Investor profile: Thomas Weber, founding partner and head of hedge fund investment management at LGT Capital Partners

From its beginnings as a family office for the Princely House of Liechtenstein, LGT Capital Partners has invested in hedge funds and private equity funds for over 13 years.

Thomas Weber sees hedge funds as an investment concept rather than an asset class. As a founding partner and head of hedge fund investment management at LGT Capital Partners (LGT), Weber’s view should come as no surprise.

The company has a long history as an alternative investment manager with around $19 billion of assets under management, of which $4.5 billion is in hedge funds and the balance in private equity commitments. It runs a range of fund of fund programmes including the multi-investor Crown programme through to tailor-made individual mandates. Its clients include over 200 pension funds, insurance companies, banks, endowments and foundations.

Weber, based at the company’s headquarters in Pfaeffikon, Switzerland, says investing in hedge funds is all about risk taking. “Essentially that’s the business we’re paid for, to take prudent risks. No investment process can eliminate all risk,” he notes. But the risks he takes on behalf of client money is within a solid framework.

“We avoid highly leveraged strategies and illiquid ones. We do not invest if the fund does not give us the level of transparency we want. When you eliminate all the risks that you can to some extent control, like transparency and liquidity, then the question is whether we deem the investment prudent or not. If a fund checks 100% all our due diligence boxes and doesn’t make an interesting return, we’re not going to put money in it,” he explains.

One of the strategies LGT specialises in is managed futures/commodity trading advisers (CTA). These are transparent and liquid funds, points out Weber, and fit particularly well into his world-view. However, Weber puts a twist on how LGT invests. This is high-conviction investing. He is not averse to giving money to early-stage managers, sometimes taking up to 20% or more of the fund.

Weber says he sticks with funds during the difficult periods. When other investors may desert a fund as soon as its returns start to drop, Weber will add money at the trough if the fund is following a trend, particularly CTAs. One CTA in which LGT invests is known for its double-digit returns. It was always attracting money on the way up and losing it at the trough. “We try to do the opposite,” says Weber.

Although LGT has a reputation for a conservative investment strategy, Weber thinks the label is relative. “The biggest risk you see on the hedge fund side is to do with leverage, illiquids and operational risk,” he says.

Going into 2008 LGT reduced its exposure to strategies that were leveraged or dealt in what were or what Weber thought would become illiquids. He said the company got out of convertible bonds, almost bringing the allocation down to zero. This helped keep losses by LGT relatively small compared with competitors.

Although Weber had hopes the company would be able to claw back losses that ranged between 8% and 14% in 2008, the poor performance in May of most hedge funds meant LGT will have to wait a little while longer to gain the elusive basis points needed to bounce into positive territory.

Weber thinks a lot of funds of hedge funds (FoHFs) are a percentage point or two away form their high-water marks. Because LGT runs a variety of programmes, with a combination of both hedge fund and private equity portfolios, it believes it should fare well over the long term.

The history of running both hedge fund and private equity investments will be important for the company in the future, too, believes Weber. He thinks hybrid products will become more popular and that the lines between hedge and private equity funds will continue to blur.

The company launched a hybrid hedge fund/private equity co-managed fund this year to take advantage of the “very interesting opportunities in the market”. Subprime buys were at “ridiculous levels”.

By combining the investment skills of portfolio managers from both the hedge fund and private equity side of the business, LGT created a hybrid structure to exploit the opportunities coming out of the financial crisis. Despite the fact the offering had “extremely interesting opportunities” it attracted only $200 million. According to Weber the problem was that a lot of institutional clients had just convinced their boards they no longer held subprime paper. Asking them to go back to their boards to advocate investment in a vehicle made up mainly of discounted subprime positions was possibly an investment leap too far.

Nevertheless, Weber expects LGT to launch further hybrids over the coming years, particularly as opportunities in more distressed securities and other illiquid assets come onto the table. He believes such assets are ideal candidates for the hybrid structures.

Looking at FoHFs in general, Weber is optimistic. “There will be more consolidation to come,” he agrees, admitting LGT is itself looking to pick up some funds at a discount. So far, however, nothing has ticked all the boxes for him.

In general Weber thinks FoHFs will continue to evolve and he expects investors to demand more from FoHFs in future. He believes LGT has specific expertise in particular areas and that such specialisation will become even more important in the future.

Weber also says that institutional investors are becoming more sophisticated and many no longer look at hedge funds as a separate asset class but have adopted LGT’s own idea of looking at hedge funds as an investment concept. So, for example, if an institutional investor wants to add a bit of shorting to an otherwise long equity exposure, it would put in a long/short equity hedge fund.

Weber predicts that in time hedge funds will be part of asset allocations, rather than being part of an alternatives bucket. Investors will think more in terms of wanting to have long/short or event driven funds as part of an equity allocation or convertible arbitrage hedge funds in its credit allocation. “We’re seeing a bigger trend towards specific investment allocations,” he says. Weber thinks the industry will see allocation on a net/gross exposure level, with hedge funds added or taken away within the major asset classes.

Made to measure
He also thinks there will be more bespoke portfolio building for institutional clients in the future and on that front thinks LGT is already well placed as it launched a managed account platform in 2000. “After 2008 there was all the managed accounts hype. But these are difficult to set up and we have seen enthusiasm cool. We’ve had managed accounts for 10 years. Around 30% of our total assets are in managed accounts on our platform. This is a significant proportion of AUM. We were able to get some very good funds onto our platform over the last two years,” he says. Weber admits some managers were not open to managed accounts before 2008 but fund managers will now consider the possibility.

Looking at how investor attitudes have changed Weber observes that in 2008 institutions were shell-shocked. In 2009 the investment story was upbeat as markets rebounded. He sees the biggest demand from US public and private pension funds who are putting the most money into hedge funds. “Europe and Asia are lagging. A lot of people have to decide what the opportunities in traditional assets are and look at alternatives,” he says.

So far this year he confirms that LGT has won some major tickets from European and Asian investors, with a particular emphasis on the most liquid strategies like managed futures/CTA and global macro. “These appeal because of their low correlation to the equity markets and high liquidity.”

Weber also believes Asia will become even more important over time for the alternative market. “Asia has been an important market for us for many years,” he confirms. In 2008 LGT acquired KGR Capital, a specialist Asian FoHF. Weber believes there is a good group of Asian funds but that it is important to have people on the ground and close to new managers and investment funds.

“There are good and interesting opportunities,” Weber says. “Diversity is not as abundant as in other regions but you need to be on the ground to spot the best managers.”

Asia is also important to LGT as a source of investment inflow. Weber says on the client side the growth in pension money that needs to find investment particularly in Australia, Japan and even China, albeit at an early stage, will increasingly make the region even more important for the company as a source of more assets.

Back in Europe, Weber says the Ucits craze is not as simple as it looks. Some client groups may prefer the Ucits hedge fund structure because of the added approval levels and because it is “easier to put on a balance sheet” but he questions whether the additional costs and potential loss of performance is worth the effort.

Weber says he is careful to avoid putting additional structural elements on an investment. He points out that most of the strategies that easily fit into a Ucits are already highly liquid and transparent, like managed futures/CTA, for example.

Because Ucits hedge funds are relatively young, there has not yet been a comparison on performance versus traditional hedge funds. That, says Weber, will be interesting.

On regulation in general Weber believes it is still “very difficult to see what will come.” Until the EU’s alternative investment fund managers (AIFM) directive is final it is hard to second-guess the impact on FoHFs as well as operations outside the EU. LGT is regulated in Switzerland and so is no stranger to constraints. Whether the Swiss regulator will be deemed equivalent or if additional regulation will be needed remains to be seen.

The AIFM directive and regulation will “not kill” LGT but more complications and compliance will add costs. The worst-case scenario for Weber is that LGT needs to move part of its operations into the EU, probably London or Dublin. “If Switzerland does not have approval we would have to move to the EU. But that does not mean our business is dead. We’re pragmatic and a significant portion will remain in Switzerland,” he concludes.

Major events in the history of LGT Capital Partners

LGT Capital Partners was formed as LGT Capital Management in September 1998 as the investment management arm for the LGT Group Foundation (LGT Group) to provide investment management and investment advisory services to LGT Group companies and selected third parties.

The alternative investments team of LGT Capital Management was segregated and incorporated into a new company, LGT Capital Partners, on November 30, 2000 with legal domicile in Pfaeffikon, Switzerland.

LGT Group has been a principal investor in alternative assets since 1994 and has offered client programmes in hedge funds since 1996 and private equity since 1997.

But the history of LGT began much earlier. In 1920 a founding general meeting of Bank in Liechtenstein (BIL) was held. In 1930 a majority stake in BIL was taken by the Princely House of Liechtenstein.

In 1970 the Prince of Liechtenstein Foundation was founded and took over the equity capital of BIL. In 1990 BIL GT Group was founded after acquisition of GT Management in London.

The BIL GT Group became Liechtenstein Global Trust (LGT) in 1996 and the company listed its first fund of hedge fund client programme, Castle Alternative Invest. Then in 1998 the Princely Portfolio was established and the first multi-strategy flagship programme opened for external clients.

At the beginning of the next decade, LGT set up its managed account platform for hedge funds
and LGT Capital Partners was established as a separate company.

In 2008 LGT Capital Partners acquired KGR Capital, a specialist Asian FoHF, expanding the Swiss-based company’s presence and capabilities in Asia.

LGT Capital Partners is based in Pfaeffikon, Switzerland, with affiliated offices in New York, London, Dublin, Hong Kong and Tokyo. It has an international team of 160 professionals with 31 nationalities.