European Fund of Hedge Funds Awards 2016
As institutional investors become more demanding, hedge fund managers have become more flexible in how they are willing to package their products. This combination of events together with continued demand for liquid regulated products in alternatives led Goldman Sachs Asset Management (GSAM) to launch a Ucits-compliant product that ticked all the boxes.
The solution was the Goldman Sachs Global Multi-Manager Alternatives Portfolio (GMMAP). But its creation was not quite as straightforward as might be expected.
"With a lower price point than a single manager Ucits, the fund gives diversification and adds value for investors," says Robert Mullane, a managing director in the alternative investments and manager selection (AIMS) group. Together with Kent Clark, co-chief operating officer of AIMS, they form the portfolio management team for the fund.
Structuring the fund was a balancing act for GSAM. The top challenge was to construct a fee structure attractive to managers while not adding costs for investors. GSAM found a way around this by a clever construction.
The fund charges a 10% performance fee on return in excess of the cash benchmark (three-month US dollar Libor). But this fee is payable to GSAM as the investment adviser, accruing daily and payable annually in arrears. A separate fee calculation is made for each share class.
GSAM pays some of the underlying managers a performance fee. But if a sub-adviser is owed a performance fee during a time when the fund has not generated a positive performance, GSAM assumes the performance fee netting risk, so the investor is not exposed to any additional fee.
"The ability to offer underlying managers a performance fee meant more managers were interested in becoming part of the product," says Mullane.
The ability to offer underlying managers a performance fee meant more managers were interested in becoming part of the product
Alignment of interests is gained through a single layer of management and performance fees. Applying a performance fee allows GMMAP to retain relatively low management fees while being able to access a broader range of high-quality managers.
Mullane has been flying around Europe explaining the benefits of GMMAP and creating even more interest in the product. He believes the fund offers single managers a much easier route into a Ucits product without the hassle and gives investors a multi-manager product with attractive fees and solid risk-adjusted returns.
"The product is positioned from a cost perspective as a suitable solution for clients who have previously not viewed a fund of funds as a cheaper alternative to a single manager Ucits fund. GMMAP is cheaper than many single manager funds offering a core liquid alt allocation and with GSAM expertise on top. Investors don't have the fund of funds level cost and it's a great way to access liquid alts," he adds.
Private wealth managers have been one of the biggest investors into Ucits funds but many were dissatisfied with performance and other aspects of the single manager funds. GSAM's idea was to create a structure that worked better with lower and simpler fees coupled with the return stream investors were looking for from alternatives.
However, Ucits-compliant vehicles cannot be compared to unconstrained hedge fund investment. "The discussion with investors will be different," says Mullane. "GMMAP targets a moderate volatility with a low to moderate beta to equities. We focus on what is achievable within those objectives and hope to outperform. Clients will focus on our ability to achieve the return expectation with appropriate volatility. There is a rationalisation of return expectations. You're not expecting the same performance with a Ucits vehicle that you'd get with a two and 20 hedge fund structure."
GMMAP uses a mixture of traditional asset managers who work in an absolute return context but are not called hedge funds, coupled with straight hedge funds. The combination helped GSAM construct a portfolio that focuses on delivering an alternative return stream but in a model that is cheaper than a traditional hedge fund structure.
The fund is focused on opportunistic thematic investing, allocating to five to 12 sub-advisers. By combining multiple alternatives strategies, it is possible to target excess return across different market cycles with downside mitigation.
The return drivers are accessed through differentiated alternative strategies while GSAM dynamically manages the strategy allocations, providing an additional source of return. Strategies include equity long/short, event driven, relative value and tactical trading, with the ability to allocate on a more opportunistic basis.
Picking and choosing
Opportunist thematic investing – investing in only a part of a manager's programme – is attractive to GMMAP. This could be in a more concentrated way and with a higher volatility. It works if the manager is happy to carve out the theme and accept a lower fee. "All managers say they are engines for alpha generation. But we want to access different parts for different clients. Managers who can engage like this are perfect for us," says Mullane.
GMMAP is sub-advised by managers implementing their strategies through what GSAM calls a "sleeve" of capital in a separate managed account. This allows for daily position-level transparency and risk oversight.
The challenge is to take these "sleeves", or alpha engines, and structure them in a liquid alternatives version. "For that you need to be thoughtful about how managers generate returns to identify a scalable return stream with a lower price tag, but with limited alpha degradation," he explains.
In this way, GMMAP builds diversifying return streams. These may come from traditional asset managers who work in an absolute return context and may not be called a hedge fund. These managers can help GMMAP to construct a portfolio focused on return.
Overall, GMMAP's manager selection process allows Mullane and Clarke to construct and dynamically manage the portfolio, adjusting manager allocations in response to evolving macro and overall strategy views. These views are encapsulated primarily in the quarterly strategy review undertaken by the group with monthly and even more frequent meetings to discuss individual allocations. As the exposure is through a managed account, adjustments can be made quickly.
Mullane says the last couple of years have seen a movement to directional exposure, with a movement towards equity long/short strategies. He believes global macro strategies in particular are entering a better environment.
One area GMMAP is looking at more closely is emerging markets.
Over the last year there were no major significant changes in our quarterly strategy views. With liquid alternatives products, we can be more dynamic and can use our daily liquidity
Overall, GSAM is allocating more money to emerging markets, especially strategies on the macro side. "We see a good opportunity set there. Over the last year there were no major significant changes in our quarterly strategy views. With liquid alternatives products, we can be more dynamic and can use our daily liquidity. There is a high frequency of discussion about market events and how they impact the portfolio. Brexit and the US elections were major market events and we sought to take advantage of the increased transparency and liquidity to manage the portfolio during these," says Mullane.
However, allocations to emerging markets are trickier in the Ucits format due to the liquidity terms. "We have to work within the Ucits constraints. We ask all sub-advisers to operate in a Ucits environment. Sometimes managers have a portfolio or subset of a portfolio that could work in a Ucits format. We will work with that but not all managers have the right business structure to do it," he says.
Nevertheless Mullane is "very open to any manager, any strategy. We are building a portfolio of different return streams. We try to find how the return stream of an unconstrained hedge fund can work in the liquid alts world. There is a way to do it for emerging markets but it presents challenges."
He believes that around three or four times a year there are changes made due to big market events and the longer-term expectation of manager returns. As with other GSAM products, GMMAP relies on the significant company research and analytical infrastructure to shape its investment views.
Looking forward to 2017, Mullane believes there will be continued interest in the product that has already gained assets under management of nearly $600 million since launch at the end of 2015. While initial demand was from high-net-worth individuals, Mullane expects to see more interest from German, Italian and Asian investors over the coming 12 months. "Anything with a regulatory umbrella and daily liquidity that performs will get traction, particularly if it performs well and delivers strong returns over a three- to five-year basis. We had that traction with our '40 Act strategy and we are hoping the Ucits product emulates it," says Mullane.
AIMS is also looking at the applications of risk premia within its offering. "We haven't ruled this out and are in active discussion about it. We have seen some CTAs in liquid alternatives offerings converge to risk premia, and quantitative market neutral combines a number of risk premia strategies," says Mullane.
One trend he is sure will continue in 2017 is the push for lower fees across all products whether pure hedge fund, absolute return or liquid alts. Institutional investors are cost-conscious and looking for value combined with performance. Mullane is confident GSAM will be able to continue to offer this through GMMAP and other products in 2017.
Goldman Sachs Asset Management also won best overall group.