risk assessment is more certain, and transparency and relationships as well as liquidity are better.
Typically a drawdown of 15% puts a manager on the watch list. At 20% the managers will consider reducing the position in part or entirely.
Both managers have been active in selecting hedge funds and building portfolios for an unusually long period of time – 13 years in the case of Blanshard and nine years for Keen – long experience which they use to build their macro-economic outlook from which themes are extracted. Their extensive first-hand experience also provides a significant edge in constructing the portfolio, selecting managers and evaluating risk.
The Culross Global Fund is designed to generate conservative absolute performance with bond-like risk. Its return since inception in December 1999 has been 140.87%, against the MSCI World ($) of -22.10%, and an annualised return of 9.6% against -2.57% from the index.
The combination of thematic investing and manager selection has won the team many awards – claiming two awards at the Hedge Funds Review European Fund of Hedge Funds Awards 2008, for the best performing diversified fund of hedge funds over one year and over three years on a risk/return basis.
The Culross team of nine permanent staff comprises four investment and research individuals, four operations and one investor relations.
Blackpoint Global Trading (Blackpoint)
Liongate Multi-Strategy Fund (Liongate Capital Management)
HI Varengold CTA Hedge (Varengold Asset Management)
Best performing diversified FoHF over 1 year
WINNER GAM Multi-Diversified LV US Z Class (GAM)
Sophia Brickell, investment specialist
GAM Multi-Diversified LV is a low-volatility, global, multi-strategy fund of hedge funds managed using the same disciplined investment process as GAM’s flagship fund, GAM Diversity.
The fund targets returns of 3%–5% a year over Libor with volatility of 2%–4% a year over rolling three- to five-year periods, with low correlation to equities and bonds.
It seeks to generate alpha and preserve capital during difficult equity market conditions. GAM’s multi-manager team manages the fund using rigorous and structured analysis of hedge funds in order to identify those with a strong competitive edge. GAM conducts detailed due diligence and research into both the investment and operational aspects of each underlying hedge fund prior to, and throughout, the investment process.
“This ensures that GAM Multi-Diversified LV maintains exposure to those funds in which GAM’s multi-manager team has the highest level of conviction,” says David Smith, GAM’s chief investment officer.
The portfolio is constructed using a blend of sophisticated quantitative modelling and qualitative judgement, and is typically invested in 30–50 underlying hedge funds. These represent a strategic combination of the funds found in the GAM Diversity fund. However, in order to target lower volatility returns, the LV fund has a higher allocation to arbitrage funds and a lower allocation to equity hedge funds.
Within the portfolio of underlying trading funds, the LV fund has a higher allocation to systematic non-trend managers, who tend to display neutral or negative correlation to equity markets.
GAM Multi-Diversified invests in three underlying hedge strategies.
Arbitrage strategies make up 30%–55% of the portfolio and aim to profit from mispricing between markets or related financial instruments. The aim is to generate consistent, incremental performance with low volatility.
Equity hedge strategies comprise a maximum 45% of the portfolio, investing in both long and short equities. It typically performs best during rising equity markets. In falling markets, the focus is on capital preservation.
Between 15% and 40% of the portfolio is in trading strategies in a wide range of assets including equities, fixed-income instruments, currencies and commodities. They typically have low or zero correlation with equity markets and bonds, specifically benefiting from periods of extreme volatility and difficult equity markets.
As with other GAM funds, risk management is threaded throughout the investment process to ensure each incremental risk in the portfolio is matched by expected returns.
“The final step in the process focuses on monitoring actual results against our expectations, with a view to continually improve the accuracy of these expectations,” says Smith.
GAM’s proprietary tools help aggregation and understanding of the drivers of risk and return, which in turn helps further build its in-depth understanding of the underlying funds and portfolios.
“Ultimately, each component of our risk management efforts supports our aim of enhancing the repeatability and robustness of our investment process,” says Smith.
A dedicated risk manager provides an independent view on risk on all portfolios, conducting formal quarterly reviews with each manager.
Culross Global Fund (Culross Global Management)
Aurum Isis Fund (Aurum Funds)
Blackpoint Global Trading (Blackpoint)
Best performing specialist FoHF over 10 years
WINNER Stenham Quadrant USD Class (Stenham Asset Management)
Javier Uribarren, investment director
Having just passed its 10-year anniversary in April 2009, the Stenham Quadrant fund has achieved an average annualised return of 12.86%, against an MSCI index that is in negative figures.
The fund’s remit is to capture major market movements through investment in a range of assets, capital instruments, markets and strategies. As such, the fund invests worldwide, with no bias being placed on any geographical allocation. Assets are invested with managers trading in four major areas: equities, commodities, fixed income and currencies.
“Capital preservation is integral to Stenham, and this has consistently been achieved over the last 20 years through sound and cautious investment principles,” says the group’s chief investment officer Kevin Arenson.
Emphasis is placed on researching, monitoring and reviewing managers to ascertain their suitability for blending together to achieve consistent superior returns with low volatility. Average annualised volatility of the Quadrant fund is 5.99%.
The nine-strong investment team, headed by Arenson, runs an investment process that has evolved over Stenham’s 25-year history in asset management, during which time it has been tested through many different market environments.
The process is qualitative with significant input from operational and quantitative research and risk is limited through worldwide diversification and hedged strategies.
Discretionary trading accounts for close to 90% of the Quadrant portfolio which invests largely in global macro managers. There is no CTA exposure and very little systematic global macro exposure.
In 2009, money was made across the range of managers in which the fund invests – largely through commodities, fixed-income and direct equity exposure. The flexibility to move between the asset classes has seen the fund return 10.2% to mid November.
Approximately 30% of the entire investment team’s time is spent monitoring the underlying and potential add-in managers and the decision to stay with an existing manager is an active one for the company.
“It is very important that the analysts are spending a good proportion of their time monitoring managers,” says Lynda Stoelker, investment director. “You can do this through statistical analysis but it is also important to get to know your managers. So the team is constantly on the phone talking to managers, understanding how their portfolios are constructed, what themes and asset classes they are favouring, and their long- and short-term views.”
This ensures that the fund is able to respond as necessary to events in the market.
“The primary requirement we make of all our analysts is that no matter what happens in the market, they must know how their managers are going to react. And if they don’t react according to what is expected then that warrants a call to the manager to find out what in the portfolio may have changed,” says Stoelker.
As to qualities the fund looks for in a manager, Stoelker says this will vary depending on the strategy being followed, but sustainability ranks highly. When assessing a new manager, the analyst team will also examine the length of time the manager and his supporting investment team has worked together and the sustainability of the business.
“It is not always the case that a good-quality fund manager will also be good at running a business. So it is important for us to know there is someone in the business who can,” adds Stoelker.
GAM Trading USD (GAM)
Aurum Investor Fund (Aurum Funds)
Best performing specialist FoHF over 3 years
WINNER Gems Perennial (Gems Advisors)
Migueal Abadi, CEO
Gems Perennial is a ‘best ideas fund’. It offers exposure to hedge funds and other vehicles that can have longer investment horizons than those found in the company’s Gems Low Volatility and Gems Recovery portfolios. The emphasis is often on long-term strategies and positions with an eye to potentially tremendous profits that may take time to bear fruit.
The portfolio is highly focused, giving extra importance to manager selection within the investment process. Manager selection makes a substantial contribution to Gems’ performance.
In-depth analysis of potential managers takes between three and 12 months. Gems’ emphasis has always been on research – of the 56 staff at the company, 29 are involved in investment work. The core team has worked together for over 15 years.
The manager-selection process is both qualitative and quantitative, with the qualitative element usually dominant in the ultimate selection of a manager. The process culminates in a narrative report compiled by specialists in the investment research, operational research and risk analysis teams. It gives a clear account of what are often complex matters and an understanding of the manager’s investment strategy, portfolio management philosophy, organisation and investment guidelines.
When it comes to risk management, Gems’ governing approach is conservative. Risk management considerations infuse the entire strategic decision-making process.
One of the research team’s essential functions is to reduce risk, especially exposure to extreme albeit rare risk scenarios. This helps to optimise and, on occasion, temper the implementation of Gems’ strategic views, whether by giving pause for thought, drawing attention to potential emerging problems, sizing an allocation or timing moves into or away from a particular strategy.
The successful application of the process to different market conditions makes Gems highly adaptable and sensitive to strategic shifts in the investment landscape.
When it comes to timing, the current market scenario is seen as a strong indicator of which strategies are most likely to be profitable over both the short and long term. For strategies that are subject to market conditions, a great deal of attention is devoted to timing entry into and exit from the portfolio.
Despite the weight normally being given to strategy allocation within the portfolio, when an exceptional manager is proposed for inclusion, a concerted effort is made to include it. This is done through resizing or redeeming less-attractive positions.
The fund is currently positioned to exploit a number of the wide-ranging, often multi-year opportunities that have emerged in the wake of the recent crisis. One quarter of the portfolio is in directional strategies. These are diverse, thematic positions that complement the core strategies in the portfolio.
Deep-value, equity-driven and long/short strategies are all taking advantage of the strong capital markets and raised activity. All are targeting returns over one to three years.
Deep value is rebounding fast, after a long period of sell-offs when investors were wary of stocks that appeared unusually cheap, Gems says. Directional strategies remain well diversified, with holdings in financials, healthcare, commodities and technology.
ACL Alternative Fund (Abbey Capital)
Crown Managed Futures (LGT Capital Partners)
RMF Managed Futures (Man Investments)
Best performing specialist FoHF over 1 year
WINNER Abbey Capital Macro Fund (Abbey Capital)
Tony Gannon, CEO
Abbey Capital was founded in Dublin in 2000. It has a team of 29 specialists focused on managed futures and foreign exchange investments. The client base includes pension funds, major private banks, multi-family offices, foundations and charities.
The Abbey Capital Macro Fund approach is primarily discretionary, relying on economic and political factors. The long-term targeted returns are 10%–12% a year. The volatility target is 6%.
The portfolio is constructed to be robust, not on an optimised basis. Margin limits are set by manager, trading style and portfolio.
Trend-followers dominate the managed future industry and Abbey is a firm believer in the long-term viability of the strategy. However, it notes that while the strategy has excellent negative correlation characteristics in equity bear markets, it can suffer from large drawdowns when trend reversals occur.
Between 50% and 60% of the portfolio is allocated to trend-followers. The remainder goes to non-trend-followers. Low correlations of less than 0.3 between the two groups ensures there is plenty of strong diversification across the underlying managers whose macro traders invest in futures, options and cash instruments.
The portfolio itself consists of eight managers, with allocations made to each through managed accounts. The fund remains in full control of the assets and accounts can be liquidated immediately if required.
The structure also ensures underlying positions are fully transparent. That clarity is the first hurdle for any prospective managers.
“The first stage of the screening process is to analyse the manager’s data to ensure that certain levels of risk-adjusted performance have been achieved and that the correlation statistics and dynamics meet our requirements,” says Tony Gannon, Abbey’s CEO.
His team insists on daily data and will not allocate to a manager unable to comply. Manager experience counts, although the company is willing to back traders in new ventures.
“Abbey Capital does not typically seed managers but will invest in new operations if the trader has extensive previous background and has shown the ability to run a business as well as trade successfully,” says Gannon.
The selection process involves a series of telephone interviews and questionnaires. Abbey also insists on site visits with two of its investment team meeting principals on separate occasions at their offices. “The experience of Abbey Capital’s principals is invaluable in this process as it makes it very difficult for the CTAs to hide any weaknesses in their trading methodology or company infrastructure,” adds Gannon.
This is backed up by extensive reconciliation of the daily performance numbers supplied and the manager’s reported track record. Any unexplained divergence ensures the manager does not make it onto Abbey’s approved list nor receives an allocation.
Some managers are also kept in reserve or as substitutes in case any other fails to implement their strategy or is stopped out.
As a result, Abbey Capital’s strategy is more focused on intensive high-quality investment appraisal and due diligence at the pre-investment stage, rather than active experiments and discarding of trading managers. “We believe that there is a high cost in frequent turnover of managers and that this should be kept to a minimum,” adds Gannon.
Crown Managed Futures (LGT Capital Partners)
RMF Managed Futures (Man Investments)
GAM Trading USD (GAM)
FRM Sigma Fund (Financial Risk Management)
Defensive Equity Fund (Fortune Group)
Best performing energy/commodity FoHF
WINNER Moonraker Commodities USD Fund (Moonraker Fund Management)
Jeremy Charlesworth, fund manager
Moonraker Commodities Fund manager Jeremy Charlesworth believes the global economy is “looking down the barrel at increasing waves of inflation over next few years,” an event that will play well to the commodities markets as investors seek to diversify away from currencies into more tangible assets that may better hold their value.
Despite depressed economies, recent rises in commodities prices – gold hit a new high of £1,100 an ounce recently – have come on the back of concerns that currencies are depreciating, Charlesworth believes. “People are abandoning currencies in favour of other assets. I don’t believe commodity prices should be rising as fast as they are but I understand why, because no one wants to hold onto cash when they are earning nothing on it.”
His own concerns on currency, which he has held since 2003, lead Charlesworth to take the view that gold, which retains its value as an alternative to currencies, “will get to $3,000 an ounce”.
With assets under management of £6 million at September 1, 2009, the Moonraker Commodities Fund has geographical exposure to just two regions, North America 48.65% and EMEA 51.35%, while underlying strategies are spread between CTA/managed futures 37.71%, cash 26.83% and a minimal exposure to equity long/short.
A physical holding/trading weighting of around a third of the portfolio is the result of taking into consideration all aspects of the commodities space.
The fund’s investment objective, over the medium term, is to outperform the DJ-UBS Commodity Index with half the volatility. Charlesworth aims to do so by investing through a portfolio of underlying funds representing a diversified universe of investment strategies and underlying commodities.
Since inception in June 2008 to August 31, 2009 the fund has returned an estimated 21.8% compared to a fall of 40.7% for the DJ-UBS Commodity Index. This it achieved with annualised volatility of 10.3% for the fund compared with 29.8% for the index.
Moonraker’s philosophy is to position the portfolio towards the strategies that will profit most from the imminent economic scenario. “Thus, we are always looking forwards rather than backwards and cannot rely on extensive back-tested analysis to support our investment decisions,” Charlesworth explains.
“We make a point of being able to dynamically shift our assets into strategies that are more likely to profit from the imminent market conditions. To achieve this, we have to keep a high level of liquidity in our funds and have an internal guidelines to keep approximately 60%–70% of the assets redeemable within three months.”
Risk management drives the portfolio construction process but not to the extent that it interferes with aspects that are not quantifiable.
Underlying managers are reviewed versus their peer group, market environment and also versus the existing components of the portfolio. The manager’s performance is closely assessed against the market environment to ensure that beta risk as well as any potential event risk is well understood.
The fund’s risk management platform, NerrenSync, has the ability to track and monitor all entities associated with a particular manager and provides liquidity timeline data which constantly identifies the minimum timeframe to liquidate underlying investments.
Charlesworth flags agricultural commodities as those to watch in coming years. While experiencing falling prices in the past 24 months, demand is set to rise, on a relative basis, Charlesworth believes, as developments in emerging markets see increased urbanisation and populations beginning to demand better diets, while arable land decreases along with soft commodity production.
“It is difficult for us in Anglo-Saxon economies to understand what is happening in Brazil, Argentina, southeast Asia and China and how many more people will aspire to enjoy a better standard of living than their parents. But all of that is going to involve the use of commodities.”
Ermitage Resources Fund (Ermitage Group)
Opus Commodities Fund (New Finance Capital)
Best performing capital-protected FoHF
WINNER Man IP 220 Series 6 (Man Investments)
John Bennett, head of UK distribution
Man IP220 Series 6 is the latest vehicle in a seasoned product set with a track record of delivering positive returns through cycles over the last 12 years.
The first product in the family has returned on average 13.4% a year over the last 12 years, often delivering strong returns when traditional investments were falling. And it has done so while offering investors a full capital guarantee on their initial principle investment.
The credit crisis was a stark reminder for investors of just how volatile and unpredictable markets can be. It also emphasised the risks of investing solely in one asset class.
“The financial crisis and the response to it were of unprecedented magnitude. One of the effects of the deleveraging and the government response – two powerful and opposing forces – is large, correlated moves across asset classes,” says Herbert Item, chief investment officer at Man Investments.
That thinking underlined the development of this latest Man IP220 capital protected fund of hedge funds. The fund has a target of double-digit returns each year for an annualised volatility of 15%–17%. The target investment exposure is around 160% of NAV.
It also offers capital security and potential profit lock-ins through a diversified portfolio. It offers monthly liquidity in a capital guarantee structure, with the guarantee secured by Deutsche Bank.
Liquidity has been a key consideration in constructing the fund’s portfolio. Man points out that it has not had to impair liquidity in any retail product during the difficult conditions experienced this year and last.
The underlying portfolio is designed to be complementary, allocated to AHL, Man’s flagship trend-following CTA portfolio, and to a diversifying multi-manager portfolio, historically managed by Glenwood.
With over 100 investment professionals, AHL is focused on providing a range of systematic, managed futures products. “The firm was founded in 1987 and has grown into a world-leading quantitative investment manager with an extensive history of performance and innovation,” says Anthony Lawler, co-head of portfolio management for Man Investments and lead portfolio manager for the IP 220 series.
Glenwood is part of the Man Group’s recently merged multi-manager business, created this year when it combined with RMF and MGS under the Man brand adding to a structure that now spans convertible bonds, leveraged finance vehicles and structured products, as well as fund of hedge fund portfolios.
“The key to the success of the multi-manager portfolio lies in active, dynamic portfolio management, focus on factor analysis and selecting managers from a high-quality approved list to reflect the investment views of the Asset Allocation Board,” says Lawler.
Liquidity, transparency and control are fundamental to the portfolio management philosophy and to achieve that Lawler is increasing the allocation to separate managed accounts in the portfolio.
The strategy has delivered near double-digit returns for low risk from around 50 underlying fund managers, trading across the full spectrum of hedge fund styles.
The portfolio mix assembled within the Man IP products provides a strong diversifier to traditional assets with a low correlation to equities. The longest-running Man IP220 product produced positive returns of 9.2% in 2008, against a fall of nearly 40% in the MSCI World equities index.
Best performing new FoHF (launched after July 2, 2008)
WINNER 47° North New Generation Fund (47°N Capital Management)
Claude Porret, CEO
The 47 Degrees North New Generation Fund launched in March 2009 to offer investors access to a diversified portfolio of early-stage hedge fund managers spread over different investment strategies.
It seeks to benefit from higher risk-adjusted returns through exposure to early-stage managers and smaller funds with shorter histories than those usually attractive to funds of hedge funds.
The underlying funds typically have assets under management (AUM) of less than $500 million and track records of less than three years at the point of investment. Early-stage does not mean that the manager is inexperienced – rather that they have recently launched a hedge fund to capitalise on their expertise and experience.
“47 Degrees North investment team members have focused on emerging managers and specialised portfolios for longer than anybody we know of. An exceptional depth of experience and knowledge regarding the crucial factors that drive investment decisions in the early-stage hedge fund sector has been developed,” says CEO Claude Porret.
Given the nature of the fund and the investment universe it covers, the 47 Degrees North team has developed the ability to analyse limited track records, recognise style drift and identify risk in new operational set-ups.
While understanding the dynamics of new teams, 47 Degrees North has no qualms about tough bargaining. “It also means being able to take advantage of the benefits of early-stage investing such as the possibility to negotiate terms, position transparency, side letter benefits, superior returns and involvement in innovative profitable strategies,” says Porret.
Target clients for 47 Degrees North’s products are sophisticated institutional investors, mainly comprising pension funds, insurance companies, banks and large corporations. Currently, over 80% of AUM is from institutional investors.
As a company, 47 Degrees North is a relative newcomer, but it has plenty of pedigree behind it. It launched in 2006 with a team of veteran capital market professionals at the helm. The emphasis is on identifying early-stage managers, innovative strategies and thematic hedge fund investments.
“Members of the 47 Degrees North team have performed due diligence on hundreds and invested in dozens of early-stage and other specialised hedge fund managers,” says Porret.
The team, headed by Porret, Fraser McKenzie and Richard Mueller, has impressive credentials. Between them, they researched and seeded one of the first power hedge funds trading in the Swiss and German electricity markets. They put together the first weather hedge funds and one of the first carbon-trading vehicles. They also seeded one of the first securitised insurance risk funds.
Members of the 47 Degrees North team also ran one of the first institutional emerging manager and seeding vehicles in the hedge fund industry while at RMF, gaining broad experience in sourcing and investing in early-stage hedge fund talent across all strategies.
The firm achieved its first significant success in April 2007 through the launch of an emerging manager fund seeded by the California Public Employees’ Retirement System (CalPERS). It was one of just three successful applicants out of a field of 97. At the beginning of 2009, 47 Degrees North brought Iveagh (Guinness family office) and CalPERS in as strategic partners and minority shareholders in the company.
Product provider awards
Best HNW/private client FoHF provider
WINNER Rothschild Blackpoint
Carol Paterson-Smith, client manager
Rothschild launched Blackpoint as a dedicated platform for alternative investments in 1993. The Blackpoint funds are part of the Rothschild Group, one of the world’s leading independent merchant banking and asset management organisations with over 2,000 employees and more than 30 offices around the world including London, Paris, New York, Zurich, Tokyo and Singapore. The funds were originally established to run Rothschild friends and family investments.
Around a third of investments in the Blackpoint funds remains Rothschild money and today the group runs over $1 billion directly in fund of hedge fund strategies, with additional sums in dedicated mandates.
One of the key differentiators for the group as a high net worth and private client provider, points out Rothschild Blackpoint global client manager Carol Paterson Smith, is that clients have the confidence of knowing that the Rothschild family has its own money invested in the funds. She also emphasises that managers and staff are invested in the funds too.
“The managers of the funds eat their own cooking,” points out Paterson Smith. This is a very important ethos of the company. “When managers are running funds it is not just a question of the NAV going up or down; they are running money for themselves, their families and friends. If the fund is going down it is their money going down. This gives them a far different view of things and very much aligns their own interests with that of our investors.”
The group also fosters a unity of process and communication between managers and marketing, another obvious alignment but one that is not always present in the market.
“Our sales and marketing team has full access to the information around the funds,” says Paterson Smith. “What that means is we are able to meet with clients and give them the full picture about how investments are performing and why.”
Doing so in plain English is also fundamental to the group’s client service, she adds. “Our clients have to understand what the investments are about and we are honest and open in the information we give them to ensure that they do.”
Another decisive factor in differentiating Rothschild from the market, is its ethos that “all clients should be treated properly no matter how much money they have invested in the funds,” adds Paterson Smith.
Significantly, the investments of the Rothschild family do not receive preferential treatment within the funds – all money is invested on the same terms. Where some private funds running family money alongside that of external investors will see the family investments exempt from paying fees and receive preferential treatment at times of redemptions, this is not the case with the Blackpoint funds, emphasises Paterson Smith. The Rothschild family is subject to the same fees and annual charges and join the queue alongside other investors when it comes to redemptions, she says.
Perhaps the most decisive factor, however, is that Blackpoint is in the market for the long term. Paterson Smith points to the plethora of funds of hedge funds that sprang up between 2003 and 2008, when numerous banks jumped on the bandwagon because it was, in effect, easy money. Many of those have since closed and that flags the all-important difference between funds run purely as a business interest and those run where the managers’ interests are fully aligned with that of investors, argues Paterson Smith.
“The Rothschild family think that Blackpoint is a good place to invest and since 1994 the performance of the funds has seen them triple their money,” she concludes.
Best institutional FoHF provider
WINNER HDF Finance
David Gilleron, portfolio manager and member of the investment committee
HDF Finance was one of the first French independent funds of hedge fund managers. It started life in 1986 and remains 100% owned and operated by the managers themselves.
The group manages a range of alternative, long-only and flexible funds of funds, domiciled both in France and internationally. It employs 60 people and operates from five offices around the world. Total assets under management exceed €1.6 billion, split 90% in hedge funds and 10% in long-only.
The client base is primarily French, made up of institutions, corporates and private investors, but around 30% of the clientele is international.
The group prides itself on its integrity, lack of conflicts of interest and qualitative analysis that drives 80% of the fund-selection process. Top-down macro-economic analysis dictates allocations in asset classes, regions, strategy and style.
A research-driven process is central to the investment strategy and the group runs as a think tank, working with a group chaired by Christian de Boissieu, an economic adviser to the French Prime Minister. The group contains many leading economic experts from France and abroad and de Boissieu has collaborated with the group since 1990.
Until this summer, HDF was headed by founder Gilles du Fretay. Before creating HDF, he worked for Citibank and ran portfolios for the London private bank the Continental Trust. Du Fretay was the first manager to introduce traditional and alternative multi-manager portfolios to the French market.
Du Fretay passed away recently after a long illness, but the ethos he installed at HDF continues. His wife Christine du Fretay has assumed the CEO role, determined to grow the group and remain true to its principles. Integrity, transparency and above all independence are the key drivers behind the group’s past and future success.
A former McKinsey consultant with 24 years’ experience in finance, Christine du Fretay also brings her comprehensive marketing skills to the table. In a previous guise, she founded Money Marketing, a specialist agency in asset-management promotion.
Giles Guérin also recently joined the firm as deputy CEO, sitting alongside CIO Christophe Chouard and COO Erwan Duquoc.
“I strongly believe our five-member executive committee and the entire HDF team has all the talents and experience it needs to continue delivering ‘excellence through research’,” says du Fretay, referencing one of the company’s core principles.
The HDF research centre drives the process, whittling down a field of 32,000 funds throughout the world to concentrate on a sample of 1,500. From that, HDF selects approximately 150 funds with superior performance, to give investors access to a wide range of management tools and to a large number of specialised fund managers.
Upward moves in the stock markets have generated positive returns for HDF since the beginning of the year and du Fretay says she is encouraged by the way the fund has weathered the storms of the last year. “Having achieved this performance without strong directional bets gives us some comfort about our ability to generate similar returns in the months ahead, whatever the market environment may be,” she says.
HDF says its strategies to the end of the year will be targeted on long/short equities, global macro and long/short fixed income.
Best managed account platform
Best overall investment platform
WINNER Lyxor Platform (Lyxor Asset Management)
Stéphane Enguehard, head of managed account platform
Alain Dubois, chairman
The Lyxor Platform saw an impressive $4.5 billion of inflows in alternative investments in the past year.
Given the $29 billion total alternative assets of Lyxor, and the fact that it has seen the number of registered hedge funds decrease as a result of the fallout from the turbulent year of trading in 2008/09, this puts into perspective the gains the platform has made. Hedge funds on the platform now number 110, down from 150 prior to the credit crisis.
“The $4.5 billion is quite remarkable and a reflection of the increasing importance of managed accounts in the market,” says Lyxor chairman Alain Dubois.
What is noticeable, Dubois adds, is that those few hedge funds that were not opening managed accounts have now been approaching the platform and signing up. “Those who do not are becoming a rare species,” he says. He cites Tudor as a high-profile example of a hedge fund that had stayed away from managed accounts and which recently signed with the platform.
A key advantage for hedge funds registering on the platform is the large base of investors that it gives access to, says Dubois. “There is a new and growing base of investors who wish to invest only through managed account platforms because it gives them added security with regard to transparency, independent valuation, liquidity, independent reporting and so forth.”
Lyxor launched its hedge fund platform in 1998. Its business model is one that strikes a chord with investors as it aims to greatly reduce the risk to which they are typically exposed when investing directly in hedge funds, while delivering access to alternative investment performance.
As the percentage of hedge funds in the market that are on the platform increases, so does the service to investors. Each hedge fund on the platform can be invested in directly and can be built into the design of efficient fund of hedge fund portfolios, as well as used in the construction of representative indexes.
A research team of 23 analysts specialising by strategy continuously monitor the industry and conduct due diligence, hedge fund relations and risk monitoring based on full transparency provided by the managed accounts.
Lyxor now has a range of managed accounts to which it is constantly adding. In the past year it launched an actively managed UCITs III fund of hedge funds – “something we believe is very original”, says Dubois.
Dubois expresses confidence that growth in the platform will continue for the rest of 2009 and into 2010. Following the shocks of 2008, he believes a large proportion of investors, both institutional and private, have yet to re-enter alternative investments. But that is changing.
“I think a lot of people are taking a fresh view of alternative investments and we will see a great deal more interest for managed accounts as investors start returning to the market,” he says. “The best is yet to come.”
Best Overall group
WINNER Stenham Asset Management
Anthony Chambers presenting the award to Javier Uribarren, investment director
Founded in 1901 the Stenham Group is 51% owned by the Peregrine Group and 49% by Stenham, including directors and management.
Active in investment management for over 25 years, the group is focused exclusively on alternative investment products and providing specialist solutions for institutions, including multi-manager hedge fund portfolios and property funds.
It has total discretionary assets in excess of
$5 billion split between hedge fund portfolios and property funds, and a client base divided roughly 64% institutional and 36% high net worth clients.
Chief executive Kevin Arenson joined the group in 1997. Since then he has grown assets under management from $70 million to today’s $5 billion figure. Alongside developing the investment process – he leads the nine-strong investment management team – and building a cohesive and professional team, Arenson has launched the group’s multi-strategy and global macro funds and introduced the equity and commodity range of funds.
The group has 181 staff in seven countries and an experienced and stable senior management team, the key members of which have been at Stenham for over 10 years and who have significant amounts of their own investable funds managed by Stenham.
A measure of success for the group is its loyal client base of many years’ standing – a testament, it says, to the successful realisation of its investment objectives, as outlined by Arenson, of capital preservation and steady returns.
Investment director Lynda Stoelker says it is Stenham’s long experience managing and advising multi-manager hedge fund portfolios that has enabled it “to have successfully delivered consistent absolute returns through periods of exceptional market volatility”.
That same experience and longevity in the market has given the group a standing that allows it to access the best managers globally and to negotiate preferential allocations despite scarce capacity.
Arenson places capital preservation at the heart of Stenham’s ethos, and says this has consistently been achieved over the last 20 years through “sound and cautious investment principles”.
“Our starting point is that we don’t want to lose money,” Stoelker explains. From there the group assesses how to protect capital and how to make returns from an asset allocation point of view. Analysts feed into weekly meetings which the whole research team participates in, and from which managers can assess how risks and imbalances may be building up from a macro perspective. From that, the group makes its decision on how that may impact different hedge fund strategies.
“We look at things from a very forward-looking qualitative perspective,” adds Stoelker. As an example, she says, in 2002 the group identified leverage building up in the system impacting arbitrage strategies. “Seeing those strategies being dominated by the hedge fund industry, we sold out of them.” As it turned out the group was slightly early in doing so but the strategy soon proved prudent. “It was the right decision for the reasons we set out,” Stoelker adds.
More recently, in 2007, the group saw similar leverage building in the debt markets and the effect it would have on volatility. “So in 2007 we introduced low-volatility holdings to try to protect the portfolios,” Stoelker says.
At the same time, the group had to look at equity managers. “This was a harder decision because they were among the best performing managers in the portfolio at the time,” Stoelker says. “But we thought that going forward they were short term and as volatility spiked and equity markets fell they would suffer; so we sold them out of the portfolio and replaced them with more market-neutral and less momentum-driven holdings. “In this way we are constantly examining the downside risk and looking at ways to protect the portfolios.”
Culross Global Management
Liongate Capital Management
Financial Risk Management
Most innovative FoHF
Harcourt Belair (Lux) Sustainable Alternatives SRI Fund (Harcourt Investment Consulting)
Reto Candrian, head of business development
Belair (Lux) Sustainable Alternatives SRI Fund provides professional investors with long-term, stable risk-adjusted performance from a portfolio of absolute return managers.
The founders of the Belair fund are signatories to the UN Principles for Responsible Investment initiative. Through a combination of customised managed accounts and bilateral agreements, all the underlying managers adhere to a strict and transparent socially responsible investment (SRI) policy.
Harcourt itself was the first hedge fund company to sign up to the UN programme. The Swiss-based firm is determined to open up the hedge fund market to SRI investors.
Its partners in the Belair fund are Folksamis, the Swedish insurance group, and the Storebrand Group, an institution in the Nordic market for long-term savings and insurance. Folksamis’s public sector pensions division, KPA Pension, has maintained a strict SRI policy since 1998. Storebrand’s policy was introduced in 1995, adding to the collective research capability and 25 years of responsible investing experience the fund brings to the hedge fund market.
The fund itself provides global access to a range of funds and trading strategies with exposure to equities, fixed-income and commodity markets. The portfolio is built for long-term capital appreciation and down-side protection.
Georg Wessling, fund manager and chief investment officer at Harcourt Investment Consulting, says: “In a world of dramatic demographic changes, increased globalisation, accelerated industrialisation and resource scarcities, the Belair investment proposition is designed to combine a sustainable investment approach with access to hedge fund returns.”
The fund aims to match solid underlying research fundamentals with the changing and increasingly tough criteria laid down by socially aware investors.
The fund’s investment policy embraces filtering and exclusion, best in class and engagement practices. “The SRI policy has been jointly defined by the founding parties of Belair to correspond to the highest standards of institutional investors’ demands,” Wessling says.
It capitalises on the new playing rules created by the demographic explosion, urbanisation, degradation of the environment and global warming. The tougher competition for resources, rising GDP in developing regions and the need for responsible outsourcing are also increasingly important themes.
“Although corporate valuation methods stay the same, future forecast needs to be revised if new challenges are not embraced. Profit maximisation at any cost is no longer viable as firms face increasing reputational risk from important issues such as child labour and environmental negligence,” says Wessling.
The investment philosophy reflects the anticipation of global change and the belief that financial markets, though largely efficient, are exposed to episodes of inefficiencies or structural imbalances.
Underlying hedge funds must restrict their exposure to a predefined list of SRI-compliant securities. Some 3,000 companies are screened on an ongoing basis; 2,400 are compliant with Harcourt’s SRI policy.
The entities must respect human rights, corruption and environment conventions. Those in the tobacco, alcohol, weapons and gambling businesses are excluded. Non-renewable energies and their associated commodities instruments are also barred.
The policy is strictly applied to long and short positions, direct exposure and indirect derivative holdings. Index futures, ETFs, baskets and optimised portfolio as listed securities (opals) are allowed provided they do not conflict with the policy.
47°N Innovation Fund (47°N Capital Management)
OPTICS Portfolio Construction and Risk Management System (Ermitage Group)
Best investor relations team
Liongate Capital Management
Paul Bentley, head of investor relations
The fact that three quarters of Liongate Capital Management’s original investors, from 2004, still have their money invested in Liongate funds “is proof that our client service approach has been successful,” says head of investor relations Paul Bentley. “We view our clients as investment partners and we strive to help them achieve their long-term investment objectives.”
The investment committee, on which sits the firm’s three partners, Randall Dillard, Jeff Holland and Ben Funk, collectively has 40 years of direct experience in capital markets and investment management, and it is from that hub that the investment approach, focus on delivering consistent risk-adjusted returns, and the proactive, accurate and timely dissemination of information to clients is derived.
The investor relations team sends out reports to investors each month, delivering a range of detailed information. This covers weekly estimates each Wednesday reflecting performance through to the previous Friday; a “flash estimate” of performance – within six business days after month-end; an “investor report” including performance analysis, commentary, and performance attribution per strategy; the “final NAV report” from Citco Fund Services (Europe) BV, the group’s independent administrators; and the fund’s annual audited financial statements.
In addition to these reports, investors who require more in-depth analysis can request detailed qualitative and quantitative analytical reports on the funds, risk management presentations, hedge fund manager information sheets, comparative peer group analysis reports and due diligence questionnaires.
“We aim to offer our investors a superior standard of service and very quick responses to emails or phone queries by leveraging our industry-leading client relationship management (CRM) software,” says Bentley.
The software, dCRM, developed by Digiterre, which is based upon a Microsoft platform and customised to meet Liongate’s specific needs, runs alongside the group’s proprietary risk management system, PRiMa. The latter system, as well as providing core data used in the investment process, enables the investor relations team to access and distribute information to investors “in the most accurate and timely way”, says Bentley.
Active dialogue with investors is encouraged by the group which looks to agree a calendar of conference calls and meetings with clients. In this respect, Bentley adds, investors can expect a monthly conference call with a portfolio specialist, analysing performance in the past month, market outlook, changes in the portfolio and any other relevant issues.
Face-to-face update meetings with a senior portfolio manager and partner in charge of investors, to go through a full review of markets, performance, portfolio and investment outlook, are scheduled at least every six months, but Liongate offers more-frequent and ad hoc meetings to meet the individual client’s needs.
At times of major market events, such as those in September through to November 2008, or any major events in the portfolio, the investor relations team will contact clients by phone or by the client’s preferred means of communication to ensure they are up to date on events and fully aware of the group’s views on, and actions being taken in respect of, those events.
But perhaps most tellingly, the commitment of Liongate to its business and its investor relations is demonstrated by the fact that all three Liongate Partners as well as employees of the group have substantial capital invested in all the Liongate funds. “It ensures that our interests are aligned with those of our investors, and every day we strive to provide exceptional client service to all of our investors,” adds Bentley.
Financial Risk Management
Long-term achievement in FoHFs (awarded to an individual)
Christopher Fawcett, senior partner and co-founder of Fauchier Partners
Christopher Fawcett, senior partner at Fauchier Partners, has won the prestigious 2009 European Long-Term Achievement in Fund of Hedge Funds award. Fawcett co-founded Fauchier Partners in 1994. One of Europe’s leading fund of hedge fund managers, Fauchier’s sole business is the management of and provision of advice on portfolios of hedge funds.
Before founding Fauchier Partners, Fawcett worked at Euris, a French investment holding company with substantial investments in private equity and hedge funds.
He gained experience in the securities industry with Morgan Grenfell, Industrial Technology Securities, a venture capital company which he co-founded, and at Duménil Group.
Fawcett is an appointed member of the council of the Alternative Investment Management Association (AIMA), a trustee of the Hedge Fund Standards Board, a director of the CFA Society of the UK and a director of Mirabaud Gestion, the Paris-based private banking subsidiary of Swiss bank Mirabaud.
In an interview with Hedge Funds Review, Fawcett said he was first attracted to the hedge fund industry by two sets of circumstances.
First, a good friend who was an equity broker told him the smartest and most talented were leaving the long-only sector to set up hedge funds and were making a great success of the change.
At the same time Fawcett was working with an investment holding company which had a lot of structural surplus cash. “We were looking for somewhere to invest it which wouldn’t be too risky and with a decent risk/reward trade-off. Hedge funds looked particularly attractive. So I came to it [hedge funds] because I was following talent and looking for a good place to invest,” says Fawcett.
People, says Fawcett, keep him in the business. “You’ve got new hedge fund managers coming in and an evolving investor base with more and more institutions. It is interesting and challenging to explain to them why this is a good area to invest in,” Fawcett declares.
Meet the judges
Phil Irvine, chairman
Phil Irvine is a director of PiRho Investment Consulting, which he co-founded in 2008. The company advises institutions on investment strategy and absolute-return mandates.
Prior to that Irvine joined Liability Solutions in 2003 as director of advisory services, where he headed the consultancy business assisting institutions on absolute-return strategies and liability-driven investment.
Before joining Liability Solutions, he was chief investment officer for TriAlpha (the offshore investment arm for South African bank ABSA), a company he helped set up in 1999.
Before TriAlpha, Irvine spent 15 years at the UK assurance company, Colonial Mutual, where he held a number of positions including head of equities and chief investment officer.
Irvine graduated from the London School of Economics in 1983.
Neil Campbell, head of alernative investments at Tullett Prebon, has over 20 years’ experience in financial markets. He started as a stock broker in 1986 working for Charles Stanley where he was responsible for constructing investment portfolios.
In 1989 Campbell moved into the capital markets arena, working for Tullett Prebon as an institutional broker covering clients trading interest rate swaps. In 1995 he relocated to Tokyo where he ran the yen interest rate swap-and-option desk for Harlow Butler covering clients throughout Asia.
In 2004 he joined Axiom Funds where he became the portfolio manager for the Opportunities fund, a multi-manager commodity hedge fund.
In 2009 Campbell was rehired by Tullett Prebon as head of alternative investments.
Tushar Patel is the chief investment officer and managing director at Hedge Funds Investment Management (HFIM) London. He is responsible for investment management activities for the hedge-fund investing or absolute-return strategies at the company. HFIM’s approach is to identify, research, advise and invest in emerging hedge fund strategies.
Patel has 13 years’ experience within hedge funds and funds of hedge funds. He is a graduate in economics and a chartered accountant, a Fellow of Securities Institute, alumnus of London Business School, an associate member of the Society of Investment Professionals, a member of the CFA Institute, CFAUK and formerly an individual member of the London Stock Exchange.
He has previously served on a number of industry committees, including the hedge fund committee at the Alternative Investment Management Association (AIMA) in London.
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