Feasting on family fortunes

Family offices turn out in force again to hear from another four premier hedge funds

The bi-monthly Family Office Investment Club Lunch offers family offices the opportunity to hear presentations from a selection of hedge funds over a gourmet lunch. The third such gathering was held at Claridge's in London's Mayfair district on 6 April 2006, and featured Lord Calum Graham of Advent Software as the Master of Ceremonies. Hedge Funds Review was in the audience.

reaping risk to harvest returns

Alistair Sayer from Henderson Global Investors was first to address the 50-strong audience, to whom he unveiled the Henderson Global Equity Multi-Strategy Fund, which the firm hopes to launch soon, although the process behind the fund has been developed by Henderson since 1997.

The leveraged, global multi-strategy fund targets volatility of 10% and aims to return 17%-18% to investors, based on Henderson's regional multi-strategy products. Henderson runs a "broad platform" of hedge funds, assets in which total $2.3bn, of which $300m is invested in hedge fund assets across its UK, pan-European, North American and most recently, Asian multi-strategy teams.

The fund is designed to leverage market inefficiencies created by the "increased opacity of corporate structures" around the world. Sayer also hopes to "harvest" excess risk premia in an insurance format to achieve consistent returns.

Henderson has applied its model since 1997 to fundamental, liquidity, relative-value and event-driven strategies in Europe, the US and across Asia and is now "bringing these strands together in a global product," Sayer said. "The benefit of these [strategies] is twofold," he continued. "They are proven to work, and at different times."

This diversification gives an "improved risk/return and and improved Sharpe ratios," of between 1.2 and 1.4.

Inefficiencies and opportunities vary over time, by strategy and by market, Sayer said, so he is not "dictatorial" about how capital is applied. Instead, he will look at opportunities using a two-thirds bottom-up perspective and work out how best to leverage investments with one of its strategies.

Sayer said the fund aspires to market-neutrality. "Opportunities of inefficiencies tend to be independent of market direction. It doesn't matter where a company's stock price goes…we're looking for arbitrage between the A and B share prices."

Describing the strategies the fund employs, "relative value is basically security substitution," Sayer said, "looking at one stock and seeing if you can benefit from holding a different version of that, say, through the convertible, the derivatives, a holding company or a different share class." Sayer refers to as "a risk-premia strategy," whereby the investment team will look for discounts on stock for not knowing why the counterparty is selling. "Historically, that premium has more than compensated for the risk you're taking on," Sayer added. Sayer said the event-driven element of the fund is "classic risk arbitrage" on index changes, corporate actions and mergers and acquisitions, while the fundamental approach is "classic long/short."

Henderson's UK fund, which has been running since 1998, shows a negative correlation of 0.3 between fundamentals and liquidity. Furthermore, the different regional funds correlate only 30%.

With fees of 1.5% for management and 20% for performance, Sayer said the fund offers a discount to providing the leverage oneself on investments in the three regional multi-strategy products

Russia still has space to grow

Next up was Yuri Lopatinsky, a fund manager with FMG, (FMG itself began as a family office in 1989), who put his Russian Federation First Mercantile Fund into the context of three large changes to the global financial landscape: the transfer of capital from states to private enterprise, the mass reallocation of labour- and energy-intensive production outside of the the 'developed' world to cheaper countries; and technological developments.

The main beneficiaries of these changes, Lopatinsky said, are the BRIC countries (Brazil, Russia, India and China), which have recently experienced increased liquidity. Indeed, he likened the "reallocation of economic and political power" to these countries as "the next Marshall Plan", which he said would "significantly change the world as we know it over the next 50 years".

Russia, Lopatinsky pointed out, continues to trade at a discount and is not close to its potential in terms of capital allocation. Indeed, she has hard-currency reserves of over $250bn ($300bn by 2007) with debts of only $200bn. However, while her population is also growing wealthier, her financial infrastructure is not yet fully developed enough to reallocate the capital efficiently. Room for Russian growth, then, particularly in terms of credit, was highlighted, although Lopatinsky suggested that "all bets are off" until after the 2007 Presidential election. In the meantime, money can be made by focusing on the growth of what he calls the "iron hand of capitalism - State influence," as well as on the "new industries and companies that are coming to market because of [current] liquidity events."

Lopatinsky identified a "new paradigm" whereby tightening spreads will impact emerging-market equities with high debt/market cap ratios.

In terms of the world's trade balance with the US, the US is effectively giving $150bn to emerging markets but receiving only $70bn in return, thus driving emerging-market liquidity.

Credit growth is lowest among BRIC countries, with significant room for expansion. Such credit should fuel investment, especially with the Russian stock market undervalued relative to other BRIC countries (with a P/E ratio of 9.23 against Brazil's 10.29, India's 21.61 and China's 17.02). Recent stock-market performance, Lopatinsky said, is mainly driven by natural resource prices and domestic consumption. The fund invests 50% in six blue-chip stocks and 50% in 30 specialised small- and mid-cap firms. It is weighted 33% to the oil sector, although this makes up 51% of the RTS index (Russia's stock market), preferring consumer exposure, which makes up 23% of the portfolio, but only 6.5% of the RTS. The fund can also put 10% of its portfolio in private equity and special-opportunity trades.

Since its inception in 1995, the fund has returned 2867.42%, compared to gains of 89.59% and 1152.99% from MSCI's World and Russia indices respectively, Lopatinsky informed the audience.

double alpha back on the table

Ian McVeigh from Jupiter Asset Management came to the podium after a resplendent lunch prepared by the legendary kitchen at Claridge's. McVeigh presented the Jupiter Ganymede Hedge Fund, which he manages.

With $25bn assets under management, of which $900m are in its hedge funds, McVeigh pointed out how useful such institutional scale is in terms of due diligence.

He explained the Ganymede Fund's flexible approach (with a value bias) to the strategy of United Kingdom long/short equity. Shorting makes up a considerable part of this approach, with the generation of both long and short ideas facilitating the achievement of what McVeigh calls "double alpha".

McVeigh, who dubbed fund management "the best job in the world by quite some way," said the fund aims to maximise returns through long/short stock-picking and a tactical market view. The fund takes around 60 positions (currently 40 long, 20 short) on stocks in the FTSE All-Share, which will make up between 2%-4% of the fund's NAV.

Monthly drawdowns, said McVeigh, are minimised through active management of the fund's net exposure, which typically ranges between -20% to +60%. Meanwhile, on the upside, the fund aims to return 10%-20%.

So far, these goals have been slightly exceeded: compounded annual returns stand at 20.28%, with 2006 so far yielding 3.46%, he said.

McVeigh also signaled a reopening of the fund in the second quarter for up to $100m additional capacity, having closed the fund in June 2005 at around $200m.

volatility's helping hand

Ole Rollag from Nordea Investment Funds was the final speaker, and presented the Nordea Managed Derivatives Fund, which aims to achieve returns of 10%-15% from the !19m it runs in volatility arbitrage. However, in good years, Rollag says the fund can also deliver around 20% to 35%.

Rollag aims to preserve invested capital, which is why, despite the name of strategy he employs, he cites the maintenance of average volatility at 7%-10% as a priority of the fund, which targets a maximum monthly drawdown target under catastrophic scenarios (such as 11 September 2001) of around -10% to -15%.

Nevertheless, the fund has returned 7.07% since its May 2005 launch having employed leverage during the quiet early days.

The fund is based on model that Nordea used between 1999-2004 while trading equity volatility in Europe and the Unites States, in which time it returned 33% while the DAX index lost two thirds of its value. Rollag claims the strategy is now even more secure.

Effectively, the fund acts as an equity-market insurer by hedging away excess and unwanted risk. The strategy, with few participants (around 2% of alternative assets), maintains a short volatility bias and an overlay strategy is added to limit downside risk. Furthermore, due to the mean-reverting tendencies of volatility, the fund is designed to recover quickly from any major loss.