Sponsored by: Societe Generale, Citco Fund Services, Dechert, Lyxor Asset Management, KPMG Ireland and RFA Congratulations to EuroHedge on your fi rst 20 years We’re with you for the long term

2018 Citco Treasury manage all cash movements 2018 2017 and balances in one location CitcoConnect Citco Waterfall data room and online carried interest computation subscription for investors

2016 CitcoOne game-changing real-time Our advanced solutions, reporting cutting-edge technology and steadfast commitment to take service to the next level ensures we remain the 2009 Æxeo Investor (AXI) leading administrator in the integrated allocation, fee calculation alternative assets industry and investor reporting

2002 Æxeo straight-through processing and real-time data

Eurohedge 20 advertisement Dec 2018 v9.indd 1 19/12/2018 09:04 03 INTRODUCTION

From humble beginnings to institutional industry

When the first issue of EuroHedge was published in January 1999, the small handful of European funds in existence managed $15bn YEARS OF between them. To call it an industry would have been an exaggeration. In trading terms, the magazine’s launch was a long bet on the prospects of a tiny corner of asset management which used sophisticated investing techniques to post high returns. Having noticed the growth in American hedge funds, the founders of this magazine believed it might just catch on in Europe. It proved a worthwhile trade. From a humble start, Europe’s community of hedge funds has grown into an industry managing more than half a trillion dollars in offshore funds, and plenty more in Ucits Main sponsors and other product types besides. Fortunes have been made, big bets won and lost, and countless headlines printed as hedge funds became a powerful force in financial markets. It has become an institutionalised industry. After initially focusing on wealthy individuals and family offices, funds now draw most of their capital from retirement and sovereign wealth funds, insurers and other institutions. The shift accelerated after 2008 as the operational spotlight intensified and the influence of funds of hedge funds waned. Firms such as Marshall Wace, Man Group and CQS now manage billions for pensioners around the world. This special edition of EuroHedge does not merely commemorate our twentieth anniversary, proud as we are at reaching the landmark. We have spoken to some of Europe’s leading names to take stock of the industry’s progress so far, explore its present and, most importantly, analyse what the future holds. The first chapter contains interviews with most of the industry’s leading names who were in business in 1999, our first year. As research on page 34 by HFM Insights reveals, 10 firms with current assets of more than $3bn have been trading since then – representing the pioneers of the industry. We have also spoken to several managers who started subsequently, including Leda Braga and Alan Howard, who have made a similarly considerable impact. Associate sponsors We provide an industry chronicle in the second chapter, highlighting the key moments from the past 20 years. EuroHedge has been there every step of the way, recording the ups and downs in print and online, and bringing the industry together at its events every year, as my colleague Nick Evans documents. We also look back in detail at the cataclysmic events of 2008. The third chapter is given over to investors, the bedrock of the industry, and the impact of the march of institutions. In the fourth chapter we explore the operational changes that have defined the past 20 years and technical challenges that continue to set the agenda. EDITOR Will Wainewright +44 (0)207 832 6610 [email protected] // Thank you to all our interviewees for their involvement and to our ASSISTANT EDITOR Hugh Leask [email protected] // EDITOR EMERITUS sponsors for their support. Most importantly, thanks to you, our readers, Nick Evans [email protected] // DATA AND RESEARCH MANAGER for supporting the magazine, attending our events and enabling the Siobhán Hallissey [email protected] +44 (0)207 832 6677 // EUROPEAN growth of this dynamic industry. RESEARCH MANAGER Amy Wilcockson [email protected] // If the last 20 years are anything to go by, the next PRODUCTION EDITOR Michael Hunt // ART DIRECTOR Jack Dougherty // ADVERTISING AND SPONSORSHIP James Barfield +1 (646) 931 9058 20 will be quite a ride. [email protected] // SUBSCRIPTION AND DATA SALES UK +44 (0)207 832 6511 Enjoy the issue. [email protected] ASIA & US Joel Dudden +44 (0)207 832 6691 joel.dudden@hfm. global REPRINTS +44 (0)207 832 6511 // CHIEF EXECUTIVE Charlie Kerr // ISSN Will Wainewright 1473-3153 // PUBLISHED BY Pageant Media, One Wall, London, EC2Y 5BD, UK // PRINTED BY The Manson Group // © 2018 all rights reserved. No part of this publication may be reproduced without written permission of the publishers. No [email protected] statement in this magazine is to be construed as an invitation to invest in hedge funds.

EUROHEDGE 1999-2019 03 04 CONTENTS BLAZING A TRAIL The pioneers who shaped an industry

SIR PAUL MARSHALL AND IAN WACE LEDA BRAGA SIR PAUL RUDDOCK

06 MARSHALL WACE – Class of 1997 INDUSTRY 08 LANSDOWNE PARTNERS – Class of 1998 10 SYSTEMATICA INVESTMENTS – Class of 2015 ALAN HOWARD CHRONICLE 12 MAN GROUP – Class of 1989 Key moments from the past 20 years 14 ASPECT CAPITAL – Class of 1998 16 CQS – Class of 1999 26 1999 – The first year of EuroHedge 18 BRUMMER & PARTNERS – Class of 1996 28 TIMELINE – European hedge industry over 20 years 20 CHEYNE CAPITAL – Class of 2000 30 COMMENT – Nick Evans reflects on the last two decades 21 – Class of 2002 32 LOOKING BACK TO 2008 – Memories of the crisis 23 TRANSTREND – Class of 1991 34 INDUSTRY GROWTH – Europe’s largest brands 24 INFORMED PORTFOLIO MANAGEMENT – Class of 1998 36 EUROHEDGE EVENTS – The Awards and Summit

SIR MICHAEL HINTZE PATRIK BRUMMER KEVIN GUNDLE LUKE ELLIS INVESTOR VIEW March of the institutions

40 INVESTOR TRENDS – The modus operandi of allocators ANTHONY TODD JONATHAN LOURIE AND STUART FIERTZ 44 ALBOURNE PARTNERS – Consultants for change 46 LYXOR – Rising interest as bull market slows TECHNOLOGY AND OPERATIONS A new industry

48 HFM INSIGHTS RESEARCH – Hedge fund operations 52 INDUSTRIAL EVOLUTION – Changing role of the COO 55 SOCIETE GENERALE – Prime brokers eye closer relations 56 DECHERT – Industry changes – the legal perspective 57 CITCO – Trends driving fund administration 58 RFA & KPMG – Operations: past, present and future

LARS ERICSSON HAROLD DE BOER CLAUDIA STANGHELLINI YEARS OF

BLAZING A TRAIL The pioneers who shaped an industry 06 CLASS OF 1997 MARSHALL WACE

Seeds of success for YEARS OF Marshall Wace sown Class of 1997 in dark days of 2008

BY WILL WAINEWRIGHT

Sir Paul Marshall and Ian Wace on how crisis and chemistry have shaped their $39bn firm

aul Marshall suspected it our business would be exposed to un- subsequent growth. was important when Ian expected events,” says Wace. “It taught The young intern joined the firm P Wace invited him to lunch us to always have a risk parameter that permanently. “Clake is the sum total of in January 1996. He did was pretty trimmed.” his natural brilliance and what he has not remember Wace – who had been Eureka became one of the first Euro- learned here. He must be one of the the first broker to call him when he pean funds to reach $1bn in 1999 and most influential people within finance,” started at Mercury Asset Management limited its size at $1.4bn two years later. says Wace. “I am proud to have had 11 years before – as a serial luncher. Work then started on a proprietary sys- someone as rounded and phenome- The pair met at Leadenhall Market. tem to measure the value of ideas re- nally capable as that join as a graduate “Ian shared his idea about starting a ceived from the sell-side. Wace enlisted trainee, and then go on to have the ca- hedge fund business and, as it hap- Anthony Clake, an undergraduate who reer he has had with us. But he is one of pened, I had been thinking of doing the had been recommended for an intern- many examples at the firm.” same thing,” says Marshall. “It was very ship, to help. The pair say it helps being a partner- serendipitous.” You needed $50m to start ship, rather than the firm having a sin- “He was my fifth call, but there you gle leader. “Some hedge funds are led go,” jokes Wace during a rare joint inter- and I couldn’t for the life of by one person who is not challenged, view at the $39bn firm’s London head- me see where we were going and who ends up falling in love with quarters, given to mark EuroHedge’s their own genius and reputation, before twentieth anniversary. Marshall Wace’s to get it from. blowing up,” says Marshall. The balance position 23 years after that lunch as one brought by the partnership is perhaps SIR PAUL MARSHALL of the world’s largest long/ equity shown by their positions in the Brexit firms would have been hard to foresee “I told Anthony I wanted to measure referendum in 2016, with Wace favour- in the early days, when they struggled the value of all the ‘inputs’ – analyst ing continued EU membership and Mar- to raise more than $1m apiece from pro- notes etc – that came in to us. By the end shall backing the campaign to leave. spective investors. of summer 2001 we had the basis of an “Ian and I are constantly challenging “You needed $50m to start and I application that captured the breadth and criticising each other. The culture couldn’t for the life of me see where we of the ideas universe.” of the whole firm is like that. No one is were going to get it from,” says Mar- After developing a success ratio to ever allowed to be in a dominant posi- shall. Only when promised assess which calls were more likely to tion.” Between 2005 and 2008 Marshall $25m could they raise the same amount be correct, Wace realised the firm had took time out from the firm to pursue from other investors and get going. an embryonic trading system on their other interests. “In that period it was “It was incredibly difficult,” Wace hands. The result was Tops, which trades extremely lonely,” recalls Wace. “When adds. “I think we represented a different systematically on sellside ideas, and re- you build a business with a partner it proposition to other startups of that mains one of two key struts of Marshall gets more difficult when they leave. time. People were interested in funda- Wace’s business, along with fundamen- We were missing his fundamental mental investing, not trading-focused tally-driven Eureka. investing knowledge and passion for investing.” Eureka, the firm’s first prod- Wace says there was little interest markets.” uct, initially combined both. in Tops at first. But they persevered Wace confesses to not sharing Mar- Marshall Wace came through the test and converted investors to the system, shall's love for investing. “But I do have of Long-Term Capital Management’s which has become a powerful force in the love and passion for building the demise later in 1998, but there were European markets. It has also facilitat- business. Our partnership has comple- lessons to learn. “It did make me realise ed much of Marshall Wace’s dramatic mentary values. I have seen it from the Photo © Piers Cunliffe Photo SIR PAUL MARSHALL AND IAN WACE position of having it, not having it and The duo admit the firm had neglected be impossible if you can’t bet against then having it back. It was a terrific the US investment market and relied too stocks, as well as go long.” boost when he returned.” much on funds of hedge funds, which He thinks the industry’s reputation Marshall returned just in time for declined rapidly from 2008. “It was un- has improved in some ways. “Hedge the financial crisis. “It was an environ- doubtedly a failure of ours not to invest funds have gone from being a cottage ment of total fear and the unravelling more in marketing,” says Marshall. “We industry to being a very respectable of a perfect storm,” says Wace, who didn’t hire a marketer until 2006, eight branch of the funds industry. But there describes the period as being “as close years after launch. Ian and I had previ- have been cases of bad behaviour and to a near-death experience you can im- ously done it. In 2008 we realised how in many cases an asymmetry of rewards agine”. Assets plunged from $14bn to useful a marketing team could be.” between managers and their clients.” less than $4bn in five months. The front office was bolstered. In As the firm grew in the years after “My strongest abiding memory was the second half of 2008 Marshall Wace the crisis, attention turned to how best the final quarter of 2008 after Lehman hired three fundamental managers – to structure it for the next phase of Brothers had filed for bankruptcy,” says Rod Rehnborg, Amit Rajpal and Fehim growth. “I never wanted to float the Marshall. “We thought Morgan Stanley Sever, who manage Japan Market Neu- company but I did want to make sure and could go down, and tral, Global Financials and Global Op- staff understood there was a value in most of our balances portunities – who remain with the firm the entity,” says Wace. In 2015 it was were with them. Ian and I stood on the a decade on. announced US private equity and credit terrace at our old office and just thought Operations benefited too. “We radi- giant KKR had bought a quarter of the ‘This is it.’” cally overhauled our risk management firm, a stake which has since increased The firm kept investing through the applications and invested heavily in to almost 35%. maelstrom. “We never suspended or our trading architecture,” says Wace. “The chemistry has been superb – gated and always published our NAVs “We diversified our revenues. All these there has been total trust,” says Wace. on time,” adds Wace. “We had monthly decisions were taken in the darkest mo- “It was a huge endorsement for our liquidity and resisted the temptation to ments of the crisis. What I most remem- business in the US. It is another sign of increase it, which ultimately was one of ber about 2008 is just how black a black how we are a different firm to what we our great successes, because when the sky looks.” were in 2008.” market turned we had no cash and were London’s hedge fund industry re- Technology remains a priority. Wace fully invested.” ceived unprecedented attention after proudly cites the fact Marshall Wace The crisis was the firm’s darkest hour, the crisis, with the practice of short-sell- stores 4.5 petabytes, or the equivalent but also sowed the seeds for its dramat- ing heavily scrutinised. Marshall, who of 270bn 10Mb photographs, on its serv- ic post-2008 growth. “We committed defended the industry in a parliamen- ers – and data capture is doubling every to the partnership and told our staff we tary Select Committee appearance in year. “Tomorrow’s world will be utterly would do whatever it takes to rebuild 2009, continues to do so. “Hedge funds dependent on data, shaped by it,” says the business,” says Wace. Lessons were are the truth-tellers,” he says. Wace. “You need to be in front, not be- learned on the investor side. “We looked “Shorting the UK banks in 2008 was hind. This is a relentless industry and we to institutionalise our asset base and fo- the right thing to do because they were have been tireless in making the most of cused on the US in the following years.” in trouble. Deep capital markets would the opportunities presented to us.”

EUROHEDGE 1999-2019 07 08 CLASS OF 1998 LANSDOWNE PARTNERS

Blue-chip name YEARS OF Lansdowne rises Class of 1998 from “obscurity” on 20-year journey

BY WILL WAINEWRIGHT

Sir Paul Ruddock, who started Lansdowne with Steven Heinz, looks back on the firm’s growth from its dramatic early days

ew hedge funds endured longevity were only heightened when to Steven Heinz, an analyst at Harvard as turbulent a start as LTCM imploded. “People started pull- Management in Boston, by Stuart Ro- F Lansdowne Partners in ing money out of hedge funds. It was a den, who later joined and led the firm. 1998. Just six weeks after tough environment.” The partnership of Ruddock, who ran the long/short equity manager began The timing was inauspicious for Rud- the business, and Heinz, who led the in- trading, Long-Term Capital Manage- dock and Heinz, who had already had vestment side, proved successful. “We had ment (LTCM) blew up, throwing markets one false start. Their initial backer had a very good year in 1999, up 67% net, par- into chaos. cold feet when the Asian financial cri- ticularly on technology stocks. It wasn’t The market turmoil that year over- sis started the year before, postponing until September 1999 we got to $100m, shadowed Paul Ruddock and Steven their plan to start in 1997. then a year later we were at $1bn.” Heinz’s new venture, which EuroHedge The performance bred interest from labelled one of the “least known” re- My background was in building investors, but Ruddock’s challenge was cent start-ups in its May 1999 issue. brokerage businesses, so I not straightforward. Institutional allo- But initial performance had been good, cators required a lot of convincing the despite the tumult. “This relative obscu- wanted to join forces with a industry had a stable long-term future. rity is unlikely to last much longer,” the talented stock-picker. Ruddock focused on the US, rather than magazine predicted. the Swiss banks targeted by many peers Two decades on, Lansdowne is one of SIR PAUL RUDDOCK at that time. the European hedge fund industry’s larg- “In the first 12 months of running the est and best-known names, a seven-time Some would have thought twice, but business I visited the US 10 times. We winner of EuroHedge Awards. But Rud- Ruddock was convinced of the business talked to a lot of institutions and were dock, who was knighted for services to opportunity. “The European hedge fund quite early, in European terms, in get- art and philanthropy in 2011, remem- industry was tiny compared to the US,” ting big commitments from US and UK bers his firm’s difficult start only too well. he says, while the “very fragmented and pension funds,” he says. “When we started there was very poorly researched” nature of Europe’s “A couple of large sovereign wealth little hedge fund money in Europe,” he equity markets offered myriad open- funds allocated to us early in their alloca- says in his first EuroHedge interview ings. “Once you got past the top 100 tions to hedge funds. We took a long-term since retiring from Lansdowne in 2013. or so companies the research was very view. There was one institution in the US I “Egerton was backed by a wealthy US poor. So there was a real opportunity in visited several times over a few years and investor. Marshall and Wace had got off terms of doing good fundamental re- ultimately got a large allocation.” to a very good start when they began, search on European companies.” In its early years the firm made ap- about 10 months prior to us. But for the First, he needed a business partner. pointments that proved crucial to its most part, people starting hedge funds “My background was in building bro- long-term future. Roden and Peter in Europe were unproven because they kerage businesses, so I wanted to join Davies joined from Mercury Asset Man- had been long-only or brokers and not forces with a talented stock-picker,” says agement in 2001 to start the UK equity worked in a hedge fund environment.” Ruddock, who built a career at Goldman strategy, which became its Developed Initial doubts about the industry’s Sachs and Schroders. He was introduced Markets flagship. The fund posted dou- SIR PAUL RUDDOCK ble-digit returns for five consecutive the crisis for shorting UK banks including Would it be easier to start Lansdowne years between 2003 and 2007, at an Northern Rock. “It was pretty clear to a today, compared to 1998? Yes and no, average of 23.9%. Firm-wide assets lot of people the system was very lev- Ruddock believes. “Today there are tons peaked at $20bn in late 2007. eraged; that Northern Rock, Bradford & of firms started by founders who have Then came the crisis, during which Bingley etc had unsustainable balance years of experience as hedge fund an- the firm’s assets halved. “The first rea- sheets relative to the liquidity of their alysts, portfolio managers, what have son was the performance loss,” recalls borrowings,” says Ruddock. “Frankly the you. It is easier to have credibility today.” Ruddock. “Second was that sterling/ regulators should have been looking at But you need more assets to survive dollar went from 2 to 1.40. A lot of our that.” in today’s industry. “We started with assets were in sterling, so that cost us He believes the episode demonstrates $40m. Now, Steve and I took no salary another $2bn or $3bn.” The rest was the role hedge funds can play in high- for the first year but we were able to redemptions. lighting financial problems. “There is cover our costs. You’d need a couple “The biggest challenge was navigat- always going to be a segment of society of hundred million to cover your costs ing the counter-party environment,” that believes if something goes wrong, today. It is probably harder, too, to dif- he says. “Morgan Stanley had been other people should not be benefiting,” ferentiate yourself unless you’ve been Lansdowne’s main prime broker and the he says. “I would counter with the exam- a star analyst or manager.” firm moved quickly to diversify its coun- ple of internet stocks, where some peo- He adds that the last decade’s low-in- terparty risk as the crisis developed (see ple were taken to the cleaners because terest rate environment since the finan- page 34 for a full 2008 retrospective). of crazy valuations. You need people in cial crisis has impacted hedge fund re- “It was stressful, but it could have the market crunching the numbers, pro- turns. “It is not easy, with all the macro been worse. We felt relatively pre- viding an alternative voice.” events of Brexit, Trump, Saudi Arabia/ pared,” he adds. “Some of the most Ruddock continued running the firm Iran, you name it,” he adds. stressful times are when you are losing until retiring in 2013. Heinz retired But the end of the bull market will money and you’re not quite sure why.” the following year, with leadership provide an opportunity for hedge funds He highlights Lansdowne’s fright passing to Roden and Davies in a text- to prove their worth. “The trouble with during the Volkswagen “debacle” in book – and rare – example of effective being long equities is there are some- October 2008 as an example. “We were succession planning by a top hedge times long periods when you may make short Volkswagen several hundred mil- fund. Ruddock has since focused on a lot of money, but from time to time lion across two of our funds. But the his interests in the arts and philanthro- you are going to lose an awful lot of share price was shooting up – it later py, as well as chairing his alma mater money. Part of the goal of good hedge transpired because of market manipula- Oxford University’s endowment and fund management is making money tion involving Porsche and Volkswagen investment committee. consistently in all environments.” stock,” he says. “It went up by some- “I was very proud that we built Lans- The industry has come a long way thing like five times in three days – now downe into a big business with great since the nineties, he concludes. “Hedge that was stressful. We ended up taking partners: of our reputation of being funds are now a part of the arsenal of some of our losses.” smart, honest and good at our jobs, and every major investor, which was not the Lansdowne came in for criticism after long-term, blue-chip investors,” he says. case 25 years ago at all.”

EUROHEDGE 1999-2019 09 10 CLASS OF 2015 SYSTEMATICA INVESTMENTS

Hedge funds YEARS OF “make a difference” – Class of 2015 Systematica’s Braga

BY WILL WAINEWRIGHT

The global industry’s leading woman says performance is the main challenge facing the hedge fund sector

ittingly, given Leda Bra- Braga spent almost seven years at JP facing the hedge fund industry. ga’s penchant for mo- Morgan working on quantitative pro- Systematica now runs a range of F torcycling, the Brazilian grams. There she met Platt, the Pres- different strategies, fee structures hedge fund manager ton-born macro trader who founded and liquidity terms. BlueTrend, which has not looked back since leav- BlueCrest, which became one of Eu- peaked at more than $15bn in 2013, ing Michael Platt’s BlueCrest rope’s leading hedge fund firms. now manages less than $4bn. Like oth- to start her own firm in 2015. Braga’s strategy soared er managed futures firms, Systematica Systematica Investments, 43.3% in 2008, a breakthrough has moved into alternative markets in which houses the BlueTrend year for CTAs when most oth- search of new sources of managed fu- strategy she founded in er strategies declined. Re- tures . 2004, now manages almost turns in recent years have BlueCrest has been a $10bn. been leaner and Braga since returning external money to Despite her firm’s im- admits performance is investors at the end of 2015. The mi- mense growth – which the “main challenge” nority stake BlueCrest initially took in makes Geneva-based Braga Braga’s new business was subsequent- the global hedge fund indus- ly bought by Boston-based Affiliated try’s leading woman – the Managers Group. trend-following pioneer Braga’s enthusiasm for the industry, says her job has become transmitted in a long profile with Euro- harder in the past two Hedge in March 2018, is again evident decades. in a fresh interview to mark the mag- “It is harder in many azine’s 20-year anniversary. She be- dimensions,” she says. lieves the hedge fund and wider asset “Market opportunities have management sectors have never been become more evident to all more relevant. and therefore more difficult “Our industry can make a differ- to monetise, institutional ence to the way companies are run, to flows have dictated institution- sustainability, to the way people feel al standards of infrastructure and about their retirement possibilities. processes, and the regulatory bur- The hedge fund segment is perhaps den has increased substantially.” the most innovative end of this very However, advances in technolo- relevant industry.” gy have helped. “The acceptance She hopes this appeal will help the of technology and science [in the young graduates who are perhaps hedge fund industry] has meant more tempted in joining big technol- a lot of excitement and develop- ogy firms consider the hedge fund ments on the alpha generating industry. “Investment management is front. Overall the job is broader, information management,” she says. more mature, one needs to look “The graduate who likes data science further forward into the future.” – machine learning, AI – will thrive in After a career in academia, LEDA BRAGA investment management.” Supporting London’s hedge fund industry for 20 years

• Fund formation • Manager equity arrangements • Fund distribution • Seeding deals • Fund operations • Tax structuring • Regulatory compliance • Employment and partnership issues • Regulatory enforcement • Intellectual property • Transactions and investment matters • Data protection • Financing arrangements • Investigations and disputes • Trading arrangements • Acquisitions and disposals

Our success is our clients’ success. dechert.com

D 12 CLASS OF 1989 MAN GROUP

Evolution of Man YEARS OF into Europe’s largest Class of 1989 hedge fund firm

BY WILL WAINEWRIGHT

CEO Luke Ellis looks back at Man Group’s journey over the last 20 years to become the world’s largest listed hedge fund manager

o firm has undergone so and Ellis in the past five years. with assets boosted in recent years by great a transformation in Man Group has fundamentally a string of acquisitions and consistently N the past 20 years as Man changed in the past 20 years, but so healthy inflows. Previously dominated Group, the largest hedge has the hedge fund industry, according by retail money, 80% of Man Group’s fund manager in Europe. And no one is to Ellis. Performance challenges have investor base is now institutional, a more aware of that fact than CEO Luke grown. “It was far easier to find alpha statistic reflecting the transformation Ellis, who has continued an overhaul of than it is now,” he says. “There was in hedge fund allocation trends. the business initiated by his predeces- much less competition, in terms of the Ellis, who spent the decade to 2008 sor Manny Roman. number of hedge funds chasing oppor- with fund of hedge funds firm FRM, lat- “We have made a conscious decision tunities, compared to today.” er purchased by Man Group, witnessed to diversify the business,” says Ellis in an the changes in this area first-hand. interview at the listed hedge fund man- The biggest change I see is “Institutions were beginning, slowly, ager’s Thameside headquarters. “In the to make their presence felt 20 years last 20 years, Man Group has gone from that hedge funds are running ago via the medium of funds of hedge being a purely retail-driven business, less vol now. funds, which became hugely influen- offering CTAs and funds of funds in vari- tial in the early 2000s,” he says. “Their ous combinations, to having more than LUKE ELLIS money helped a lot of early funds to get 100 different products doing remarka- going. The FoHFs space is much smaller bly different things. There are almost At the same time, costs have in- now, partly because institutions often no structured products.” creased in the past two decades. “The invest directly into hedge funds.” When EuroHedge printed its first cost of running a hedge fund was much The years leading to the 2008 finan- issue, the company was still allied to lower and the regulatory challenges cial crisis are often viewed as the hedge ED&F Man, the agricultural commodi- were smaller,” he adds. “It was typical- fund industry’s heyday. “The noughties ties business which harked back to the ly easier to raise money to make the were the most profitable time for the company’s eighteenth-century roots business profitable. Hedge fund firms hedge fund industry,” says Ellis. “Cu- as a sugar broker. That unit was sold managing $100m could get by, where- mulative profits peaked in 2007 – since in 2000 and Man Group subsequently as now you need four of five times as then, assets have gone up, as have focused solely on growing its alterna- much to be profitable, in most strate- costs, but fees have gone down.” tives business under the leadership gies.” But he does not wear rose-tinted of Stanley Fink, dubbed by some the Man Group’s $114.1bn under man- glasses. “In 2008 it stopped being easy. “godfather” of the hedge fund industry. agement makes it the largest listed The industry is more rigorous now – In 2010 the company stunned mar- hedge fund manager in the world, investors are more careful with their kets with a $1.6bn acquisition of GLG money, ask more questions and nego- KEY FACT Partners, the high-flying long/short tiate over fees. Do I think any of that is equity firm where Pierre Lagrange, unhealthy? No.” Philippe Jabre, Greg Coffey and others 12 The financial crisis proved that the had made their names. That was Man rocketing asset prices in the preceding MAN GROUP IS THE LEADING WINNER Group’s breakthrough in strategy di- years were not sustainable, says Ellis. OF EUROHEDGE AWARDS (THE FIGURE versification, a process which has con- INCLUDES ALL GLG TRIUMPHS) “It is interesting to consider whether tinued and accelerated under Roman 2008 is an outlier year, or whether in fact years like 2006 and 2007 were the outliers.” Ellis has a theory about why average hedge fund performance has been low- er since 2008 compared to the decade before. “The biggest change I see is that hedge funds are running less vol now. Many were running at 10-12% vol before 2008, while it is around 5% now for many. But the Sharpe ratio has not doubled in any chart I’ve seen – it’s stayed basically the same before fees.” Fee levels should reflect this new reality, he believes. “I think that two- and-twenty fees are reasonable for a fund running vol at 10-12%, with a gross Sharpe of 1.5; it produces a per- fectly fair income for the manager of about 30% of fees.” When vol is lower, he thinks fees should be too. Ellis disagrees with the prevailing view that the increasing influence of institutional investors explains the lower vol levels (the suggestion being funds reduced vol due to fears of being jettisoned after a big drawdown). “I don’t think institutions are any quicker to let go of under-performing managers than high-net-worth indi- viduals were 20 or 30 years ago. I think in some cases the key cause for lower vol was funds taking in too many assets and diluting their returns.” Changes in technology have re- shaped the way hedge funds trade. “Aside from systematic strategies practised by the likes of Man AHL, it is remarkable how little technology was used 20 years ago,” says Ellis. “It wasn’t quite blotting pads but, compared to today, it wasn’t far off.” LUKE ELLIS The scale of technological change in the industry and society more broad- agers will be around for a few years yet. “The question is how you do it in ly guards Ellis against making major “They may use technology to improve a hedge fund format,” he adds. “And tech predictions. “Twenty years ago, their processes. The proportion of com- what is a better investment: something smartphones didn’t exist,” says Ellis. puter-driven strategies may increase. that is ‘good’ from an ESG perspective, “The notion of a smartphone had not But I believe there will be a role for the or something that is ‘bad’ but getting even been imagined. So it is very hard foreseeable future for good discretion- better? There are very different mind- to make predictions on a 20-year time ary managers.” sets among clients on that.” horizon. The speed at which technolo- Looking to the future, Man Group More generally, Ellis is fundamen- gy has moved on is incredible and looks has been increasingly focused on issues tally positive about his sector’s future, unlikely to slow.” around responsible investment and which the rise of institutional clients Man Group has been innovating in started a podcast series on sustainable has helped secure. “The hedge fund artificial intelligence and other areas. investing. Ellis says an increasing num- industry has gone from strength to But Ellis, who believes driverless cars ber of clients are now asking about ESG strength in the last decade and now will be the norm in London within 20 (environment, social and governance) serves the needs of millions of pension- years, thinks discretionary fund man- issues. ers, which it didn’t do 20 years ago.”

EUROHEDGE 1999-2019 13 14 CLASS OF 1998 ASPECT CAPITAL

Aspect Capital targets YEARS OF market inefficiency Class of 1998

BY HUGH LEASK

Co-founder and CEO Anthony Todd reflects on 20 years of evolution in systematic strategies

he launch of Aspect Capital fund manager (with the remaining $20m to have a critical mass north of $1bn,” reunited most of the origi- going to Aspect’s other programmes). says Todd. Sub-billion-dollar manag- T nal team behind AHL, the “A $40m allocation in 1998 – that ers “don’t have the ability to invest in pioneering quantitative was a big launch in EuroHedge,” says building that robust infrastructure, hedge fund. The firm’s early days were Todd. “But $40m these days barely particularly in the quant space,” emblematic of the forward-looking even touches the sides. It is inconceiv- he adds. entrepreneurial spirit and almost-DIY able you can start a business with that Aspect currently manages $7.3bn in ethos which drove much of the hedge level of capital today.” nine different strategies across a range fund industry in the late 1990s. The new millennium would see As- of quantitative funds spanning man- “It was literally just the four of us – pect hit its stride, racking up four con- aged futures, alternative risk premia, Mike Adam, Marty Lueck, Eugene Lam- secutive years of double-digit returns currencies and multi-strategy. Staff bert and myself – in a room on Glouces- as the dotcom bubble’s burst sent mar- numbers total 130, with offices in Lon- ter Place,” remembers Anthony Todd, kets into a tailspin. don, Stamford and Hong Kong. Aspect’s co-founder and CEO, of the “Some people had looked at the Conversation turns to which firm firm’s origins in Marylebone. The quar- tech-wreck of the early 2000s, and saw – other than Aspect – Todd would in- tet had the responsibility of setting up the performance of managed futures, vest with, given the choice. “For me, the entire business, from building the and wondered whether those sorts looking at my portfolio construction, infrastructure and sourcing and secur- of returns would ever be repeatable,” I’m going to be looking for something ing data to researching and building Todd recalls. “But just five years later, it completely diversifying from what we the trading models. happened again.” do at Aspect.” He would consider dis- “Right from the start, our approach The 2008 crisis was the second time cretionary managers uncorrelated to was to look at everything we knew in a decade that managed futures had quant strategies and picks out Crispin about medium-term been able to provide strongly diversi- Odey, praising his “remarkable” long- and work out how we could extract fied returns. With Aspect Diversified term track record. every element of performance, from gaining more than 25% in the im- “It’s 100% discretionary, convic- data input right the way through to mediate aftermath of the meltdown, tion-based and to me that’s going to execution,” Todd says of the strategy. Todd believes the events of the year provide a huge level of diversification However, with the rid- emphatically demonstrated, once and from the rest of my investments. It’s ing high, a computer-driven systematic for all, the diversifying benefits of CTA terrific the way he’s doing well this programme offering diversifying re- strategies for investors. year – and good for him. Everyone had turns proved a tough sell to poten- The market crash and subsequent completely written him off.” tial investors. “The pervading regulatory upheaval transformed Todd remains confident about the view at that point was that the industry, says Todd, with new future of the hedge fund industry. one couldn’t use systematic investor expectations leading “Over the course of the next 20 years, approaches to beat the mar- to changes in operational the investment environment is going kets, that markets were com- infrastructure, transparency to be very different,” he says. pletely efficient,” says Todd. and due diligence. The institu- “Many pension funds have got return The founders stuck to tionalisation means firms now targets of Libor +500, or Libor +600 or their guns and ultimately need more assets to get by. +700. How are they going to find those launched their flagship, As- “Now, for the level and returns in a very different environment pect Diversified, with $30m in calibre of infrastructure and from the last 35 years? That’s where I seed capital. Two-thirds came from the investment in R&D that in- think hedge funds, managed futures, a $40m ticket supplied by RMF, stitutions quite rightly and quant investment strategies are the Swiss fund of hedge are looking for, absolutely going to play an important you have role. I’m extremely optimistic.”

ANTHONY TODD GAIN ACTIONABLE INTELLIGENCE FROM OUR PREMIUM CONTENT RESEARCH REPORTS

Our Insights reports shed light on the most important topics affecting hedge fund industry professionals. Concentrating on four key topic areas - Operations, Technology, Investor Relations and Compliance - they provide you with data, opinion and in-depth analysis.

What you can expect from Insights… + Four annual surveys of hedge fund professionals + Two annual surveys of hedge fund investors + Actionable insights and analysis backed by hard data + Dozens of data exhibits, charts and infographics + And much, much more

Find out more: hfm.global/listing-insights

HFM Insights House Ad 2018 FULL PAGE (203x273).indd 1 20/02/2018 16:20 16 CLASS OF 1999 CQS

Hintze builds CQS YEARS OF into credit giant after Class of 1999 “daunting” start

BY WILL WAINEWRIGHT

Sir Michael Hintze’s hotly-tipped 1999 launch now one of global industry’s largest credit firms

any investors believe the Year three times, an achievement “The markets are a giant puzzle and that Hintze’s fund could matched only by Sir Chris Hohn’s The working out how to generate alpha M quickly become one of Children’s Investment Fund (TCI). has always excited me. Performing for the giants of the Euro- Hintze celebrated his sixty-fifth clients is critical. In that sense, the job pean hedge fund industry,” reported birthday in 2018 but shows no signs of has not changed much.” EuroHedge as it broke news of the slowing down, beginning his working The love of puzzles is closely con- impending launch of CQS in 1999. Led day with a 5.30am trip to the gym. He is nected to the advice he has for students by Michael Hintze, a promising Brit- usually at his desk and trading by 7am. or graduates interested in a career in ish-Australian convertible Hintze – a self-confessed “news junkie” hedge fund management. “It is impor- trader, and backed with $200m by – has a legendary appetite for informa- tant to be curious,” he says. “Read a lot First Boston, his former tion and might send 50 or more emails of books about markets and the history employer, the new firm was expected of heavily-annotated research and of finance to understand the funda- to thrive. analysis pieces every weekend to staff mentals, but also read more widely – Two decades on, CQS has more than to read on Monday morning. context is important. $18bn under management and the “I love problem-solving,” says Hintze. “We have a graduate scheme here founder a knighthood in recognition at CQS but plenty of the banks offer

of his philanthropy. But Hintze says CITIZEN OF THE WORLD schemes too which would offer a good

the early days of his firm were not as Hintze was born in northern China on the day the Korean War grounding. Have an open mind, never straightforward as they sound. “It was ended, to a family that had fled from Russia after the Bolshevik lose that curiosity, be focused and be daunting and very challenging, quite Revolution in 1917. A fluent Russian speaker, he was raised humble.” honestly,” he says in an interview and educated in – after his family left Maoist China In terms of key turning points, the and were taken in by as stateless refugees – before reflecting on the twentieth anniver- year 2008 stands out to Hintze as joining the Australian Army. He later pursued a finance career sary of EuroHedge, which started just on Wall Street before starting CQS in London. His varied acutely as it does to most other leading months before CQS began trading. background inspired the artwork, below, for the July/August founders. His firm came through the Despite initial fears, Hintze says he 2018 cover of EuroHedge. trials of that year, but the behaviour of felt ready for the task – plus a keen some prime brokers serving CQS at the sense of duty towards the staff he was time will not easily be forgotten. taking on which has persisted to this “Some behaved well, they were day. “I saw risk, but I also saw oppor- honourable. Others did not, increasing tunity. There are big responsibilities; to our margin and then trying to buy our the client to generate returns, but also portfolio,” says Hintze. “We had been you are responsible for people, their good clients and treated them with livelihoods, their careers and their fam- respect during the good times but that ilies. It’s a big deal.” didn’t seem to count for much – among The task of running CQS, which has some providers – when the crisis hit. since diversified into a multi-strategy Fortunately, we always had multiple credit-focused asset manager, has kept prime brokers and we were able to him busy ever since. The firm’s flagship move balances.” strategy, CQS Directional Opportu- The liquidity test was also unprece- nities, which Hintze personally runs, dented. “As a team we battled hard to has been named EuroHedge Fund of maintain the liquidity levels in port- SIR MICHAEL HINTZE folios necessary to meet redemption I love problem-solving. The who he admires, Hintze has not one but requests if they came,” he says. “Hedge a list of contenders. funds were seen by many investors as markets are a giant puzzle and “There are so many: the industry is ATMs, but some peers failed to meet working out how to generate filled with talent,” he says. “I would that liquidity (which, it should be point- pick out Greg Coffey at Kirkoswald, ed out, benefited them in the long alpha has always excited me. Chris Rokos, both of whom are excep- term, and led to higher redemptions Performing for clients is critical. tionally talented traders, and Marshall elsewhere).” Wace, who have built a great business. After losses in 2008, several CQS In that sense, the job has not Pete Davies at Lansdowne, David Hard- funds had their best year in 2009: Di- changed much. ing at Winton… I could go on.” rectional Opportunities was one, up He is philosophical about the chal- 56.3%. CQS’s client base was trans- SIR MICHAEL HINTZE lenges facing the industry. “Perfor- formed as institutional investors be- mance is and always will be the main came the dominant force in hedge fund are gapping markets.” challenge,” he says. “Providing clients allocations. “This meant an institution- CQS is a different business now with investment solutions will be an alisation of the firm, a focus on client compared to the pre-crisis era, with even greater imperative. There will be solutions and increased complexity the long-only side of the business a blurring of the lines between hedged, in running the business – regulation, now larger than the fully alternative long-only and private equity.” compliance, operations, HR,” says side, which “would have been hard to And will he still be running money Hintze. predict in 1999,” admits Hintze. “I am at CQS two decades from now? Despite He also thinks there have been proud of what we have achieved at CQS reaching the official UK state pension changes in market structure since and how the shape of the business has age, he is still relatively youthful in an 2008. “Liquidity and the prevalence changed over time.” industry where iconic investors like of passive investment funds and algos Among Europe’s leading hedge fund George Soros and Warren Buffett are has dramatically changed the invest- managers, one would be hard-pressed in their late eighties. “In 20 years’ time, ment environment,” he says. “Markets to find a more passionate advocate for who knows?” he says. “God willing I appear to be resilient to news, there’s the industry or enthusiastic supporter will still be running money (if my inves- little apparent volatility and then there of other leading names. When asked tors let me!)”

EUROHEDGE 1999-2019 17 18 CLASS OF 1996 BRUMMER & PARTNERS

Scandi innovator YEARS OF Brummer & Partners Class of 1996 continues 22-year journey

BY WILL WAINEWRIGHT

Founder of the region’s first hedge fund sees a long-term future for the Swedish giant

he challenge for every Zenit was the first Brummer fund the approach in action. hedge fund business – and there have been many since – nine “We are the most active and in- T especially if you’ve been currently sit on the platform, spanning formed investor in all these funds,” says around for 22 years – is a range of strategies and geographies. 69-year-old Brummer, who co-manag- how you reinvent yourself,” says Patrik Brummer has an ownership stake in es BMS alongside Mikael Spångberg. Brummer, founder of $13bn Swedish each manager and invests in their Perhaps the most distinctive aspect of manager Brummer & Partners. “That is commingled funds via Brummer Mul- Brummer’s model is its attitude to fees, a constant challenge.” ti-Strategy, its flagship which remain set at one-and-20 for in- Few individuals in Europe have product. Its oldest CTA, Lynx, is one of vestors in BMS – despite the same 1% played as important a role in their home the nine European names in existence management and 20% performance region as Brummer, whose firm es- when EuroHedge started which cur- fees being charged by underlying tablished the first hedge fund rently manage more than $3bn. funds. in Scandinavia. The com- Brummer knows only too well “Our attitude to low fees is real,” says pany’s collaboration with the importance of choosing to Brummer. “It’s in the walls here.” But regulators in Sweden led invest with the right managers at Spångberg thinks there is more pres- to the development of the the right time and, when required, sure from investors now. “We get more country’s hedge fund indus- an ability to be ruthless. “Indi- credit from UK consultants than we did try and cleared the way for vidual funds can die, sometimes five or 10 years ago because they value Zenit, a long/short equity because they are operating in a our approach more now than in the fund, to launch in 1996. difficult market environment, past.” or if they underperform,” The firm employs about 400 staff he told EuroHedge in a and more than half of the risk-takers feature interview last at its nine underlying funds are based summer. The firm’s outside Sweden. “I want Brummer to decision in 2016 to be here 22 years from now,” says the withdraw its in- founder. “The business model has been vestment in Zenit tested for 22 years – the structure has was evidence of stood the test of time.”

PATRIK BRUMMER Photo © Dan Coleman Photo Credit-Focused, Multi Strategy Asset Management

CQS is a credit-focused multi-strategy For further information asset manager. We are an active asset [email protected] manager with expertise across the credit www.cqs.com spectrum, including corporate credit, structured credit, asset backed securities, CQS (UK) LLP convertibles and loans. 4th Floor, One Strand London WC2N 5HR Our deep experience allows us to offer United Kingdom solutions for investors across a range of return objectives and risk appetites. Our investors include pension funds, companies, sovereign wealth funds, funds of funds and private banks.

We are committed to delivering performance and high levels of service to our investors. CQS has offi ces in London, New York, Hong Kong and Sydney. 20 CLASS OF 2000 CHEYNE CAPITAL

Cheyne finds credit YEARS OF in post-crisis markets Class of 2000

BY WILL WAINEWRIGHT

Stuart Fiertz and Jonathan Lourie describe how their London-based firm changed after 2008

t the height of the finan- equity and convertibles-driven,” says housing provision. “More recently, cial crisis in 2008, Cheyne Fiertz. “Whilst it was a challenging we’ve identified a significant structural A Capital co-founder Jona- backdrop, navigating that stood us in opportunity as European banks shed than Lourie bumped into good stead for the ensuing years.” non-core loans, which led us to start a long-term investor on the street. Wor- The pair had managed credit invest- our stressed credit business, Cheyne ried about navigating the turmoil and ments for wealthy individuals at Mor- Strategic Value Credit,” adds Fiertz. protecting the jobs of Cheyne staff, he gan Stanley before launching Cheyne. The firm has been re-shaped in conse- was told to remember, ”the best type of The firm remains a credit specialist at quence, with the more traditional hedge steel is tempered steel”. heart, though a small part of its $8bn fund strategies it has managed since These words have resonated with under management is invested in oth- the start now accounting for just half Lourie in the decade since. “One er asset classes. Lourie describes the its assets. “This means we now have a wouldn’t trust a pilot who had never firm’s mission as identifying opportuni- diversified and complementary offering been exposed to severe turbulence,” ties presented by market dislocations, with a large private markets business he tells EuroHedge in a joint interview examples being European commercial alongside our more liquid strategies,” alongside co-founder Stuart Fiertz. mortgage-backed securities in 2007 says Lourie. “What has not changed is “Today, as a result of the financial cri- and real estate lending in 2011. our DNA, with good old-fashioned fun- sis, I believe the hedge fund industry is damental analysis continuing to under- among the most aligned businesses for Our mantra is to keep it simple. pin everything we do.”

its investors.” STUART FIERTZ On the subject of technology, Fiertz Lourie, Cheyne's CEO/CIO and Fiertz, sounds a note of caution on the rise its president, started the firm at the The events of 2008 had a big impact of passive and quantitative strategies turn of the millennium. “Starting at on Cheyne’s business, in terms of both made possible by new tech. “We fear that time meant we caught the abso- operations and strategy. “We moved to that strategies such as factor investing lute peak in the Nasdaq and the tech rigorous matching of fund liquidity with can cause winners and losers to acquire bubble, so we had to cut our teeth in investment liquidity, capacity targets a momentum regardless of their intrin- a difficult equity market backdrop and for our funds to protect performance, sic value, with the inherent pro-cycli- with a business that was principally back-ended performance fees in most cality of factors themselves – especially of our funds, lower fees, hurdles etc,” momentum – leading to the risk of says Lourie. The importance of aligned them becoming overcrowded,” he says. interests was underscored. “More than “Our mantra is to keep it simple.” ever, we invest substantial sums of The industry has faced performance money in our funds ourselves and pressures in the last decade, but Fiertz always provide the seed capital for is optimistic. “Many years of low inter- them.” est rates and, until this year, low vola- Regulation following the crisis tility has been a major challenge,” he played a “huge part” in increasing says. “It looks like we are now set for a the opportunity set for alternative change of environment that should suit managers, he adds. Cheyne bought certain strategies.” up books of loans from banks His co-founder agrees. “It’s hard to who had to retreat from the predict what the next 20 years will hold space after 2008 and but, as we come out of a 36-year bull has made inroads market in bonds, interest rates look set in real estate to rise and if equities are as volatile as lending and they have been in other such periods, affordable this could be good for hedge funds.”

JONATHAN LOURIE AND STUART FIERTZ 21 CLASS OF 2002 BREVAN HOWARD

Brevan Howard YEARS OF surfs the macro wave Class of 2002

BY WILL WAINEWRIGHT

Co-founder Alan Howard, whose firm returned to form in 2018, has stark advice for next generation

eing a hedge fund man- the credit crunch and had 85% of the source of satisfaction. “I also get a lot of ager, let alone in global portfolio in cash and short-term securi- satisfaction from finding and developing B macro, is not for the ties as a pre-emptive measure. trading talent, but nothing comes close faint-hearted. Just ask Assets subsequently reached a peak to making money for investors.” Alan Howard, who co-founded one of of $40bn in 2013 before falling as Howard has advice for students and Europe’s longest-running and best- demand for macro ebbed in an era of young financiers who want to be part of known macro names. quantitative easing and little interest the next generation of hedge fund man- “You have to be totally consumed rate movement. The flagship returned agers. “Be intellectually honest with with the job and have the right balance to form last year with a double-digit yourself as to whether you have the of risk appetite and discipline. It’s a gain after losses in three of the previ- right mindset for the job,” he says. “It is mindset. If you can’t live with risk and ous four years. It was a major boost for an incredibly competitive industry with don’t have discipline, being a hedge Howard, who admits markets “seem to huge potential rewards. What makes fund manager is not for you no matter be far less prone to dislocations, which you think you can win against thousands how smart and hardworking you are.” of course lead to trading opportunities”. of people competing for the same dol- Howard, a former Salomon Brothers The firm’s client base became more lars in the market who are just as smart trader, started Brevan Howard with institutional after the 2008 crisis, with as you and work just as hard as you? a team of Credit Suisse First Boston Being smart, hungry and a hard worker colleagues in 2002. In an interview to There will always be a demand just gets you into the game.” Having the mark EuroHedge’s twentieth anniver- for uncorrelated attractive risk correct mindset is all important. sary, Howard says assembling the team Looking ahead, Howard says it is was the most difficult aspect of starting adjusted returns. impossible to predict the next 20 years

the firm. “It is not easy to put together ALAN HOWARD but that the future will be determined a group of highly skilled, motivated and by performance, regulation and what ambitious individuals.” pensions and sovereign wealth funds viable alternatives exist for investors. The $8bn firm uses interest rates, cur- replacing funds of hedge funds. “These “There will always be a demand for rencies and other instruments to trade new investors demanded a much higher uncorrelated attractive risk adjusted macroeconomic trends. Giving a rare level of service and transparency, which returns. So there will always be a hedge insight into his strategy, Howard says the we needed to provide,” says Howard, fund industry,” he says. “How big it gets basics of macro investing have changed adding that regulation has also had an and which investors it caters to will be little in the last 20 years. “The core func- impact on how he runs the firm. a function of how well it delivers on its tions will always remain understanding He differs from some peers by down- promise and how regulation evolves. the evolution of macro policy, what the playing the impact of technology, say- Overall I suspect that the lines between market is discounting and how to struc- ing advances have affected the firm’s traditional ‘hedge funds’ and mutual ture convex payoffs to scenarios that you support functions rather than trading. funds or Ucits will continue to blur as think are mispriced. There are poten- For trading, individual talent will always managers try to cope with regulation tially more tools available, but the be key for Howard. “We remain discre- and fee pressures and investors seek basic job remains the same.” tionary managers,” he says. “Tech- diversification and lower cost.” His business has had ups nology has provided more tools And who does he admire? Asked and downs in its 16-year his- for traders to follow markets and which European hedge fund manager he tory. The highpoint remains form views but trading success is would invest with, Howard initially jokes the financial crisis, when ultimately still a function of indi- he would “double up on myself”. He then Brevan’s flagship posted an- vidual trader skill.” names Rokos, his fellow co-founder who nual returns of 25.2%, 20.4% Making money for Bre- left in 2012 and set up his own macro and 18.7% between 2007 and van’s investors firm in 2015, at which point Brevan took 2009. Howard anticipated is his greatest a stake in the new business.

ALAN HOWARD EUROHEDGE 1999-2019 21 DISCOVER VALUABLE SALES LEADS

CONDUCT MEANINGFUL DUE DILIGENCE

GAIN A COMPETITIVE ADVANTAGE

HFMData

The number one data source for hedge fund industry professionals.

Membership includes: + 17,800 hedge funds profiles + 6,000 manager profiles + $3 trillion in + 3,000 investor profiles

Find out more: hfm.global/data

HFMData House Ad 2018 FULL PAGE (203x273).indd 1 20/02/2018 16:27 23 CLASS OF 1991 TRANSTREND

Transtrend bears YEARS OF witness as CTAs move Class of 1991 to mainstream

BY WILL WAINEWRIGHT

“Hedge fund” term should disappear, says Dutch firm’s founder

arold de Boer, who It was not until the collapse environment above all required opera- founded Rotterdam-based tional excellence.” H Transtrend in 1991, has of the dotcom bubble In terms of ops and technology, the witnessed CTA fund man- that more people became firm is unrecognisable compared to its agement move from the margins to early days. “Recently, one of our guys the mainstream over the course of his seriously interested in our in the electronic trading team told me career. “It has changed from being a investment strategy. that we were working a few thousand somewhat eccentric job to something different orders simultaneously for our that is now widely accepted,” he tells HAROLD DE BOER Diversified Trend Program,” says de EuroHedge. Boer. “Imagine how many traders at the The $4.4bn firm, which has been of more than 26% in 2001 and 2002 desk we would have needed to work trading its Diversified Trend Program undoubtedly helped attract interest in that amount of orders without the cur- since 1992, had hoped for a better those years. The financial crisis period rent technology.” initial reaction from Dutch investors, proved equally important, with gains Looking ahead, de Boer has an in- bred on an investing diet of stocks of 22.4% in 2007 and 29.4% in 2008 teresting wish for the hedge fund in- and bonds. “We expected that a truly placing Transtrend among the best CTA dustry – he would like the term “hedge different investment style would be of performers of the era. fund” to disappear. “What it essentially great interest to the pension funds and De Boer says keeping a grip on oper- represents is active investment man- other institutional investors,” says de ational control was the key to success agement, which I believe is the only Boer. “But our expectation turned out in those volatile years. “Most of our sustainable type of investment man- to be a naïve one: there was no interest efforts focused on the practi- agement,” he says. whatsoever!” calities necessary to be “So, the term 'investment manage- The firm was managing $225m by able to profit from the ment' should by then clearly represent 1999. “Most of these assets came from strong trends in the active investment management, and investors that we initially had not tar- markets. Extreme- what are now called 'hedge fund strat- geted,” says de Boer. “We were better ly high volatility, egies' should be an integral part of that. known in London, Switzerland and reduced liquidity A new and more appropriate name Sweden than in the Netherlands.” The and increased needs to be introduced for ‘investment firm’s first non-European allocation counterparty risk management’ that isn't active.” came from the US, where investors ruled the day. This In an age of rising interest in ESG were already acquainted with CTAs. (environmental, social and govern- Unfamiliarity with commodity mar- ance) investing, de Boer praises the kets and strong trust in stock markets positive impact markets can have on were to blame in the Nether- improving society. “I am happy to see lands. “It was not until the that such developments are on many collapse of the dotcom people’s agendas, including a growing bubble that more number of investors’ agendas,” he says. people became se- “Well-functioning markets serve as a riously interested riverbed guiding such developments, in our investment they are essential in achieving real strategy,” he adds. progress. Contributing to that brings Annual gains HAROLD DE BOER me satisfaction.”

EUROHEDGE 1999-2019 23 24 CLASS OF 1998 INFORMED PORTFOLIO MANAGEMENT PARTNERS

Systematic macro YEARS OF pioneer IPM runs Class of 1998 largest Scandi hedge fund

BY WILL WAINEWRIGHT

Strong post-2008 growth takes Stockholm firm to almost $9bn

tockholm-based Informed index futures. The firm also has $3.1bn strategy launched in a commingled for- Portfolio Management in long-only strategies. mat in 2006 and its breakthrough year S has been quietly pioneer- “The systematic macro universe of came two years later, the fund posting ing the use of systematic managers is relatively small and heter- a 31.3% gain in 2008. macro for as long as EuroHedge has ogeneous and has therefore not been “It was a very exciting time. Our best been in business. Strong growth in the on the radar for many investors,” says year ever,” says Ericsson. “We have al- last decade has lifted assets to almost Ericsson. “Bridgewater and other big ways wanted to be a different type of $9bn, transforming the Nordic man- US names tended to dominate invest- diversifier – the strategy was built to ager into one of Europe’s heavyweight ment exposures but investors have provide low correlation to equities and firms. branched out and are looking for fur- to trend-following strategies, given “We had not been very active mar- ther diversification.” the lack of momentum exposure. The keters,” admits Lars Ericsson, who has IPM was founded by Anders Lindell strategy was well positioned to benefit been with the firm since 2002 and cur- and Jonas Rinné, former colleagues at from what we saw as a normalisation rently serves as acting CEO. “Our mar- Sweden’s JP Bank, a leading fixed in- [in 2008] after years of excessive risk keting team has now grown and a few come trading house. Other senior staff taking, particularly so in the subprime years ago we started targeting the US at IPM share the same background, in- markets.” investor base for the first time, which cluding CIO Björn Österberg, JP Bank’s There was also a “normalisation” in has paid off to the extent that we are former head of quantitative analysis, FX, which helped IPM’s systematic cur- now opening a US office.” and COO Stefan Detlof. rency fund rise 27.9% that year. “After Its systematic macro flagship now With revenues in the fixed income years of sustained and leveraged carry manages $5.6bn, making it business declining, as falling spreads trades in currencies, valuations of fund- the largest hedge fund in and interest rates limited profits from ing currencies were abnormally low Scandinavia (a title long trading and market making, Lindell while the typical carry currencies saw held by Lynx, the Brum- and Rinné spotted an opportunity. their valuations pushed to unsustain- mer-backed CTA). IPM Pension funds and other institution- able levels,” says Ericsson. “When risk uses models to system- al investors were growing in Swe- assets sold off significantly in 2008, the atically trade liquid den but lacked the capability to strategy continued to capitalise from instruments such as seize tactical opportunities across our currency positions.” currencies, government asset classes and markets. At the time, the strategies managed bond futures and equity IPM was among the first to im- less than $1bn between them. Sub- port the Global Tactical Trading sequent growth has been rapid and Allocation (GTTA) approach to Ericsson says the firm is approaching Europe, initially offering capacity in the macro strategy, which mandates to investors opened in a Ucits format in 2015 and via managed ac- already runs $1.6bn. counts. “A lot of IPM’s Staff numbers recently hit 60 and early allocations may increase to 70 in the next year or came from Nordic, so, he adds. “Some time in the future UK and Dutch insti- we may expand into another strategy tutional investors,” using the same fundamental and sys- says Ericsson. Its tematic DNA, but there are no immi- LARS ERICSSON systematic macro nent plans.” YEARS OF

INDUSTRY CHRONICLE Key moments from the past 20 years 26 EUROHEDGE THE FIRST YEAR 1999: the first year of EuroHedge

BY WILL WAINEWRIGHT

he first issue ofEuro - FEBRUARY Hedge was printed in Europe bucks the trend and wins T January 1999 and ran to new money eight pages in length. Its The early issues have a clear message: purpose? To shine a light on a quickly Europe’s hedge funds are on the rise. growing but little-understood area of A piece on the second front page cites asset management: European hedge research estimating the size of the Eu- funds. ropean industry to be $15bn, up from “Promising new fund managers of- $14bn a year earlier. “Europe is the hot ten 'close' within a few weeks of launch, place for hedge fund investment,” the which means that it is imperative to find magazine reported in February. “De- them quickly,” stated an editorial in the spite heavy redemptions from US man- first issue. “You have to find them. They agers after the Long-Term Capital Man- won't find you. And it is worth looking agement debacle, European-based because, although there is little infor- managers, particularly those investing mation available on European hedge in European bond and equity markets funds, they are an expanding asset class continue to attract capital.” and are performing well.” The magazine was initially a cottage Truth and lies in the closing game enterprise. Founder Iain Jenkins, a fi- “Working out which hedge funds are nancial journalist, wrote the entire first about to ‘close’ is the new game in issue in his spare room and his wife Suz- Europe,” declared another February ie proof-read the articles. But interest in article. “Investors need to know the the magazine (initially titled EuroHedge ‘closing’ rules, as some funds, it ap- Update) quickly grew, both from inves- their feet, while the sector’s rapid pears, are more ‘closed’ than others.” tors keen to learn about a sparsely-cov- growth defied the gloomy predictions There follows a list of funds which were ered sector in Europe and managers sparked by the demise of Long-Term either closed or almost closed, with an interested in how rivals were faring. Capital Management a year earlier. As explanation of their admission policy. Two decades on, it is uncanny how the magazine celebrates 20 years, we For instance, John Armitage’s $1.5bn some articles in the first few issues have delved into the archive to chron- Egerton flagship was one of Europe’s strike parallels with today. “Investors icle 1999 using EuroHedge headlines. biggest funds and closed to all inves- forgive Odey with $75m boost” runs tors, while Marshall Wace’s Eureka a headline in the January 1999 issue, JANUARY flagship, running $550m, was only ac- which reveals how the fund manager Sweden's high-flying Zenit pushes cepting money from existing investors. had regained investor trust in the years into the US following a record drawdown in 1994. Stockholm giant Brummer & Partners MARCH The fortunes of Marshall Wace, Sloane had launched Zenit, the first Scandina- Vive la différence continentale Robinson and other still-familiar names vian hedge fund, in 1996. The $900m “It is easy to believe the European are tracked in the early issues. But in long/short equity fund was the top hedge fund industry is just a London many other ways it was an entirely performer in Europe in 1998, gaining phenomenon – but it isn’t,” EuroHedge different industry, not least size: the 90.8%. Performance was boosted by asserted in issue three. “While most sector in Europe managed just $15bn at the fund’s decision in the summer to managers are indeed based in London, the start of 1999. raise its coverage of US equities from there is a growing band of promis- That year was a landmark one not zero to 36% of its portfolio. “It paid off,” ing managers on the continent.” The only for EuroHedge but the industry reported EuroHedge in its first issue. piece informs readers about hedge in general. Many of Europe’s leading “While many other European-based funds managed in Frankfurt, Paris and names, including Lansdowne Partners, hedge funds missed the early part of Lugano and says investors are keen Aspect Capital and CQS, were finding the post-October rally, Zenit didn't.” for non-UK exposure to diversify their portfolios. “Rather alarmingly, many last year, partly because it started continues the pattern of high-profile of the London managers were running trading in the eye of the third quarter defections from the proprietary trad- the same 'shorts' (SAP, Nokia and M&S) storm,” reported EuroHedge in a pro- ing desks of the leading London invest- at the start of the year.” file, which tipped the firm to succeed ment banks,” reported EuroHedge. following strong early performance. APRIL “With Long-Term Capital Management SEPTEMBER Uncle Sam struts into London blowing up and the market seemingly Risk arb funds race into Europe The fourth issue said growth in the Lon- in freefall, it is hardly surprising that Like , was don hedge fund industry was driven Lansdowne scarcely made a ripple on another strategy starting to put down not only by domestic managers start- the stormy waters.” roots in the Europe industry, which had ing funds, but US firms such as Citadel hitherto been dominated by long/short starting UK offices. “Tempted by talk of JUNE equity. “Europe is the hottest risk arbi- huge opportunities and less competi- Ex-AHL team launch CTA and European trage market around,” claimed Euro- tion than they face in their home mar- equity quant funds Hedge. “Europe, which was once a tiny ket, US funds are crossing the Atlantic “A new range of quantitative products merger market compared to the US, is to set up research and trading opera- is being launched by Aspect Capital, starting to catch up.” tions.” Other US firms mentioned were a company which reunites six of the Och-Ziff and Moore Capital, whose team from AHL, the successful quan- OCTOBER founder Louis Bacon “is now part of titative investment company that was Trading secret of Gartmore’s Guy the social and shooting set in London bought by ED&F Man in 1994,” report- Roger Guy, one of the most successful and owns a house in The Boltons, near ed the sixth issue. Swiss investor RMF long-only traders of the nineties, had Chelsea.” was to be an early backer, showing the turned his hand to long/short equity important of funds of hedge funds to in February 1999 and it had quickly MAY many early startups. Aspect was one of proved successful. EuroHedge report- Eureka approaches $1bn as top several new launches attracting sup- ed that Gartmore are hoping Guy “will funds ‘close’ port, with EuroHedge data suggesting successfully lead them into the brave Marshall Wace was growing quickly in new hedge funds drew in $1.5bn in the new world of hedge funds with some the early days of EuroHedge and the first half of 1999. style.” The firm went onto be one Eu- magazine reported on its plan to cap its rope’s main hedge fund players in the assets of Eureka, its flagship, at $1bn. JULY/AUGUST following decade. The firm was not alone in running out Brokers square up for prime fight of capacity. “Eureka's growth has been The growth of European hedge funds NOVEMBER/DECEMBER the most spectacular as it is on the affected many areas of the financial US cavalry rides into Europe point of rocketing to Europe's elite ecosystem. Prime brokers, in particular, “From family offices to the legendary billion dollar club of Sloane Robinson, were well-placed to benefit. “Extraordi- 'Dallas doctors', endowment funds and Egerton and Zenit in eighteen months.” nary things are happening in the world the growing army of fund of funds, US of London prime broking which have investors are increasingly willing to Hintze picks $200m arb fund team profound implications for investment invest in European hedge funds,” Eu- Michael Hintze was putting the final banks, hedge funds and investors,” Eu- roHedge reported in the final issue of touches to his new team after leaving roHedge reported in July. “The first is a the year. “Many US investors say that Credit Suisse First Boston to start CQS. dramatic explosion of broking salaries. they are now looking to invest slugs He was backed with $200m by his old The second is the move by investment of $100m in the right European man- employer. “CSFB's decision to hive-off banks towards 'capital raising' for hedge ager, and most say that their preferred Hintze's desk into funds. Both are part of a looming 'prize strategies are convertible or merger a separate fund – owned by Hintze – is fight' between investment banks eager arbitrage.” US money was not the only likely to persuade other banks to do to win a greater part of the booming route to fresh investment mentioned in similar deals with their prop desk stars,” European hedge fund market.” the issue. The move by Stamford Asso- wrote EuroHedge, a prediction which ciates, a UK consultant, to came true in the years which followed. Salomon team crosses Rubicon with start a hedge fund investment vehicle macro fund was labelled “the first indication that Lansdowne poised for lift-off Paul Brewer’s launch of Rubicon, one of mainstream pension fund consultants Lansdowne assets had hit $63m by London’s longest-running global mac- are ready to embrace hedge funds.” May, but few had heard of Paul Rud- ro funds, was reported in the summer Industry growth was accelerating: 70 dock and Steven Heinz’s long/short of 1999. He was previously the co-head hedge funds started in 1999, almost equity firm. “The fund is still one of the of the Salomon Brothers global foreign three times the 25 which started in least known of the clutch of European exchange operation in London. “The 1998. They attracted a record $3.5bn long/short managers that launched fund will launch in the autumn and compared to $1.5bn the year before.

EUROHEDGE 1999-2019 27 28 EUROHEDGE TWENTY YEARS OF THE EUROPEAN HEDGE FUND INDUSTRY Twenty years of European hedge funds

BY NICK EVANS

01_EH_0105_cover 18/1/05 5:15 pm Page 1

LIFE’S NOT TOO SHORT THE RECOVERY BEGINS THE EUROHEDGE SUMMIT Voltaire, Zadig long/short veteran New launches pick up in H2 2009 Marshall, Pellegrini and Ruddock Saglio goes for long-only growth and industry assets start to climb join top-tier Paris speaker line-up »12-15 »16-17 »10-11 1999 Volume 7 Issue 1 January 2005 www.eurohedge.com

HedgeFund Intelligence $15bn industry assets NYLon joins fixed-income CONTENTS 2 Editorial The credit revolution top tier with $1.2bn launch 3-4 News Shutdowns pass 70 after year-end flurry. Lansdowne gears up for global asset fund with A significant new player in the three-month period at NYLon’s together for at least seven years VOLUME 12 ISSUE 2 FEBRUARY 2010 WWW.EUROHEDGE.COM EuroHedge Composite Index: 19.7% fixed-income and currency space request. The fund will not and have all worked for Burnell, new hire Davidson. MPC diversifies EuroHedge has emerged with the launch of reopen for at least one year. who has overall responsibility for into commodity space. Insight to NYLon Capital, a macro and Heading the team is managing all trading and risk decisions. enter the game. Mittal family backs Dawnay Day mc2 fund. Dalman hires relative value firm run by a team partner Alan Burnell – the Knott acts as the fund strategist. Brummer moves into London with Observatory tie-up for quant strategy. Waine joins Polar of ex-Barclays Capital traders. former head of government NYLon is one of the biggest small caps team. Brummer lines up The firm opened and closed its bond and fixed-income launches in the fixed-income and Brummer & Partners, the long- an annualised return addition, Brummer is with other third-party funds, the First issue of EuroHedge in January. managers for new US equity fund established and well-performing of 18% on a Sharpe also investing some of Observatory management team NYLon Flagship Fund on day derivatives trading at BarCap. macro space for many months. Stockholm-based multi-strategy ratio of nearly 2, and its own capital in the will continue to own the company one and was forced to scale back Three BarCap colleagues – The strategy focuses on G7 8&11 New fund news hedge fund group, is adding its fi rst with very low correla- Observatory fund. in partnership with Brummer. investors. The strategy went live David Knott, Justin Excell and bonds, swaps, derivatives and Cairn set for credit launch. Hanover in London-based manager to its grow- tion to corporate credit The move expands Brummer, which was founded in in early January with assets of Domenico Crapanzano – and FX, and will also allocate private equity crossover. Elgin widens ing portfolio through a partnership market indices. The the Brummer group’s 1995 and is led by founder Patrik with credit markets specialist fund lost just 5% in reach into the corpo- Brummer and CEO Klaus Janttï, is around $600 million that will rise Steve Cain, formerly of opportunistically to emerging with Spectrum. New Delta global equity strategy from Trafelet. North of Observatory. the credit market melt- rate credit sector at a one of Europe’s largest and most Total assets in European hedge fund to $1.2 billion by March. Shumway Capital and Deutsche markets and currencies. Observatory, led by 20-year credit down of 2008 and took time of high opportu- respected hedge fund fi rms. South in emerging markets. Old style Barclays, together with the Asset Management, complete The fund trades only in market veteran Shazad Ghaffar, was full advantage of the Patrik Brummer nity and volatility in The group has been among the approach for Mitteregger. Pictet plans other investors that include a the partnership line-up. government debt, with no one of the earliest Europe-based credit sector’s revival global credit markets. most impressive European hedge debut. Baring eyes eastern Europe. number of top US funds, are The team – with the exception exposure to credit or mortgage corporate credit-focused hedge in 2009, returning a stunning 67%. It also gives the Scandinavian fi rm fund performers through the crisis Martin Currie plots EM, financials funds back at the end of 2003 and Observatory will become one of a presence in Europe’s fi nancial of the past two years, with several investing the money over a of Cain – have all worked markets. has achieved very strong perform- 10 managers on the Brummer & centre, extending its geographical of its funds and strategies achiev- industry stand at $15bn. EuroHedge 12 New fund profiles ance since inception. Partners platform, with an initial base to eight countries. ing EuroHedge Award nominations Fleming Family & Partners kicks off Since July 2004 the Observatory allocation of 5% from the fi rm’s Following the model that the again this year for their strong per- BNP Paribas mulls single-manager emerging market Credit Markets Fund has generated fl agship multi-strategy fund. In group has pursued successfully formance in 2009. Hohn fund raises at least $18m business. Generali seeds Tenax multi-strat spin-out global financials fund from UBS duo CONTENTS Ton Tjia, one of the pio- short equity invest- for charity after 43% debut year neers of the long/short eq- Long/short ing – aiming more of prop trading team 14-15 Building the 2 Editorial All aboard for a roller- uity industry in Europe as to the market-neu- Composite Index posts median annual coaster ride for the markets in 2010 the co-founder of Olympus tral end of the spec- The Children’s Investment Foundation Business High-octane funds fuel Capital in 1997, has joined equity pioneer trum and targeting Fund, the ground-breaking new is separately BNP Paribas is considering a RAB’s drive for breadth and growth News Ex-GLG manager Gedeon 3-6 ex-Gartmore man Jonathan low directionality, hedge fund launched by Chris managed by move to spin out a large chunk goes live with Mereor. Centaurus targets 16-18 Industry analysis small-cap risk arb. Quantica innovates Sharpe and former Caze- Ton Tjia joins Jonathan Sharpe Ralph Jainz low volatility and Hohn that donates a proportion Hohn’s wife of its proprietary trading with emerging markets-focused CTA nove broker Ralph Jainz at low correlation to New funds raise $22bn in 2004, with of fees to children’s charities in and activities into a separate multi- strategy. Permin plans ‘pure alpha’ Ratio Asset Management Jainz, which is also run equity markets. equity roaring back and a high ratio of equity trading fund. Mako’s high-fl ying and plans to launch a pan- Sharpe’s Ratio with a low net but is fo- The new fund is being gain of 19.7% in 1999, its highest-ever developing countries, raised a independent strategy hedge fund group. Pelagus passes $600m. GLG hits fund new strategies from established firms European all-caps long/ cused on small and mid- seeded with internal capi- hugely impressive total of at trustees, and Although no final decisions launch trail again as new distressed short fund in May. with an annualised return cap stocks with a strict tal and the Ratio principals least $18 million for charity invests have been taken, a standalone EuroHedge Awards strategies soar. Ex-Hermes man Ricci’s 20-26 Marinvest builds solid track record. After leaving Olympus of over 10% over 12 years upper limit of €5 billion are now talking to poten- during its first year. Chris Hohn primarily in firm could have around €1 Who won what and who came close Italian family offi ces support Alkimis at the end of 2005, Tjia and just one down year in in terms of market cap. tial day-one investors. The fund had a scintillating long-term projects, particularly billion of capital from the bank in our celebration of fund excellence spent three years running 2002. Tjia and Jainz have They hope that the 7-9 Fund profi les a long/short equity book His new Ratio European known each other since the generally cautious view return of 43.65%, and was the in Africa – rather than disaster and some €500 million to €1 Althea, Eschler, Taiga and Sanctum return to date. Egerton Capital is big- Performance profile at Millennium Partners Opportunities Fund will days when Jainz broked to of equity markets among clear winner as Fund of the relief initiatives such as those billion from outside investors. 28-29 Baptism of fire tests new GMP event 18-19 Performance profi le – where he generated be an all-caps strategy, Olympus at Cazenove and investors is fuelling an in- Year overall at the EuroHedge put together to deal with the It would be a sizeable fund as M&A pace starts to quicken Charlemagne sticks to its guns with strong returns for three focused on fundamental has known Sharpe, who crease in appetite for more Awards for 2004. recent Asian tsunami. Trustees operation, with around 15 market-neutral EM equity approach years through very diffi cult stock-picking and running left Gartmore in 2005 to market-neutral strategies markets. a low net exposure. set up Ratio at the start of this year after the strong The fund generated about $7 include Peter McDermott, traders and up to 60 staff in 30 Performance reports 22-23 Performance reports million for The Children’s head of HIV/Aids at Unicef. total, and would operate a Long/short ends on a high. Bailey Long/shorts diverge as jitters hit His long-term record It will complement the 2006, since 2006. directional gains that in- is one of the longest and fl agship Ratio European The three men share a vestors and managers were gest European hedge fund with $1.5bn Coates turns positive as event funds equity markets. CTAs tumble again. Investment Foundation from Hohn’s initiative has multi-strategy approach BlueGold drops 10% as commodity strongest in the business, Fund run by Sharpe and common approach to long/ able to enjoy in 2009. management fees, with $11 prompted others to take a encompassing fly. CB arbs gain in credit rally. Plus funds stumble. Credit funds fl y high million more performance- similar course, such as Richard arbitrage, convertibles and the EuroHedge year-end medians 24-39 League tables EuroHedge related. This could be boosted Urwick with UC Financials and credit trading, long/short performance data for January 2010 PLUS: The full report on The EuroHedge Awards for 2009 G EuroHedge performance data for »Centre pages by partners, who may make Luca Bechis with Richmond, equity, risk arbitrage and event- December – pages 31-43 in AuM. CQS and Aspect Capital launch. further donations. The though with varying terms. driven strategies.

01_EH_0210_cover.indd 1 22/02/2010 18:52 2000 Global Investors (now BlackRock), Perry, keynotes at second EuroHedge Sum-  $46bn industry assets BlueCrest, Rubicon, Threadneedle and mit. Hohn’s TCI becomes first manager EuroHedge Composite Index: 13% Lazard. Brevan Howard launches. to win fund of the year in consecutive Number of funds: 310 years, a record which still stands. Nasdaq Composite stock market in- 2003 dex peaks in March before starting to  $168bn industry assets 2006 crash, bringing end to dotcom bubble. EuroHedge Composite Index: 7.7% $459bn industry assets  Hedge funds substantially outperform Number of funds: 810 EuroHedge Composite Index: 9.7% stockmarket indices and traditional Man Group buys 25% stake in BlueCrest Number of funds: 1,509 asset managers in global equity bear for £105m. Perry European manager Jabre Capital Partners founded in market that ensues. Cheyne Capital and Chris Hohn quits to start The Children’s Geneva and raises $2.5bn at launch, BlueCrest launch. Man Group demerges Investment Fund. Lazard Asset Man- three years after Philippe Jabre re- from agricultural commodities busi- agement hedge fund business rocked ceived record £750,000 market abuse ness, ED&F Man. as William von Mueffling leaves to set fine from Authority. up Cantillon, raising a record $2.5bn at More than 4,000 industry participants 2001 launch. EuroHedge/Hedge Fund Intelli- attend Albourne Partners’ Hedgestock  $64bn industry assets gence acquired by Euromoney Institu- hippie-themed ‘conference’ at Kneb- EuroHedge Composite Index: 6.5% tional Investor. worth House. Vega’s assets under man- Number of funds: 446 agement plummet from peak of over Ex-Mercury Asset Management/Merrill 2004 $11bn in 2005 to low of $1bn following Lynch Investment Managers duo Peter  $256bn industry assets two years of poor performance. Davies and Stuart Roden join Lansdowne EuroHedge Composite Index: 6.3% to launch UK Equity fund, which becomes Number of funds: 1,030 2007 Developed Markets flagship. Assets at RAB Capital floats on London Stock Ex- $575bn industry assets  Marshall Wace Eureka capped at $1.4bn. change’s AIM market, at 25p per share. In- EuroHedge Composite Index: 7.6% Firm begins work on system assessing augural EuroHedge Summit held in Paris Number of funds: 1,617 sell-side ideas, which becomes Tops. in spring. First-year speakers includes Hedge Fund Standards Board (initially Peter Davies, Luke Ellis, Reade Griffith, Hedge Fund Working Group) formed by 2002 David Harding and Sushil Wadhwani. leading European hedge funds as clouds  $84bn industry assets gather over financial markets and threat EuroHedge Composite Index: 4.2% 2005 of political interference rises. GLG floats Number of funds: 578  $325bn industry assets on New York Stock Exchange, with Ja- EuroHedge Awards held for first time in EuroHedge Composite Index: 8.7% bre protégé and star emerging markets/ London in January. Inaugural winners Number of funds: 1,258 macro trader Greg Coffey ringing NYSE include CQS, Gartmore, Tosca, Barclays Marshall Wace co-founder Ian Wace opening bell on first day of trading. fuelling widespread investor disen- US private equity group KKR acquires 2008 chantment and frustration. RAB Capital 24.9% stake in Marshall Wace (which $399bn industry assets  delists from London Stock Exchange, has subsequently increased to almost EuroHedge Composite Index: -4.8% at 10p per share. Henderson buys 35%) to form long-term strategic part- Number of funds: 1,638 Gartmore for 92p per share, less than nership. BlueCrest goes private, returns Problems in securitised credit markets half its IPO price at the end of 2009. all outside capital to investors. Leda escalate into full-blown financial cri- Braga starts Systematica Investments sis. Lehman Brothers goes bust, global 2012 in Geneva after leaving BlueCrest, tak- financial system nearly fails. Short-sell- $436bn industry assets  ing the BlueTrend CTA program with ing bans introduced by regulators. EuroHedge Composite Index: 4.8% her. Rokos starts Rokos Capital Man- Hedge funds suffer losses but outper- Number of funds: 1,084 agement. form plunging stockmarkets, despite Ex-Goldman prop trading star market liquidity crunch and heavy Pierre-Henri Flamand’s Edoma Part- 2016 redemptions. Many asset managers im- ners shuts down, less than two years $484bn industry assets  pose gates and other withdrawal-lim- after raising $2bn in one of the largest EuroHedge Composite Index: 2.2% iting measures. Sharp rise in fund clo- and most feted European hedge fund Number of funds: 935 sures, notably $3bn Peloton Partners. launches on record. AIMA opens office Sir Michael Hintze’s CQS Directional Madoff fraud uncovered. Coffey quits in New York. Lansdowne co-founder Opportunities wins EuroHedge Fund of GLG, joins Louis Bacon’s Moore Capital. Paul Ruddock knighted for services to the Year award for third time. Cheyne arts and philanthropy. Coffey ‘retires’ becomes second group to win a third 2009 from Moore Capital and hedge fund Management Firm of the Year award. $382bn industry assets  industry, at the age of 41. Luke Ellis succeeds Manny Roman as EuroHedge Composite Index: 9.7% CEO of Man Group. Marshall Wace Number of funds: 1,309 2013 co-founder Paul Marshall knighted for Tsunami of new regulatory measures $475bn industry assets  services to education and philanthro- aimed at hedge funds in the US and EuroHedge Composite Index: 8.2% py. Brexit referendum divides industry Europe. First draft of EU’s Alternative Number of funds: 1,074 heavyweights. Investment Fund Managers Direc- Sir Chris Hohn’s The Children’s In- tive emerges. G20 calls for increased vestment Fund becomes first fund to 2017 scrutiny of “systemically important” win the EuroHedge Fund of the Year $565bn industry assets  hedge funds. Markets start to recover award three times. Brevan Howard’s EuroHedge Composite Index: 5.4% from crash. Hedge fund performance AuM peaks at over $40bn, BlueCrest’s Number of funds: 1,059 rebounds dramatically. Trafalgar’s Lee at $37bn. Former GLG co-CEO Manny Man Group’s assets under manage- Robinson moves to Monaco. Roman takes over from Peter Clarke ment pass $100bn mark for first time. as chief executive of publicly-quoted EuroHedge/Hedge Fund Intelligence 2010 Man Group. Reputation of CTAs, which acquired by Pageant Media, owner of $423bn industry assets  soared in 2008, dented as trends dry up. HFMWeek. Greg Coffey prepares for in- EuroHedge Composite Index: 6.0% dustry return with Kirkoswald Capital Number of funds: 1,223 2014 Partners in London. Eurozone crisis erupts. Man Group ac- $479bn industry assets  quires GLG Partners for $1.6bn as pace EuroHedge Composite Index: 3% 2018 of industry consolidation intensifies. Number of funds: 1,047 $579bn industry assets (at mid-year)  Adoption of Ucits onshore hedge fund AIMA establishes Alternative Credit EuroHedge Composite Index: -1.5% framework by managers and investors Council, underlining growth in private Number of funds: 1,147 (at mid-year) starts to take hold in Europe as ‘liq- credit and non-bank alternative asset Global hedge fund assets hit all-time uid alternatives’ appeal to investors’ management. Jon Hiscock’s GSA Inter- high at over $3trn. ExodusPoint leads a changing needs. Key Gartmore Euro- national flagship fund wins EuroHedge resurgence in major new fund launch- pean equity duo Guillaume Rambourg Equity & Quantitative es in the US and Europe. Assets under and Roger Guy quit listed group. Strategies award for fourth time in six management at Rokos Capital Man- years. Brevan Howard co-founder Chris agement overtake Brevan Howard. Cof- 2011 Rokos contests non-compete restric- fey’s plan to move firm from London $427bn industry assets  tion with old firm. to New York revealed. Volatility and EuroHedge Composite Index: -2.6% market routs in February and October Number of funds: 1,158 2015 trigger heavy hedge fund losses across Global hedge fund performance weak- $511bn industry assets  most strategy areas. Philippe Jabre an- ens again with a second negative EuroHedge Composite Index: 3.7% nounces return of capital to investors year after the 2008 industry debacle, Number of funds: 965 after losses.

EUROHEDGE 1999-2019 29 30 COMMENT Two decades in the front row

Nick Evans, who edited EuroHedge between 2004 and February 2018, reflects on the magazine and industry’s joint journey over the past two decades

uroHedge began life in the turned out to be not quite so smart after anti-institutional and ever-so-slightly aftershock of one seismic all. And there have been endless other naughty culture. E financial crisis, starting surprises and shocks along the way too But, for all the changes of the past 20 just a few months after – not least in terms of some of the firms years, at the heart of the industry there the collapse and bail-out of the Green- that haven’t made it and sometimes, it remains that sense of community, of wich-based hedge fund Long-Term Cap- has to be said, in terms of those that have. innovation, of individualism, of breaking ital Management in 1998. The investor base these days bears the mould, of pushing the envelope, of At that less-than-auspicious juncture, almost no resemblance to that of old – doing things that others either don’t or there was hardly a European hedge with the wealthy individuals, the private can’t, of offering something distinctive fund industry to speak of – with the banks and the funds of funds that pre- and valuable to investors, of creating performance data listings in the early viously dominated the hedge fund cli- enterprises of real substance and sus- issues of the magazine barely filling a entele giving way to pension funds and tainability. Above all, of identifying and page. And there were plenty of people other institutional investors, along with exploiting an “edge” – and one that is who doubted that there would ever be their attendant consultant advisors, demonstrable, repeatable and scalable. one of any note. who see things through a profoundly Hedge funds may not yet have be- Well, they were wrong – and Iain Jen- different prism. come entirely respectable, and in some kins, the founder of EuroHedge and the Gone are the glitzy cocktail parties, respects it is perhaps a good thing if they creator of the business that developed the perpetual chatter and gossip, the never do. But the good ones, of which into Hedge Fund Intelligence, was right. continual need to be “in the know”, the there are many, have certainly become It may not always have been an alto- permanent quest for the hot new thing. respected – even if they have probably gether smooth or straightforward ride, Gone too is much of the glamour long since given up hope of being liked. but boy has it been an entertaining and and mystique that characterised the In many ways the transformation in eventful one. industry back then – and, as some might the industry – certainly here in Europe In the two decades since then, say, the “sex, drugs and rock ‘n’ roll” ele- – since EuroHedge first appeared has EuroHedge and its sister publications – ment of what felt like a distinctly edgy, been total. But in one key respect, little and the now $3trn-plus global hedge has changed. fund industry that they collectively It is a remarkable fact that It is a remarkable fact that many of the cover – have lived through the bursting many of the funds and firms that funds and firms that launched around of the dotcom bubble and the ensuing the same time as EuroHedge, in those bear market, the 9/11 attacks, the 2003- launched around the same time early go-go days, have emerged and 2007 hedge fund industry surge, the as EuroHedge have emerged and endured as the true leaders and stand- 2008 crash and the near-failure of the ard-bearers of the industry in Europe. entire global financial system, the cred- endured as the true leaders and Marshall Wace, Lansdowne, GLG, CQS, it crunch, the Eurozone crisis, QE, the standard-bearers of the industry Cheyne, TCI, Brevan Howard, BlueCrest – second tech-fuelled equities boom and these, and others before and since, have umpteen other ups and downs along in Europe. been the firms that turned Europe’s the way. NICK EVANS hedge fund community from a backwa- Over those 20 years, the industry has ter cottage industry into a mainstream changed out of all recognition from its area of the asset management world. pioneering, freewheeling, renegade, EuroHedge has grown up alongside have-a-go, seat-of-the-pants origins them – and, in lots of ways, we have all – morphing into the more mature, in- grown up together. They’ve all had their stitutionalised and straitlaced global highs and lows over the years, as have alternative investment management we. There have been bumps and scrapes business that exists today. and incidents galore. But it has been an Countless funds have come and gone unforgettable journey to have been a in that time. Myriad new stars have part of – and we wouldn’t have missed emerged, only to be extinguished again. it for the world. Numerous smart new wheezes have So here’s to the next 20 years. Open to ideas

As expert investors for institutions around the world, IPM analyzes fundamental data to develop strategies, which are designed to deliver attractive, risk-adjusted, long-term returns. Our open, research-led, culture reflects our Swedish origins – commitment to staying open and curious; we simply test ideas rigorously and implement the best of them systematically. Perhaps that’s why we now manage over $8 billion globally for major institutional investors. And we are always striving to further refine our research process and investment strategies. Our guiding principle is that systematic investment models should be based on intuitively resonant and rational ideas with a clear foundation in sound economic principles.

Find out more about our approach at ipm.se or contact us at [email protected]

Serious about the fundamentals

IPM is regulated as an AIFM by the Swedish Financial Supervisory Authority (Finansinspektionen), and registered with the U.S. Securities and Exchange Commission as an investment advisor since 2011, and as a COP/CTA with the Commodity Futures Commission since 2013.

IPM_EuroHedge_full page_131218_AW.indd 1 13/12/2018 11:37 32 LOOKING BACK TO 2008 MEMORIES OF THE CRISIS 2008: the year that changed everything

BY WILL WAINEWRIGHT

Sir Paul Ruddock, Alan Howard, Sir Michael Hintze, Luke Ellis and Lee Robinson discuss the events and impact of a defining year for the industry

he memory of one meet- ing stands out as Lee T Robinson recalls events leading up to the finan- cial crisis a decade ago. The co-founder of Trafalgar Asset Managers, a leading London hedge fund, was shown the short-mortgage trade by ’s Gregg Lip- pmann, who was later written into the history books in The Big Short by Michael Lewis. “I remember the hair on the back of my neck standing up – I thought it was one of the best risk/reward trades I’d ever seen. We put the trade on, leading me to see we were going to have a credit crisis much worse than 2002/03 and needed to get our inves- tors through it unscathed.”

Robinson was one of the few man- 2008: TIMELINE OF A CRISIS YEAR agers to successfully navigate the FEBRUARY: UK government announces Northern Rock to be nationalised, five months after crisis in 2008, as Catalyst, his flag- biggest run on a British bank in more than a century. ship fund, rose 5%. Many other funds JULY: US financial authorities step in to assist America's two largest lenders, Fannie Mae and tanked. It was a cataclysmic period Freddie Mac. for financial markets, in which hedge SEPTEMBER: Fannie Mae and Freddie Mac rescued by US government in historic bailout. Lehman funds and their service providers were Brothers files for bankruptcy. Lloyds TSB takes over HBOS after run on shares of UK’s biggest tested to the limit. mortgage lender. A second, Bradford & Bingley, is nationalised. US politicians announce $700bn Alan Howard remembers his financial rescue plan. “absolute determination” OCTOBER: US Congress passes rescue plan in biggest intervention in markets since Great to cut his fund’s gross Depression. UK passes series of measures to prop up banking sector. exposure and remove NOVEMBER: US government announces plan to rescue Citigroup. IMF agrees $2.1bn loan for anything “complex” from the portfo- Iceland after a collapse in its banking sector. lio. “That consumed us from the day DECEMBER: US enters recession. President Bush announces plan to use some of US rescue it became obvious Bear Stearns was package on saving car-makers. Interest rates cut across the world. in trouble,” he says. Brevan Howard’s flagship rose 25.2% in 2007 and 20.4% ful, but it could have been worse. We “You couldn’t rely on counterparties in 2008, its best two years on record. felt relatively prepared.” being solvent. Fiat currency, the bank- For Sir Paul Ruddock of Lansdowne Liquidity is a recurring theme during ing system, it is a house of cards that Partners, navigating the counter-par- retrospective interviews with leading could fall apart,” says Robinson. “It ty environment was the biggest chal- managers of the day. “As a team we was probably as late as 2010 I was able lenge. “We had always had Morgan battled hard to maintain the liquidity to take stock and realise quite how big Stanley as our main prime broker; we levels in portfolios necessary to meet that period was for financial markets.” also had Goldman and UBS, and were redemption requests if they came,” The typical profile of investors allo- adding Deutsche Bank. In the wake says CQS founder Sir Michael Hintze. cating to hedge funds changed. “We of Bear Stearns collapsing we had cut “Hedge funds were seen by many in- were forced to become much more ‘in- counter-party risk with Lehman and vestors as ATMs, but some peers failed stitutional’ as our client base changed Merrill Lynch by taking positions back to meet that liquidity (which, it should over a period of less than 12 months to the fundamentals (e.g. instead of be pointed out, benefited them in the from being overwhelmingly funds running a swap we’d just run the cash long term, and led to higher redemp- of funds to overwhelmingly pension position).” tions elsewhere).” plans and sovereign wealth funds,” The behaviour of some counterpar- says Howard. “These new investors You couldn’t rely on ties also stands out. “Some behaved demanded a much higher level of ser- counterparties being solvent. well, they were honourable,” says vice and transparency, which we need- Hintze. “Others did not, increasing ed to provide.” Fiat currency, the banking our margin and then trying to buy our CQS went through a similar trans- system, it is a house of cards portfolio. We had been good clients formation. “This meant an institution- and treated them with respect during alisation of the firm, a focus on client that could fall apart. the good times but that didn’t seem to solutions and increased complexity

LEE ROBINSON count for much – among some provid- in running the business – regulation, ers – when the crisis hit. Fortunately, compliance, operations, human re- The firm had barely any exposure to we always had multiple prime brokers sources,” says Hintze. Lehman Brothers by the time the US and we were able to move balances.” Man Group’s Luke Ellis counters the investment bank filed for bankruptcy. It was a fraught time. Robinson re- widely-held view that 2008 was the “The majority of our assets were with members it as “fantastic in some ways, unusual year. “It is interesting to con- Morgan Stanley, so we moved rapidly horrible in others” due to the extreme sider whether 2008 is an outlier year, to diversify that. We shifted about range of the possible outcomes. “This or whether in fact years like 2006 and $5bn of cash, $5bn of short positions time a decade ago, we were posi- 2007 were the outliers,” he says. “As- and $5bn of long positions away from tioned correctly, but knew that if Mor- set prices were shooting up, but it was Morgan in those 24-48 hours. The cash gan Stanley or Goldman Sachs went not sustainable – as 2008 showed. In went to places like HSBC, which we under we would take a 20-point hit, 2008 it stopped being easy. The indus- thought was very safe, and the shorts maybe more – it was just horrible.” try is more rigorous now – investors and longs to a combination of UBS, The week Lehman Brothers went are more careful with their money, Deutsche etc.” under will not easily be forgotten by ask more questions and negotiate The sovereign nature of UBS and those trading at the time. “Wow – over fees. Do I think any of that is un- Deutsche Bank was a factor in that what a week,” says Robinson. “If you healthy? No.” decision. “It was almost inconceivable take the ten half-days of that week, Markets have never been quite the the IMF would let them go under, even nine different things happened. Over a same since, with historically low in- if other investment banks were,” says period of three weeks, something like terest rates and the tsunami wave of Ruddock. “Maybe that was naïve, but 24 banks went bust. We had one bad bond-buying by central banks distort- we tried to chase the safest havens we half-day when Gordon Brown banned ing markets. “Liquidity and the prev- could.” the shorting of banks, but overall we alence of passive investment funds Losses, currency movements and played it well.” and algos has dramatically changed redemptions led to Lansdowne’s firm- The EuroHedge Composite Index the investment environment,” says wide assets halving during the crisis lost 4.8% in 2008, its worst year on Hintze. “Markets appear to be resil- from a peak of $20bn in 2007. The firm record, but bounced back with a 9.7% ient to news, there’s little apparent could handle redemptions without gain in 2009. Having come through volatility.” any forced sales. “Some of the firms the ultimate operational and liquidity The turbulence in 2018, a decade on which really struggled in the wake of test, survivors felt vindicated in their from the crisis, could be the precursor Lehman were those with not enough business practices and the industry to a return to market norms – but few liquidity, too much leverage or both.” recovered from its assets slump, grow- can say with any certainty whether Ruddock, who retired from the firm ing significantly in the next decade. or not a similarly historic crisis lies in 2013, is philosophical. “It was stress- The period left deep scars, however. around the corner.

EUROHEDGE 1999-2019 33

34 GROWTH OF EUROPE'S LARGEST BRANDS AuMg Jun-18 Growth of Europe’s largest brand $113.7bn

names AuMg Jan-09

AuM

HEDGE FUND AUM $46.8bn Jang-99 $42.4bn FIRM AUM

$19bn** $3.8bn Man Group HQ: UK Formed: 1783

$4.9bn

$8bn Transtrend $0.2bn HQ: Netherlands Formed: 1991 $19.5bn***

$6.4bn $4.2bn Egerton $1.5bn Capital $3.2bn** HQ: UK Formed: 1994

$12.8bn

Brummer & $5.6bn Partners $1bn $30bn* HQ: Sweden Formed: 1996

$26.5bn

$13.3bn Winton $0.1bn *Estimate HQ: UK **June 2009 ***Egerton, March 2018; Lansdowne, May 2018; IPM, Nov 2018 Formed: 1997

Listed are the 10 European firms in business since 1999 that now manage more than $3bn in hedge fund assets. Aspect and CQS started trading in 1999, but after January; IPM was only consulting. Research by HFM Insights.

g AuM AuM Jan-09 AuMg Jun-18 Jang-99

$7.7bn

Aspect $3.5bn** Capital HQ: UK $0.1bn Formed: 1998 $39bn*

$34.7bn

Marshall $3.5bn** Wace $0.5bn HQ: UK Formed: 1997 $8.9bn

$1.9bn $5.7bn*** IPM $0.8bn $0.1bn HQ: Sweden Formed: 1998 $21.4bn***

$12bn $12.2bn

Lansdowne $11bn Partners $0.1bn HQ: UK Firm Aum Formed: 1998 $14.6bn

$14.5bn

$5.4bn

CQS Source: $0.1bn HQ: UK INSIGHTS Formed: 1999 EUROHEDGE 1999-2019 35 36 EUROHEDGE AWARDS AND SUMMIT

EuroHedge events: provoking debate and rewarding performance since 2001

BY NICK EVANS

The ups and downs of the industry have been chronicled by our events for almost two decades

he EuroHedge Awards barometer of shifting sentiment, (having returned almost 90% with a and Summit have been trends and issues. Sharpe ratio of over 3), only to be out T staple and keenly-antic- The awards were held for the first of business five weeks later after one ipated annual fixtures in time in London in January 2001. of the swiftest and most stunning col- the European and global hedge fund Judged solely on a transparent and lapses the industry has seen. calendars for the past 18 and 15 years, tried-and-tested quantitative method- And the accompanying Roll of respectively. ology focused on risk-adjusted returns, Honour list of the EuroHedge Awards Generally upbeat and celebratory, they have become known both as the winners over the years does contain at times more sombre and subdued, “Oscars” of the industry and also – by many names of other funds and firms often contentious or controversial, the odd wag – as the “kiss of death”. that are no longer with us, or which and always well-attended, the two There has been the occasional shone brightly for a brief time only to events have in many ways reflected mishap, for sure. None more abrupt fade away. the evolution of the industry – acting than when highly-rated firm Peloton But what stands out most clearly as a mirror to the changing fortunes, scooped two awards in January 2008 from that leaderboard is how con- environments and moods of the hedge for the stellar performance of its $2bn sistently successful the brand-name fund community and serving as a asset-backed securities fund in 2007 players in this business have been in winning awards (and nominations)

EUROHEDGE AWARDS HISTORICAL WINNERS OF THE MANAGEMENT FIRM AND FUND OF THE YEAR AWARDS over the years. In an industry that is ultimately all about performance over Year Management Firm of the Year Fund of the Year the long term, that says it all. 2001 Gartmore Lazard European Technology Man GLG heads the ranking with a 2002 GLG Henderson European haul of 12 awards thus far, with Cheyne 2003 Vega Sloane Robinson International in second place on 11 and BlackRock, 2004 BlueCrest/Cheyne The Children’s Investment Fund CQS and Sloane Robinson (which won 2005 Lansdowne The Children’s Investment Fund 2006 RAB Capital Parvus European Opportunities four awards last year alone) each hav- 2007 Sloane Robinson GLG Emerging Markets ing claimed 10 trophies over the years. 2008 BlueCrest Brevan Howard Behind them come a further seven 2009 BlueCrest Jabcap Multi-Strategy firms that have also been leading play- 2010 BlueCrest CQS Directional Opportunities ers on the European and global hedge 2011 Marshall Wace Brevan Howard fund scene over many years: AlphaGen/ 2012 Cheyne CQS Directional Opportunities Gartmore, BlueCrest, Marshall Wace, 2013 Jabre Capital The Children’s Investment Fund Brummer & Partners, GSA, Toscafund 2014 Chenavari Man AHL and Lansdowne. 2015 Lansdowne BlackRock European Given the intense level of com- 2016 Cheyne CQS Directional Opportunities petition for awards every year, to 2017 Pharo/Sloane Robinson Kairos Pegasus keep winning trophies over the years

Continues on page 38 CLOUD SERVICES IT SERVICE MANAGEMENT MANAGED CYBER SECURITY AND COMPLIANCE DEVELOPMENT SERVICES

Whether you’re launching or expanding—locally or globally—RFA is your trusted technology partner.

www.rfa.com

London | Luxembourg | Boston | Connecticut | New York City 38 EUROHEDGE AWARDS AND SUMMIT

EUROHEDGE AWARDS ROLL OF HONOUR AWARD WINNERS 2001-2017, BY MANAGEMENT FIRM (sometimes for the same funds, but also 12 Man GLG often for different ones) is a tribute to 11 Cheyne the consistently outstanding long-term 10 BlackRock, CQS, Sloane Robinson performance of these and other firms. 9 AlphaGen Capital/Gartmore, BlueCrest, Marshall Wace Sloane Robinson’s achievement in 7 Brummer & Partners, GSA, Lansdowne, Toscafund winning four trophies in 2017 marked 6 Chenavari, Polygon 5 Brevan Howard, CFM, IKOS, Vega only the second time in the history of 4 Henderson, Napier Park, Pelham, RAB, The Children’s Investment Fund, Trafalgar Asset Managers, VR the EuroHedge Awards that a single 3 Alcentra, Boussard & Gavaudan, Danske Capital, Duet, Horseman, Jabre Capital, JP Morgan, Kairos, Pelagus, Pharo, Selwood, TT firm has landed four awards in one 2 Alcentra, Amplitude, Argo, Asgard, Ben Oldman, BGI, BTG Pactual, Endeavour, Ennismore, Finisterre, Gemsstock, GLC, Hengist- year – 14 years on from 2003, when bury, Insch, ISAM, KBC, LFIS, LMR, Man AHL, Millennium Global, Morley/Aviva, Odey, Oddo, Parvus, Peloton, Perry, Polar, the then high-flying Madrid-based Polunin, Promeritum, Rhenman, Rubicon, Threadneedle, Zebedee 1 36 South, AKO, Algebris, Altavista, Altima, Antares, Argenta, Armajaro, Andurand, Auriel, Aventicum, Bailey Coates, Black macro manager Vega Asset Manage- River, BlueBay, BlueGold, Caius, Camox, Capricorn, Cazenove, CDAM, CFP, Charlemagne, Clareville, Concordia, Copper Street, ment (a name with which many more Covalis, Cube, Cumulus, Dalton Strategic, Deep Field, Deephaven, Dominice & Cie, Dromeus, Duet, Dynamic, East Lodge, Edale, recent entrants to the industry may Eiffel, Eikos, Eisenstat, F&C, First Geneva, Focus, Fortelus, Fortis, GAM, Gladstone, Global Advisors, GO Capital, Granada, GZC, not even be familiar) swept the board Halkin, Hermitage, Insight, Jacobson, Julius Baer, Kairos, Kinsale, Krom River, Lancelot, Lazard, Lionhart, London Diversi- by winning in four categories. fied, Lyxor, Madrague, Maple Leaf, Marwyn, MKM Longboat, Moore, MPC, Mulvaney, New Amsterdam, Newman Ragazzi, NewSmith, North, North of South, Numen, Nykredit, Oslo Asset Management, OxAM, Pensato, Pictet, Pivot, Portland Hill, But even more impressive perhaps Powe, Premium, Progressive Capital, Prologue, Radar, Sabre, Sector, Securis, Serone, SGAM, Sofaer, Spinnaker, Stone Milliner, are the four Management Firm of Syquant, Systematica, Theleme, TradeWind, UFG, Urwick, Visio, Wadhwani, Winton, York the Year awards won by Mike Platt’s BlueCrest Capital – including its re- markable hat-trick of three successive just for him and his mates before flying many, many more besides. victories in 2008, 2009 and 2010 that down to Spain to continue the merri- They – and countless other top-tier underlined the firm’s outstanding mul- ment. Those were the days... managers, investors and intermediar- ti-year performance during the crisis It has always been an evening that ies – have provided many memorable era – and the three Management Firm combines a lot of fun, a dash of glam- moments of keynote speeches, panel of the Year trophies won by Cheyne our and even drama – some brilliant sessions, fireside chats and general dis- over a period of 12 years. (and occasionally awful) acceptance cussion and debate. We thank them all As for individual funds, the two that speeches spring to mind. Long may it for their time and their contribution. have been most frequently decorated continue, through the good years and The summit has seen agreements over the years as the overall Fund of the not so good ones. and arguments galore. There’s been the Year are both run by knights of The inaugural EuroHedge Summit glorious spring sunshine and torren- the realm – which have both won the took place in Paris in 2004. Year after tial downpours. There’ve been times ultimate accolade at the EuroHedge year London-based delegates flocked of high optimism and confidence, and Awards on no fewer than three occa- to Waterloo – and, later, St Pancras – in times of deep gloom and apprehen- sions each. droves to board the Eurostar to the City sion too. Sir Chris Hohn’s The Children’s Invest- of Light for two days (and two nights) There have been numerous ritzy ment Fund became the first to achieve of networking and entertainment. soirées and gourmet dinners, in some that notable feat in 2013 – adding to People have gone to extraordinary of the finest restaurants and most chic its previous back-back-victories in 2004 lengths to attend. Never more dramat- venues on the planet. And there has and 2005 – while in 2016 Sir Michael ically or determinedly so than in April also been the odd late night or two in Hintze’s CQS Directional Opportunities 2010, when the ash cloud from the the Buddha Bar and other celebrated Fund joined this super-elite club, win- eruption of the Icelandic volcano Ey- Parisian boites de nuit, it must be said. ning its third Fund of the Year award jafjallajökull resulted in the almost to- Its first year in London was eventful following earlier trophies in 2010 and tal shutdown of European airspace for last June, as Sir Michael Hintze keynot- 2012. the duration of the Summit – requiring ed and John Glen MP, the British gov- Although entirely sober in its pur- conference-goers journeying from fur- ernment’s City Minister, made head- pose, the EuroHedge Awards dinner ther afield to resort to some extraordi- lines with his comments on Brexit. has always been a big party night – a narily creative and committed back-up The awards and the summit have time when the hedge fund community travel methods and routes. always been a blast. Neither event comes out in force for an event that is The line-up of speakers over those 15 would ever have been possible with- in many ways as much of a social occa- years has been a roll-call of the leading out the help, support, engagement sion as an industry gathering. lights in the European industry: Manny and encouragement of so many peo- The high water mark in that respect Roman, Luke Ellis, Ian Wace, Paul Mar- ple in the industry over all these years. was probably reached in 2005 – when shall, David Harding, Michael Hintze, We appreciate your help hugely – and a well-known entrepreneur and bon Chris Hohn, Leda Braga, Paul Ruddock, hope that you’ve had as much fun as viveur in the industry kicked off a Peter Davies, Jonathan Lourie, Stuart we have, and you’ll continue to enjoy three-day stag party by taking a table Fiertz, Philippe Jabre, Greg Coffey and our events in the years ahead. YEARS OF

INVESTOR VIEW March of the institutions 40 INVESTOR TRENDS THE MODUS OPERANDI OF EUROPEAN ALLOCATORS Investor twists, turns and trends

BY JASMIN LEITNER

From seeking high-octane returns to the growth of Ucits and risk premia; the modus operandi of European allocators has changed significantly over the last two decades

hen I started, hedge funds when he gave EuroHedge sister title revealed that pension funds and insur- were leveraged. Now they InvestHedge this somewhat melan- ance companies accounted for only 4% W are hedged. In the past, choly interview in 2002, reflecting on of small start-ups, 5% of medium-sized managers were traders what had changed since he started funds and 12% of larger, hard-closed from brokerage houses; today, they out in the 1960s. His descriptions don’t funds. have MBAs. They were willing to bet seem radically out of place today. The research polled star Merrill the ranch and investors were willing Of course, plenty has changed in the Lynch trader Adrian Holmes’ Cambrian to tolerate a drawdown of anything last 20 years, from the underlying in- Capital Management and the new unit up to a third of NAV. No investor today vestor base and due diligence practices formed earlier that year by CSFB to in- would tolerate anything like that level to strategy appetite and the way inves- vest in prop desk start-ups such as the of volatility.” tors engage with hedge funds. one Alan Howard went on to form. These are the recollections of the “If you think about the last 20 years, Even when institutional investors late Georges Karlweis, the legendary it’s been a big change from something made larger forays into hedge funds, Edmond de Rothschild banker who that was more of a high-net-worth, they did so predominantly through gave George Soros’s Quantum its start, private bank industry that not many FoHFs. and who founded one of the early fund people actually knew about, it wasn’t An early mover in the UK was the of hedge funds, Leveraged Capital really reported on in the mainstream Railways Pension Scheme, which start- Holdings. press, to one which is regularly re- ed exploring the space in 2001. “Investors understood that their ported on,” explains Robert Howie, a The then-$30bn scheme didn’t de- managers were taking risks. [During principal in the hedge fund team at ploy any capital until 2004, when it split an] exceptional crisis, I remember one Mercer. a $1bn mandate between US groups manager having, in one day, turned his, While the investment consultant Blackstone, the Rock Creek Group and maybe, 400 long currency, gold and has been a behemoth in the broader Grosvenor Capital Management. In- stocks into the equivalent short posi- financial services industry for several vestment director Brendan Reville ex- tion,” Karlweis recalled. decades, in the late nineties and early plained at the time that they selected “We had fantastic performance. To- noughties, it didn’t have a dedicated firms across the pond simply because day, I still own hedge funds, but I have hedge fund team. there was more choice, and because reduced my return objectives... quite In 1998, family offices and HNWIs European FoHFs were not as mature. dramatically.” made up almost two-thirds of the in- "The UK-based firms at the time did Karlweis was retired in the Bahamas dustry’s assets globally, while FoHFs not have enough coverage of the US, made up another 24%. and vice versa for the US firms, but the Far less concerned about month-to- majority…were based in America.” month liquidity and volatility, the nimble HNWIs and entrepreneurial The road to transparency family offices were an ideal match The financial crisis and the years that for Europe’s fledgling managers, ensued were seminal for European who were, in Karlweis’s words, hedge funds and their investors. willing to “bet the ranch”. The scale of Bernie Madoff’s $65bn An InvestHedge survey in May fraud was revealed and its impact was 2002 of nearly 50 man- far-reaching, explains Kevin Gundle, agers, of which CEO of Aurum Research, the FoHF 21 were group that provided data to EuroHedge KEVIN GUNDLE ROBERT HOWIE European, when it first launched. The changing investor base: 1998 vs 2018

80%  1998  2018 70% 61% 60%

50%

40% 29% 30% 30% 16% 20% 13% 14% 9% 9% 11% 10% 3% 5% 0% 0% 0% 0% FoHFs Individual/ Endowments & Public & private Corporations/ Asset managers Other family oƒce foundations pensions, insurance institutions

Sources: Estimates based on data from Hennessey Group, investment bank cap intro surveys, Preqin and HFM data

“Capital from the Swiss private was preferable, with the caveat that in- initially split $100m between Halcyon banking sector was exposed to Mad- ternal governance needed to be robust Asset Management, MKP Capital and off, and this sector had significant to manage a portfolio well. Swiss commodity specialist Krom River, allocations to hedge funds. “What we wanted was low corre- Elementum and Pacific Alliance Asia “Madoff really put a shot across lations to equity, credit or anything Opportunity Fund. Krom was dropped most investors’ bows even if they did else we held in our return-seeking the following year, with Brevan How- not have exposure to Madoff (which assets and we wanted [the portfolio] ard, Och-Ziff and Taconic Capital Advi- was the majority). There was a sense to have low volatility, which hedge sors added instead. that there was a risk that they could funds should be and generally are. We Today, the hedge fund portfolio of become contaminated by an industry wanted to get away from this percep- the £10bn-plus pension fund is worth that clearly had problems.” tion that [hedge funds] are all very risky just under $500m, although that Following Madoff and other cri- investments. could double over the next few years, sis-related revelations around redemp- Hedge funds really started to McKnight says. Brevan Howard remains tion terms and side pockets, investors the only European manager on the realised that much more focus on oper- struggle and not deliver the roster. ational due diligence was needed, ush- returns that they promised. “We’re not bothered where [manag- ering in expanded roles for specialist ers] are based, if they’ve got the char- and generalist consultants. CLAUDIA STANGHELLINI acteristics we want and the opportuni- That also coincided with the start of ty set is better, it’s more [about] looking a continued contraction among FoHFs. “I think after the Madoff scandal at whether it’s an event or macro or Many larger institutional investors people thought hedge funds were risky, commodity hedge fund, that’s a more making their hedge fund debuts after dangerous and expensive. They might important decision in terms of relative the crisis bypassed FoHFs in favour of well be expensive, but you have to pay difference than exactly where they are making direct allocations with the help for skill,” he says, adding that they were running that strategy,” he says. of consultants, including the UK’s pen- able to get comfortable with fees but He adds that fund jurisdictions must sion fund for Royal Mail postal workers. that it was “a big deal back in the day”. meet Royal Mail’s requirements from a “If you look back perhaps 10 to 15 On the internal governance front, compliance and legal perspective. years, most UK pension schemes Royal Mail hired Bev Durston, the Other institutional allocators ap- that bothered investing in former head of alternative in- proached by EuroHedge agree. hedge funds, which wasn’t vestments at British Airways “We have a mixture of managers and many, used FoHFs and of Pensions, to lead its imple- strategies, we don’t select by geogra- course with that, they were mentation in 2013. phy,” explains Claudia Stanghellini, paying an extra layer of fees,” McKnight says they want- head of external management at SEK explains CIO Ian McKnight. ed to create a concentrated 351.1bn ($39.5bn) Swedish pension He says the board con- portfolio of specific themes, fund AP3, although she adds that they sidered fees, trans- ideas and investments find managers in Europe and the US to parency and liquid- which delivered be more institutional and able to cater ity and concluded on their to its needs than Asian ones. that making di- goals. “We started our portfolio in 2007 rect investments IAN MCKNIGHT CLAUDIA STANGHELLINI They with exposures to CTA and macro

EUROHEDGE 1999-2019 41 42 INVESTOR TRENDS THE MODUS OPERANDI OF EUROPEAN ALLOCATORS

managers, gradually building a more Looking for liquidity fits against the threat of cannibalisa- diversified portfolio, with long/short The demand for greater liquidity has tion and overall lowering of fees. equity, long/short credit, event-driven been especially prevalent in Europe An additional consequence is that and emerging markets strategies.” – a hangover from the financial crisis – simpler, cheaper, more liquid products AP3 had exposure to some 20 man- and the move to further regulating the increase the pressure on managers to agers at its peak but reduced this sig- industry has led to an influx of onshore demonstrate that their high-octane, nificantly over the last few years as products in the form of Ucits. higher-fee products can deliver the performance has been disappointing, Appetite for these funds was relent- alpha they promise. Stanghellini explains. less after the crisis, bringing alterna- “There was kind of a feeling that “Hedge funds really started to strug- tive strategies into the portfolios of hedge funds had some sort of magic gle and not deliver the returns that conservative institutions and retail in the past, whereas now the growth they promised and so after many inter- clients that wouldn’t otherwise get of alternative risk premia has shone a nal discussions, two or three years ago, exposure to them. torch on some of the things that hedge we decided to start taking down risk Alternative Ucits funds managed funds were doing that were inherently from the portfolio.” less than €20bn in 2003, when Ucits capturing a risk premium out there,” She adds that they have reduced the III was enacted. Assets crossed the says Mercer’s Howie. number of managers as well as the €100bn mark in 2012, had grown to He adds that mainstream asset amount invested, retaining only a few some €350bn in 2016 and as of 30 managers launching hedge fund-like with whom they have long-standing November 2018, stood at €426bn products also compounds that pres- partnerships. ($487bn), according to data from sure. A recognition that big is not always Morningstar and Deutsche Bank. Indeed, the convergence between better has also prompted other size- Many of the blue-chip managers mainstream and alternative has been able European allocators to rethink profiled in this special edition ofEuro - two-way, with firms such as CQS, Man their investment approach in hedge Hedge have been front and centre of Group and Lansdowne becoming as funds. this trend, including Marshall Wace, well known for their long-only offer- “Most people that invest in this area Aspect and IPM, although not every- ings as their hedge funds. tend to go for the largest established one views it as positive. The Church Commissioners’ Kuo managers,” says Roy Kuo, head of al- argues that many investors are better ternative strategies at the Church Com- Madoff really put a shot across off investing in risk premia products missioners, which manages the Church most investors’ bows even if they than traditional hedge funds due to of England’s £8.3bn endowment. the limited alpha generated by the “The problem with that is that if did not have exposure to Madoff. latter compared to their costs, but he you’re trying to generate any sort of cautions that implementation needs KEVIN GUNDLE alpha or outperformance over the in- to improve significantly to be effective. dustry, you are bearing the hefty cost “Many investors, from a compli- “If you do [alternative ] as a ded- of fees charged and generally lower ance and regulatory standpoint, are icated allocation you will underper- market beta, both of which put you at compelled to buy Ucits. I think the tax form everything, you need to do it as a performance disadvantage. framework has made it more difficult an overlay on your existing holdings. “The outperformance needs to be to potentially own offshore funds,” If you buy passive equities and then very material and that is very difficult Aurum Research’s Gundle says. overlay it with alternative beta then to achieve when you’re a large shop,” He adds: “The essence of what you can actually create a better risk he adds. hedge funds are all about is an uncon- and return profile over the market.” “You have to be fairly small and spe- strained approach to investing and as He suggests this is one area where cialised to actually deliver that type of soon as you put constraints [on that], allocators in Europe can learn from return, so we’ve been transitioning- you diminish outcomes and opportu- their US counterparts. some mandates to smaller managers nities.” Others predict that continental – more sector or country-specific.” Another trend that has character- hedge fund appetite may increase if Kuo caveats that they don’t really ised the industry over the last few managers can deliver outperformance invest with emerging managers, but years is alternative risk premia. during the next market downturn and many of the holdings in their portfolio Seeking to provide systematic expo- beyond. run less than $2bn. sure to various risk premia that have The European hedge fund industry Concentrating manager relation- an academic, economic or behavioural has undergone a remarkable transfor- ships and placing more emphasis on rationale underpinning expected re- mation over the last 20 years. partnership are two trends that have turns, these strategies have arguably The next two decades will no doubt played out across Europe, as well as been a blessing and a curse for manag- bring about more change in Europe, other markets, particularly as perfor- ers, who need to weigh up the investor which managers and allocators will mance has been challenged. diversification and asset-raising bene- have to adapt to and embrace. The right insights at the right time

The best leaders need the best insight and support to inform their decisions.

That’s where we fit in.

kpmg.ie/assetmanagement

Daniel Page Head of Asset Management Advisory E: [email protected]

© 2018 KPMG, an Irish partnership.

HFM_Advert_203x273mm_December_2018.indd 1 11/12/2018 16:33 44 INVESTOR TRENDS ALBOURNE PARTNERS Consultants for change

BY JASMIN LEITNER

EuroHedge sits down with Albourne Partners co-founder Simon Ruddick to discuss fraud warnings, allocating in the aftermath of Lehman and shifting the conversation on fees

he collapse of LTCM and Ruddick recalls that they were Albourne differentiated itself was that it Bernie Madoff’s fraud: “teased enormously” by their peers for researched hard-closed funds as well as T events that occurred talking about something that, at the those raising assets, unlike some of their almost a decade apart time, didn’t seem to materialise. competitors, who only focused on funds with little in common, except that “If you keep going on about some- they could put client money into. they played a key role in cementing Al- thing, it sounds like you were wrong,” Their approach served them well dur- bourne’s credibility as a leading invest- he says. Eventually – a decade later ing the crisis, Ruddick says. “In the fourth ment consultant for hedge funds. – they were proven right, once again quarter of 2008 no one was closed. All In February 1998 the London-based boosting their status in the hedge fund the top funds reopened, and we were firm produced a document that was advisory world. allocating client money to firms that hugely bearish on fixed income arbi- were previously impossible to get into. trage. It was one of Albourne’s first Right but wrong “That helped our clients, but also strategy reports, drafted by Hitoshi The raison d’être for setting up Al- those funds, who thought it was a mir- Nagata, whose hedge fund, Cambridge bourne was also an example of Ruddick acle to be getting money at that time.” Financial Products, had recently closed and his colleagues being right at the and returned investor capital because wrong time. Alphatraz and Opera of the limited opportunity set. Founded in 1994 by derivatives trad- The aftermath of the crisis was sobering Unlike other pieces of research, which ers Ruddick and Guy Ingram, who had for many reasons, but was a reminder of were only shared with clients, Albourne worked together at Westminster Equi- what Albourne wanted to focus on. widely distributed its concerns on fixed ty, Albourne was established to help a Ruddick recalls the firm’s corporate income arb, which played out a few small group of clients assess the risks planning committee gathering after the months later when hedge fund giant in their portfolios. This select group of collapse of Lehman Brothers. At prior LTCM saw the value of its trades drop by allocators was already too sophisticat- meetings, the discussion had always 50% as a result of Russian currency de- ed to use a FoHF and just wanted some been around how the consultant could valuations and a flight to US treasuries. advice, says Ruddick, adding that from continue on its 50% annualised growth “It wasn’t luck that we wrote that, it there, they “just over-extrapolated”. trajectory, but post-Lehman it was obvi- was skill, but what was luck was that we “We were absolutely convinced, in ous that such a focus was inappropriate. gave it to everyone we knew,” explains 1994, that institutions would want “I started the meeting by saying, in- co-founder Simon Ruddick. “In the sum- advice to be able to top up their direct stead of talking about 50% growth, why mer of 1998 that was the whole story investments. don’t we talk about how we potentially and we had this document from Febru- “That was at least six years too early, manage a business through what could ary pointing out all the issues, so that but it meant that everything we be a severe corporate-life-threatening was a huge leap in credibility.” did was in preparation for such decline and [prioritise] the best interests The second “leap” took a bit a day, with that type of client of our clients as well as trying to secure longer to play out, although it base, that type of sophistication employment for our colleagues, given also started in the last quarter of and transparency. So we were it’s their livelihood and the livelihood of 1998, when the consultant began quite fortunately placed when their dependents.” to warn people about Madoff. that’s the way the world went.” He describes the experience as salu- They took a similar tack in dis- Among the ways tary and sobering, adding that while he seminating their wouldn’t want to repeat it, it brought views, telling home the idea that corporate respon- “everyone”, sibility went far beyond bonuses and not just cli- dividends. ents, that A slightly more bizarre anecdote they should Ruddick shares from the days following avoid Madoff. SIMON RUDDICK Lehman’s collapse relates to a client event called Escape to Alphatraz, held few years? “With institutional money and 2016 tipped the balance and al- at Alcatraz Prison, which had been and their longer time-frames, there lowed Albourne to bring to fruition a planned for months and included con- is less flight of capital risk than in the campaign it had started much earlier vict-style jackets to be handed to clients. past,” says Ruddick. – creating a more equal conversation “I remember thinking, it’s slightly “The more stable capital base and around fees. awkward because this might be the end greater amounts of capital have been At the end of 2016, Albourne and of the world...when’s a good time to paradigm shifts which mean the ration- one of its largest clients, the $155bn hand out the convict jackets?” al expectation of return is smaller now.” Teachers’ Retirement System of Texas, Albourne’s themed events are not While investors should have moder- revealed a new fee structure, 1 or 30. simply a way to show the world the ated their return expectations, he cave- The ‘or’ structure is designed to company’s quirky culture, they serve a ats that performance should not have ensure that allocators receive 70% of distinct purpose – arguably to push their been as disappointing as it has been. alpha or outperformance generated by clients, and the industry, forward on the Ruddick says that the performance of managers, while also guaranteeing the path to institutionalisation. the “Fangs” – Facebook, Amazon, Apple, latter a fee – the higher of performance Among the things born out of the Netflix and Google – has made active or management – regardless of returns crisis were administrator transparency managers, and hedge funds in particu- generated. reports and Open Protocol, a risk report- lar, look like “charlatans”, but that this is Having conquered that industry ing standard initially dubbed ‘Opera’, a phase and not a paradigm shift. bone of contention, some might think launched in 2011. “The key thing for hedge funds at Ruddick would be content to take a Ruddick is keen to stress that the the moment...is there is less tail risk in step back from pushing for further re- industry had started considering what hedge fund portfolios than in a long form. was best practice before the crisis, evi- bond portfolio. Hedge funds are a phe- They couldn’t be further from the denced by a hedge fund working group nomenally complicated way of earning truth. In October, Albourne unveiled its which evolved to become the Hedge almost no money, but they are still just second Investor Manifesto (IMII), hav- Fund Standards Board (and since re- about worth it.” ing released an initial tome in 2013. named the Standards Board for Alterna- The document, revealed during Al- tive Investments). 2008 was a huge wake-up call bourne’s annual meeting in London, He adds: “2008 was a huge wake-up and it triggered a lot of changes contains 50 proposals designed to call and it triggered a lot of changes improve the alternative asset manage- that we were passionate about. Some of that we were passionate about. ment industry for the benefit of inves- them happened quickly, some of them SIMON RUDDICK tors and fund managers, with Ruddick happened slowly and some of them stepping down from Albourne’s execu- have absolutely not happened at all.” He predicts that hedge funds will do tive committee to focus on champion- He emphasises that many of the prob- well out of the next crisis, not because of ing the initiative. lems that led to the last financial crisis their holdings at the time, but because Given the number of proposals on the have returned. “It concerns me deeply of their ability to react in the aftermath. table, Albourne doesn’t anticipate de- that we have not learnt the lessons that “People like to think that hedge funds livering all of them and intends to spend really count and matter from 2008.” should gain during a crisis – if markets the next 12 months carrying out further These include high levels of lever- go down, hedge funds rise – but it is consultations with clients and manag- age and weak lending documentation completely coincidental what they’re ers to determine what to focus on. related to structured products which holding. Ruddick is fiercely committed to the are now parked in funds “Their job is not to guess what oth- sector and “passionately” convinced and other products sold to the mass ers will do and do the opposite, their that hedge funds are good for Al- market. job is to be smarter than everyone else bourne’s clients and for the world. “If the last financial crisis felt scary, if there is a spike of inefficiency in the But he is also never one to shy away we will literally have seen nothing yet. market and use their more flexible man- from speaking his mind and has some A financial crisis gets most scary when date to profit. The best time for them is strong views on how a number of Eu- retail investors realise it’s happening.” immediately after a disruption and the rope’s heavyweights have involved Regulators, frustratingly, have the reversion to a long-term norm or equi- themselves in the political debate wherewithal to model and manage librium.” around Brexit. systemic risk but are failing to do so, he He likens hedge funds to hyenas “pok- “The crowning irony of Brexit, if it says, due to a lack of harmonisation and ing around in the aftermath of a kill and happens, will be that those who voted cooperation between jurisdictions. scavenging returns.” for it will suffer the most while those hedge fund managers that funded Performance plight Fees and future innovations it will most likely benefit as they run And what is Albourne’s take on the sec- Investor disappointment with the businesses with US dollar-denominat- tor’s underperformance over the last less-than-meaty returns of 2014, 2015 ed revenue and a sterling cost-base.”

EUROHEDGE 1999-2019 45 46 PARTNER CONTENT LYXO R Lyxor sees rising hedge fund interest as bull market slows

athanael Benzaken, Lyxor of a ten-year cycle of rising equities and and asset managers. Alternative Ucits Asset Management’s chief interest rates near zero. Investing pas- will provide new investors access to N client officer responsible sively in equities was just as profitable, these diversifying strategies in a liquid, for global business devel- and often more so, than hedge funds. transparent, tax efficient, and regulat- Nathanael opment, products and solutions, gives The environment is likely to be more ed format. Benzaken his take on the progress of his firm and challenging. Equities are wobbling, the wider hedge fund industry over the interest rates in the US are normalising On the subject of fees, what changes past two decades. and volatility is changing regime, to a have you seen? higher level. We see a growing inter- NB: Increasing pressure on fees has Can you give a brief history of your firm? est in hedge funds now from investors brought average levels down in the last NB: Lyxor was founded in 1998. The globally because more volatile markets decade. Unless performance goes back company started a managed account and a potential downturn will create to the higher hedge fund performance business after seeing an opportunity more opportunities for them. numbers seen before the great financial to make investing in hedge funds more crisis, that pressure will continue to rise. efficient and scalable, through extra Are investors more forward-looking There is a perception that clients take transparency, enhanced liquidity and a now? all the risk and managers most the re- greater focus on risk management. In- NB: Yes, definitely. And I think many in- wards. Fees should be a function of the vestors liked the line-up of hedge funds vestors realise that now is the time to hedge fund manager’s ability to make we put together. Our range of business reinforce hedge fund allocations, even money, and managers should offer dif- lines has developed from that start. We though – or perhaps because – recent ferent fee models to investors, provid- had as much as $13bn in our managed performance has been subdued. Hedge ing a better alignment of interest. accounts before 2008. We navigated the funds are a diversifier and now would crisis quite well and developed two new seem a good time to build or expand How do you see the next 20 years businesses since then: dedicated man- a portfolio of diversifying strategies, playing out? aged account solutions for institutional away from equities. Investors are also NB: Three trends I have mentioned will investors and our Ucits platform. more open to a greater range of strat- continue to deepen: the industry will egies now. We have seen a rise in de- offer a broadening range of strategies, Do you see another 2008-style crisis mand for alternatives to hedge funds, pressure on fees will mount and inves- coming? such as alternative risk premia strate- tors will demand ever greater diver- NB: I will not go so far as to predict gies. They can offer a hedge fund-style sification in their portfolios. Markets, that. But I do think that Lyxor’s 20-year return with good liquidity and usually as I said, may be approaching another history, and the fact we came through lower fees. The Ucits format has really turning point – but I think the hedge the most difficult years in the indus- taken off in the past decade, which fund industry is well-placed to serve in- try’s history, puts us in a good position helps provide investors with a different vestors well in that scenario. Lyxor re- if there is a repeat. We have seen all the type of access to hedge fund manage- mains committed to the development ups and downs in the past two decades ment. The interesting fact about Ucits of its alternative Ucits range as well – just like EuroHedge. is that it has been adopted beyond as its institutional dedicated managed the borders of Europe, especially Asia account solution, and has ambitious Which investors are investing in man- and Latin America, offering a greater growth plans. With an average rate of aged accounts now? opportunity of investors and asset 30% since 2014 (and 40% YTD 2018), NB: We have observed a tidal wave managers. our Alt Ucits platform is one of the fast- of large institutions putting money est-growing platforms in the industry into hedge fund managed accounts in Where do you see fresh demand? and we have strong ambitions for the recent years. Pensions, in particular, NB: Growing demand for diversifying future. Our architect-manager busi- ask us to form dedicated managed ac- strategies will come not only from ness model will help drive this future counts for them with selected manag- investors familiar with investing in growth. Through an agile combination ers. Growth in the last year or two has alternative strategies but also from of our passive, active and alternative been particularly strong, and I think new types of long-only investors such strategies, Lyxor is well-positioned for that is because we are reaching the end as private bank clients, mutual funds the next 20 years. YEARS OF

TECHNOLOGY AND OPERATIONS A new industry 48 INSIGHTS RESEARCH EUROPEAN HEDGE FUND OPERATIONS Operational overhaul

BY JAMES SIVYER, SENIOR RESEARCH ANALYST, HFM INSIGHTS

Research division HFM Insights explores the changing face of European hedge fund operations, as firms strive to improve their infrastructure despite pressure on costs

edge fund operations The process allocators most Least likely to have been automated have advanced consider- by European firms are treasury-related H ably in the past 20 years, wanted to see automated was functions, such as cash payments and with several consistent compliance and mandate margin, with managers indicating that trends having a major impact. The investors remain jittery about the pros- ever-increasing regulatory burden, reporting, thanks to the pect of a “robot” wiring their money to higher expectations from investors and additional transparency and the wrong place (see exhibit 3). new technology have all contributed to The process allocators most want- wholesale changes in how hedge fund accuracy this can bring. ed to see automated was compliance managers run their businesses. and mandate reporting, thanks to the At the same time, many managers additional transparency and accuracy have seen their fee revenues squeezed talent to build sophisticated operation- this can bring. This process was the due to investor pressure, while lower al infrastructure. second least likely to be automated by performance levels have eaten into the A major consideration behind man- European managers, in common with profits of some firms. Firms of all stripes agers’ efforts to automate has been the global average, suggesting this have sought to bring costs down the views of investors. As we see from may be an area for managers to focus through automation and outsourcing, exhibit 1, most investors would like to on in the future. as well as leaning on service providers see managers go further in automating With the hedge fund capital of Eu- in a bid to reduce costs. Drawing upon their operations. Those investors who rope, London, frequently ranked top data and analysis from HFM’s Insights were keenest on automation were also in global fintech league tables, it was team this section examines these more likely to increase their allocation unsurprising to find European firms trends within the context of the Euro- to hedge funds in the year ahead than making the most of the rich seam of pean hedge fund industry. those who were indifferent or averse tech talent to develop operational to the idea (see exhibit 2). Indeed, one processes in-house (see exhibit 4). Automating operations European allocator the team spoke to Off-the-shelf solutions also proved It has become a cliché – but remains noted that when presented with two popular among European hedge true – that when EuroHedge began similar funds, the strides each firm had fund shops, although temporary con- “two guys and a Bloomberg” was virtu- made towards automation could be a tractors were spurned by managers ally all it took to establish a basic hedge deciding factor in their choice of fund. concerned about knowledge of key fund firm. The institutionalisation of European managers have focused on systems leaving the firm once projects the industry over the past two decades automating “core” processes in the life were completed. has seen managers take on a raft of of a trade, such as risk attribution and new costs in a range of business areas. monitoring, as well as reconciliation Time for R&R? Service provider Lacklustre returns have also lowered or and trade allocation and monitoring. rotation and renegotiation erased performance fee gains, adding When asked by Insights in a 2017 Ops a sense of urgency to the issue of cost KEY FACT Survey how they had sought to im- management. prove margins over the preceding 18 As a result managers have sought $600,000 – months, almost a third of European to cut costs and streamline their work- managers said they had renegotiated load through the automation of oper- $700,000 fees with service providers (see exhibit ations. European managers polled by PRIME REVENUE CONSIDERED A 5). A sense of injustice, as well as cost Insights during last year’s Ops Survey “BORDERLINE” AMOUNT FOR A pressure, was partly responsible, with were leading the charge towards au- SINGLE-VEHICLE HEDGE FUND some managers complaining that ser- tomation, with London-based firms in MANAGER LOOKING TO MAINTAIN vice provider contracts contain “fairly THEIR TOP TIER PRIME RELATIONSHIPS particular leveraging the city’s fintech egregious” terms, often lacking in 1 Investor sentiment toward managers’ 2 Investor plans for hedge fund need to do more to automate operations, allocation in the year ahead broken down 2018 by views on automation, 2018

Analyst note: Investors were asked whether they agreed with the statement “Hedge fund managers  Keen on automation  Indifferent about automation need to do more to ensure their key operational processes are automated.” 100%

Disagree 90% 8% Agree 80% 74% Indifferent 70% 18% 60%

50%

40% 30%

20%

10%

0% Increase Maintain Decrease 74+Source: HFM Insights Allocator18+8N Survey - H1 2018 Source: HFM Insights Allocator Survey - H1 2018 3 Operational processes automated by hedge fund managers, 2018

Analyst note: The 10 options put to managers were ordered in the sequence the processes occur and were chosen from submissions by hedge fund managers.

100%

90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Trade limits/ Trade Trade Trade Risk Reconciliation P&L and Risk Cash Compliance restrictions matching allocation monitoring monitoring NAV production attribution payments and mandate and margin reporting

Source: HFM Insights Ops Survey - Q2 2018

4 How hedge fund managers automate operational processes, 2018

 Developed tech/processes in-house  Outsourced to an automated solutions provider  Temporary contractor to help build tech  Via tech purchased off-the-shelf

100%

90%

80%

70%

60%

50%

40%

30% 20%

10% 0% Trade limits/ Trade Trade Trade Risk Reconciliation P&L and NAV Risk Cash payments Compliance restrictions matching allocation monitoring monitoring production attribution and margin and mandate reporting

Source: HFM Insights Ops Survey - Q2 2018

EUROHEDGE 1999-2019 49 50 INSIGHTS RESEARCH EUROPEAN HEDGE FUND OPERATIONS

5 Margin improving methods hedge fund managers use or sunset clauses and other provisions, plan on using, 2017 leading to a multitude of hidden costs. Many managers were also look-  Last 18 months  Next 18 months ing to pursue the riskier margin-im- 35% proving strategy of launching new

30% products, with an eye on generating fresh revenue streams from investors. 25% Switching vendor also proved popular, 20% with service providers that failed to play ball over fee discussions presum- 15% ably losing out. 10% With pan-European directives such

5% as AIFMD and MiFID II bringing new levels of regulation to hedge fund op- 0% erations, the role of compliance con- Renegotiate Launch Switch Streamline Reduce Reduce Outsource Other Outsource Increase service new, service product/ headcount marketing back-oce middle-oce investor sultants has taken on more significance provider lucrative providers service eorts elements elements fees in the past 20 years, particularly in the fees product range or service last decade. This helps to explain why Source: HFM Insights Operations Survey Q2 2017 compliance consultants were joint bot- tom for service providers negotiated 6 Service providers that managers successfully negotiated down on fees. down on fees or switched in the past 18 months, 2017 That said, managers changed their compliance consultant more often  Negotiated down  Switched provider than they changed other providers (see 35% exhibit 6). Insights heard from Europe-

30% an firms who said they switch compli- ance consultants every few years as a 25% matter of course, hoping to gain a fresh 20% perspective on regulatory compliance within their business. 15% Fund administrators appeared to 10% have borne the brunt of the fee negoti-

5% ation onslaught from European hedge fund managers, followed by audit firms 0% Administrator(s) Auditor(s) Legal advisor(s) – Legal advisor(s) – Custodian(s) Compliance (see exhibit 6). This dynamic can work onshore oshore consultant(s) both ways, however, with one Lon-

Source: HFM Insights Operations Survey Q2, 2017 don-based hedge fund COO telling In- sights his firm had been “fired” by their administrator after failing to meet cer- 7 Where managers believe the balance of power lies between tain revenue targets – a phenomenon prime broker and client, 2018 more commonly associated with prime brokers. Analyst notes: Equities and fixed income/credit managers said they ‘mainly’ trade these instruments. ‘Mixture/other’ managers are those that said they mainly trade ‘a true mixture of instruments’ or ‘commodities’. Shifting sands in the PB power Balance of Power: Manager HQ Manager AuM balance Hedge Fund (HF) or Prime Broker (PB) Europe Non-BDC BDC The growth of the prime brokerage

Equities - high volumes Tieie HF PB business ahead of 2008, as banks sought to grab a slice of the market, Equities - low volumes PB PB PB combined with steady AuM growth gave many hedge funds leverage in Mixture/other - high volumes HF PB HF their prime relationships. But the re-

Mixture/other - low volumes PB PB Tie strictions placed upon trading busi- nesses at banks since then have seen Fixed income/credit - high volumes HF Tie HF many brokers pull back, with less lucra- Instruments primarily traded primarily Instruments tive hedge fund clients being ditched Fixed income/credit - low volumes PB PB Tie or put on watch by their primes. This Source: HFM Insights Ops Survey - Q2 2018 may help explain why none of the Eu- 8 Prime broker usage by European hedge fund managers, 2018

 1 prime broker  2 prime brokers  3+ prime brokers

- 1 prime broker 3% 3+ prime brokers 1 prime broker +1 prime broker 32% 24% 21%

No change 76% Number of Year-on-year prime brokers change in usage used

2 prime brokers 44% Source: HFM Insights Ops Survey - Q2 2018 ropean managers surveyed by Insights The majority of investors The majority of investors will now had successfully24 renegotiated fees or +4432N 3expect to see at least one+7621N “tier one” switched prime broker in 2017. will now expect to see at broker on a firm’s books, if not two, Yet research conducted by Insights least one “tier one” broker while managers themselves have into the balance of power between sought to spread their risk and partner manager and prime indicates that a on a firm’s books, if not two, with primes that are able to offer a full shift may be occurring. As banks seek while managers themselves spectrum of services. The multi-prime to rebuild their market share, man- phenomenon has also allowed some agers previously spurned by prime have sought to spread their firms to play off primes against each brokers are starting to hear from them risk and partner with primes other on both price and offering. again. Indeed, one London-based firm interviewed by Insights said the very that are able to offer a full Moving forward primes that had fired them a number of spectrum of services. European hedge fund managers have years earlier for failing to meet revenue gone to great lengths to profession- hurdles were now trying to woo them alise their operational infrastructure back. over the past two decades. At the same Despite these signs of thawing, Eu- were more confident in their dealings time cost pressures have seen manag- ropean managers are less confident with primes. Earlier conversations In- ers adopt innovative new solutions, than their US or Asian counterparts of sights had with managers suggested while wringing the most from their ser- being in the driving seat in their prime that between $600,000 and $700,000 vice provider relationships. Although relationships. The Brexit cloud hanging in prime revenue would be a “border- considerable progress has been made, over the UK financial services industry line” amount for a single-vehicle hedge Insights expects to see firms straining may go some way towards explaining fund manager looking to maintain their every sinew to continue the march to- this, with many survey respondents top tier prime relationships, with $1m wards automation in the years to come, running Ucits funds that may be nega- considered a more respectable sum. while also keeping a watchful eye on tively impacted in the event of no-deal, costs. while some global investment banks The rise of multi-prime Indeed, European managers sur- have been reluctant to invest in their More than three quarters of Europe- veyed by Insights felt they had yet to European businesses in a landscape an hedge fund firms employ at least reach the limits of what they could dogged by low margins and business two prime brokers (see exhibit 8) – a automate. Firms were also quick to uncertainty. statistic which would have been hard extol the virtues of automation and At the strategy level, the picture to envisage when EuroHedge started. outsourcing, with the ability to scale was more nuanced. Among European The multi-prime phenomenon has up without adding large numbers of participants in the Prime Power Games occurred in response to the industry’s staff, and by proxy additional cost, chief 2018 report, managers of high vol- growth and more complex trading among these. Success in the hedge ume-trading strategies were most like- practices, as well as the perceived need fund industry, then, is no longer just ly to feel they held the balance of pow- for diversification after banking scares about performance, but also cost man- er (see exhibit 7). Equally, larger firms during the 2008 financial crisis. agement and streamlining as well.

EUROHEDGE 1999-2019 51 52 CHANGING ROLE OF THE COO Industrial evolution: the changing COO role

BY HUGH LEASK

The role of chief operating officer has been transformed during the sector’s advance from entrepreneurial cottage industry to institutionalised business

t is not only portfolio Mayfair townhouses, the sector offered lot of people, particularly in the early managers who have had eye-catching returns across a range of days, often forgot.” I to contend with a dra- strategies, but precious little in the way matically reshaped in- of transparency or operational detail. A watershed moment vestment landscape over the past two “Here were these mythical, wonder- Questions of transparency and opera- decades: COOs and other ops staff have ful beasts that basically were all about tional risk among were already becom- seen their jobs change, too. an alpha return, and investors were ing live issues for both managers and As the hedge fund industry globally lucky if they got any detailed informa- investors following a handful of hedge has surged beyond $3trn in assets, it tion or definitions,” Chapple recalls. fund blow ups during the early 2000s. is no longer enough for a prospective But it was the monumental events of firm to be built around the strong Twenty years ago, you could set the 2008 crisis that proved to be a wa- investment track record of a skilled up a hedge fund with two people. tershed moment, and the biggest driv- trader or charismatic lead portfolio er behind the industry’s transformation manager. PHILLIP CHAPPLE to where it is today. The business of launching and run- By ushering in a more stringent reg- ning a successful hedge fund firm has “In the past, many managers saw ulatory regime directly affecting alter- become intrinsically linked to a whole themselves as these superheroes who native investment managers, the crisis new raft of regulatory requirements, could manage money and produce brought a whole new focus on opera- due diligence processes and extensive amazing returns, and investors needn’t tional and counterparty risk and regu- investor demands, bringing major worry about how they did it,” suggests latory control, altering the relationship changes to the COO role. another senior ops professional at a between managers and investors, and Many COOs acknowledge the buc- London-based fund. “But we are look- throwing a bigger spotlight on the po- caneering entrepreneurial spirit which ing after, and taking responsibility for, sition of hedge fund COO. HFMWeek’s helped spur the sector’s growth during other people’s assets. Those people annual COO Summits subsequently the late 1990s has steadily given way have a fiduciary duty to look after those became must-attend events. to a more institutionalised and profes- assets, which they are then passing on “The line in the sand primarily has sionalised industry. to us. It’s an important point which a been 2008 – it really was that clear- “It’s changed completely – it’s a night-and-day situation. There’s not PHILLIP CHAPPLE JESSE MCCORMICK really the aspirational, let’s-just-have- a-go mentality anymore,” says Phillip Chapple, COO of London-based long/ short equity manager Monterone Part- ners. “Twenty years ago, you could set up a hedge fund with two people.” Though perhaps not quite the wild west, laissez-faire landscape so often depicted by mainstream commenta- tors, Europe’s hedge fund industry in 1999 nevertheless carried an air of mysterious allure for investors. Oper- ating almost as a glamorous cottage industry out of quiet, unassuming cut,” observes Jesse McCormick, COO and legal documentation has brought complexity to trading models and of London-based Palmerston Capital about far-reaching implications for the algo-based strategies, they’ve also Management, a European credit-fo- role of COOs. benefited firms’ operations – particu- cused specialist. “The institutionalisa- “When I was first working in oper- larly at the COO level where reporting tion of the industry after 2008 has been ations in hedge funds, the focus was requirements have been aided by more phenomenal in terms of its pace.” on just that – the operations. It was advanced monitoring systems. The sheer volume of rules impacting literally settling trades,” says Chapple. For Mace, the big shift here for COOs hedge funds directly on both sides of “Due diligence was simply: ‘Who’s your has been the development of cloud the Atlantic – Volcker, AIFMD, EMIR, prime broker, who’s your admin, who’s technology. “No more comms room to short-selling rules, disclosure regimes, your auditor? Tick, tick, tick’.” worry about, no swapping out back up Mifid II, FATCA, anti-money laundering tapes, no more-or-less flaky ‘DR site’ regulations and more – has led some You always get a big tick arrangements,” he explains. “With to draw parallels to the considerable from investors when you use everything in the cloud we can access compliance burden faced by invest- everything and do anything we need ment banks and more traditional main- technology intelligently for your to from anywhere with a reasonable stream asset managers. operational support. internet connection. Hand in hand “When I first took a role as a start-up with this is the massive reduction in COO in 2003 I probably spent 5-10% JESSE MCCORMICK the price of data storage – we can now of my time on compliance,” says David keep everything.” Mace, COO at London-based Altavista The amount of regulation, best prac- “You always get a big tick from Investment Management, which has a tice and reporting requirements now investors when you use technology global equity focus. “The last few years mean a COO can no longer do things on intelligently for your operational sup- it’s been more like 50%.” a shoestring. port,” McCormick says. “They have an The events of 2008 opened investors’ “There are many areas of focus – in- appreciation that you have systems eyes to the very real possibility that vestors can spend between $60,000 to and processes in place which allow you assets could be lost not only through $100,000 on due diligence; you must to automate as much as you can, focus negative performance, but also as a re- have a fully developed infrastructure on exceptions, and build control scala- sult of an operational or counterparty with all the appropriate processes, bility into those processes.” failure. “Investors were willing to lose systems and controls,” he says. “In- He adds: “Whether it’s the portfolio assets via the strategy, but they’re not vestors view the sector with a whole management system or reconciliation willing to lose assets through lax oper- new mindset, spending more time and software, we’re in a completely different ational control,” Chapple says. money on the process, factoring in dif- league to where we were. Some of the ferent scenarios and potential impacts functionality you can get in off-the-shelf Investor attitudes on their capital. Despite the fact our products from system providers certain- A decade on from the financial crisis, customers are sophisticated investors, ly wasn’t available 13 or 14 years ago.” hedge funds are now faced with an in- and not retail clients, regulation has vestor community much more strident increased exponentially.” Hiring headaches in its scrutiny of underlying businesses. While larger, more established firms In the past, managers tended to source Allocators’ keener focus on due dili- have for the most part weathered this portfolio managers, traders and sales gence issues surrounding back-office sustained regulatory upheaval, one staff through operations, technological capabilities consequence of this recalibration of channels, while compliance and opera- focus towards operational risk and tions staff were hired through adminis- DAVID MACE greater due diligence has been the trators and prime brokers. Recruitment creation of extra barriers to entry for has evolved markedly in the past two smaller managers and start-up names decades, with COOs highlighting a lack with limited resources. of new ops talent coming into the in- “That’s been a really big problem for dustry. the smaller managers since the 2008 “Speaking with others in the COO crisis, and you saw money flowing to community, it’s a huge challenge,” says the big managers as a result,” says Mc- Chapple. “The prime brokers have all Cormick. “You ended up with assets go- very much slimmed down. They have ing to the established managers which smaller teams, and you don’t have a lot created additional challenges for the of people coming through the prime emerging managers who are the life- broker route anymore,” he explains. blood of the industry.” “In the past you could hire people from On the flipside, while advances in operations through the investment technology have added considerable banks, but they don’t have the same

EUROHEDGE 1999-2019 53 54 CHANGING ROLE OF THE COO

graduate schemes any more.” role – it's more so now.” He observes who once knew a little bit about the This dearth of fresh talent is partly how the increased bureaucratisation markets. There now has to be a proper attributed to the negative image of the has made the role harder work, more hiring structure,” the senior ops profes- financial services industry which took time consuming, and more tedious for sional adds, noting the process is set to hold during 2008. Some believe the little or no actual business purpose in become more onerous when the FCA’s sector is no longer seen as an attrac- most cases. senior managers & certification regime tive place to go and work among many “The challenges are still there, as is (SM&CR) takes effect in late 2019. graduates. the satisfaction of creating and grow- The relatively low rate of success Underlining this point, the senior ops ing something, and the variety of the among new hedge fund firms is also a professional contrasts the extensive role, but generally it's a lot less fun factor and has a bearing on how firms rules and requirements which now af- than it was.” develop and foster their own corporate fect all corners of the banking and fund When I first took a role as a start- culture, particularly during the initial management with the tech industry, launch period, adds McCormick. where there is seen to be a less onerous up COO in 2003 I probably spent “Culture fit is very important – if you regulatory burden by comparison. 5-10% of my time on compliance. have five people in a tiny room, and “There’s a sense that if you are a people aren’t getting along, it could young, bright graduate and you want DAVID MACE make a challenging time harder,” he to get in the front door, you should go suggests. “You’re in the trenches to- to Silicon Valley, not Wall Street,” he A more fundamental cultural change gether trying to get something off the observes. “Twenty years ago, going within the industry, which demands ground and trying to get some trac- to Wall Street was seen to be frontier hedge fund staff have the correct expe- tion. Personality fit has to absolutely – things were growing, finance was in rience, has also altered the ways firms be there.” expansion mode. Where are the fron- build their business. For their part, Reflecting more widely on the 20- tiers of knowledge now? The frontiers COOs must help ensure more detailed year evolution of the business, the of knowledge are no longer in the City, background checks and extensive ref- COOs each believe that despite the in- or in investment banking. They’re in Sil- erences are carried out during the for- creased regulatory costs, greater time icon Valley and in AI.” mal hiring process. and resource spent, and heftier com- Mace adds: “Being a COO has always “You can no longer just hire your pliance burden for firms, the changes been a challenging, and often lonely, friend who happens to be a salesman have left the hedge fund industry in a better place.

HOW 2008 AFFECTED THE HEDGE FUND ECOSYSTEM “Nobody runs a hedge fund from

Service providers are in firm agreement with hedge funds on the cataclysmic impact of 2008, which had significant long-term their back room or their garage any- consequences for all sides of the industry. more, which many did 20 years ago,” “In Europe, the use of outsourcing in administration and other areas of fund management had been on the rise well before observes the senior ops professional. 2008, but the crisis and the regulation that emanated post crisis made the shift towards independent outsourcing irreversible,” says “There are fewer instances of fraud, Declan Quilligan, European head of hedge funds in Citco’s fund services division. “Many of us will remember the fear at the time and and many of the poorly-run, bad enti- everyone became very conscious regarding the counterparties they were using and the risks on their balance sheets.” The impact on the prime brokerage business was substantial. “Unlimited hypothecation was a big issue. We had many clients ties are weeded out much more quickly which had Lehman Brothers as a counterparty (including some funds of hedge funds invested in underlying funds facing the bank),” now.” says Abigail Bell, specialist funds partner at law firm Dechert. “When Lehman went under it became clear the bank had rehypoth- The prevailing sense that start-up ecated the assets and nothing was held in custody. These funds were unsecured creditors with respect to the portfolio, so were hedge funds had a period of grace immediately locked up and couldn’t recover their assets.” before regulatory requirements truly Most of the assets held with Lehman Brothers were eventually recovered, but the process took so long that a lot of funds were in wind-down by the time that happened. Giving the legal perspective, Bell adds: “I think it resulted in a wholesale change in the kicked in has also disappeared amidst relationship funds and managers have with their counterparties. It is now standard market practice to include prime brokerage the professionalisation of the industry. rehypothecation limits in English law contracts which are broadly equivalent to those in the US. Also, most funds will now start with “That’s completely gone – you’ve got at least two prime brokerage/custody arrangements so they are able to move assets quickly to another custodian in the event of to hit the ground running now,” he another Lehman-style event.” observes. Duncan Crawford, Societe Generale’s global head of hedge fund sales, witnessed the resulting shift first hand. “After the 2008 crisis there was a shift in favour of multi-prime as hedge funds sought to reduce their counterparty risk by having a greater number Chapple believes that COOs are of prime brokers,” he says. “But more recently there has been a shift in the other direction, with Basel III regulation putting pressure very much part of the company nar- on prime brokers to justify their worth to their parent bank on a balance sheet basis.” rative in a way that was not the case The expansion in product and strategy offerings in the wake of the financial crisis means Citco clients are far better diversified in 1998. “Hedge funds now need to now compared with prior to 2008, adds Quilligan. “The fund administration industry similarly adjusted. The Citco group of compa- ensure they have a product that is un- nies today is a full-scale asset servicer across the whole gamut of products and strategies.” Nathanael Benzaken, Lyxor Asset Management’s chief client officer, describes 2008 as a turning point for the industry. He says the derstandable, and a proof of concept, Paris firm's favourable liquidity terms meant it was often the first provider of liquidity for clients during the crisis, leading to a decline which investors will buy into, as well in assets. “But they recovered (we are above $17bn as of today) and in the long term the lessons of the crisis benefited us: managed as an infrastructure that is fully built accounts were considered a useful way of investing large amounts of money in hedge funds. Running the same hedge fund strategy out with all the regulatory bells and but holding assets in segregated accounts provides a layer of protection and customisation many needed. Some labelled the initial whistles, which wasn’t necessarily the post-2008 growth in managed accounts a “knee-jerk reaction” to the crisis but the last decade has shown it was a long-term trend.” case 20 years ago.” 55 PARTNER CONTENT SOCIETE GENERALE SocGen: Prime brokers eye closer relations in a new era

he hedge fund and prime probably had less time in the past to futures move into increasingly niche brokerage businesses have ensure all those relationships were in areas including over-the-counter mar- T transformed in the past 20 place – we have more regular visits and kets. It is very encouraging. years – and now work to- discussions with clients now. Duncan gether more closely than ever, says Dun- What has caused that? Crawford can Crawford, Societe Generale’s global How have changes at your business DC: Diversification is your only free head of hedge fund sales. boosted the service you provide? lunch, as the saying goes. In theory, man- DC: NewEdge has been fully-owned agers should be as diversified as possible What changes in the European hedge by Societe Generale since 2014, which because every additional market added, fund industry have you witnessed in means we are able to combine our his- with a lower correlation that one to any the past 20 years? toric strength as a prime broker to CTAs market already in the portfolio, adds DC: It is a different business now – the (we were originally a futures house) diversification and should improve the investor base has been transformed, with a growing footprint in equities, Sharpe ratio. There are many smaller operational standards have progressed fixed income and indeed commodities and seemingly improbable markets hugely, the technology is unrecognis- & FX. Societe Generale’s stock-lending which can serve as a source of healthy able… I could go on. Legislation has desk and strength in equity derivatives returns for CTAs, for instance carbon. altered what was virtually an unregu- have been invaluable as we expand our lated industry. It was a very innovative business lines and provide a fuller ser- Do you think hedge fund fees will con- business at the beginning and the in- vice to clients. We have long-established tinue to go down? vestor base reflected that, with entre- strengths in cap intro and consulting, DC: Hedge fund fees are a marketplace preneurs, wealthy individuals and fam- which we have been able to increasingly like any other, driven by supply and ily offices dominating. They have been apply in areas other than CTAs. demand. If you are doing something replaced by pension funds and other different from other people and it’s institutions, which have far greater ex- Aside from Basel III, what regulatory adding value you are going to be able pectations in terms of operations and changes have re-shaped the industry? to charge higher fees. If you are doing due diligence. This is all positive – the DC: Mifid II has affected the ability of something more replicable, it is harder chance of a risk management issue or banks to provide research to the in- to charge higher fees, particularly if a fraud are much lower. The growth dustry. The price of research has come you have very large capacity. Volatility, of the industry may have compressed down more than many would have capacity and uniqueness of the strat- returns, but as we enter a new market hoped since the regulation passed. The egy – not solely the gross return and environment there are reasons to be Volcker Rule and other restrictions on sharpe ratio – should be considered hopeful on that front. prop trading by banks was transforma- by investors when thinking about an tive and had a dramatic impact on the appropriate fee level and split. We ex- How has prime brokerage changed? hedge fund seeding business. plored some of this in our Don’t worry DC: Basel III regulation has put pressure fee happy report last year. on prime brokers to justify their balance How popular are CTAs with investors sheet basis worth to their parent bank. now? Are you confident for the industry’s Some brokers have “cut their tails” and DC: Managed futures have been on future? got rid of less profitable clients. It has quite a journey. 2008 was a break- DC: Very much so – we are entering a never been more important for prime through year in terms of performance, new market environment, so perfor- brokers and their hedge fund clients to but many suffered heavy redemptions mance should improve. Assets have have a meaningful relationship and un- due to their high liquidity. The strong been highly correlated in the decade derstand each other’s business needs. performance attracted a lot of insti- since 2008. Quantitative easing and near In many ways the relationship has got tutions to the sector and new money zero rates globally have made it difficult closer. Prime brokers want to have larg- flowed in in subsequent years. We were for active managers to outperform the er relationships with a smaller number an important source of information and market, but that could be changing now. of clients. I have always believed in education helping facilitate this. There We could be entering a period where strong relations with all sides of the has been a shift recently in favour of hedge funds perform more in line with firm, from investing to operations. We more esoteric strategies, as managed expectations and seem less expensive.

EUROHEDGE 1999-2019 55 56 PARTNER CONTENT DECHERT Industry changes – the legal perspective

us Black and Abigail Bell, tax requirements. Start-up fund man- What was the impact of regulation specialist funds part- agers will often be engaged with their imposed after the crisis? G ners at law firm Dechert seed investor from a very early stage, GB: One impact from a documentation discuss the significant and the overall fund formation process perspective was disclosure, which in changes in the industry over the past can be heavily negotiated. simple terms has boosted transparen- 20 years and the legal impact on hedge cy. As the regulatory environment has funds. What about from a jurisdictional per- changed, the whole approach to com- spective? pliance and its cultural significance How has the hedge fund industry GB: We have domiciled funds the world within firms has changed. Much of the changed in the past 20 years? over, but Cayman still represents the cultural change would probably have GB: We set up our London funds prac- most common hedge fund domicile. been pushed for by investors regard- tice back in 1997, so, as a firm, we That said, as the investor base has di- less, as the industry became more so- have watched this industry mature versified, we had to develop structures phisticated. from both sides of the Atlantic over that can be marketed and accessed by more than two decades. Processes different types of investors in different AB: The introduction of AIFMD has cre- have become much more sophisticat- locations and that can involve differ- ated operational challenges. Manag- ed on pretty much every front. There ent jurisdictions. We do a lot of struc- ers have been required to adapt their is a much greater regulatory overlay, turing in the US, across Europe and systems and controls to comply with more transparency and a greatly di- increasingly Asia, depending mostly the risk management and reporting versified manager and investor uni- on the target investor requirements requirements as well as impacting on verse. and distribution plan. remuneration arrangements and fund distribution. How does the fund formation process What is the situation now in terms of More stringent capital requirements compare today to 20 years ago? liquidity management? applicable to prime brokers have im- AB: The type of investor allocating to AB: There is more scrutiny to ensure pacted on their trading relationships hedge funds has changed significant- that the liquidity terms match the with funds. Markets regulation includ- ly. Family offices, funds of funds and liquidity of the underlying portfolio. ing Mifid II has changed the manner high-net-worth individuals have been Many investors will push for additional in which funds buy and use research joined by pensions, foundations, in- liquidity management tools in docu- as well as trading processes including surers and other large institutions on ments because they have seen the val- reporting, best execution and record a global scale. They often have their ue of them, particularly following the keeping. EMIR has impacted on the own commercial, legal, regulatory and global financial crisis. way in which OTC derivatives are trad- ed as well as introducing additional reporting requirements.

What are current industry priorities? AB: For investors and regulators, I would say transparency. Investors are interested in their exact exposures and not just whether they are invested in “hedge funds” or some other blanket term. Funds will struggle if they are not transparent about what they in- vest in. Regulators are looking more at substance in terms of tax, operations, accountability and a raft of other areas. Where people are based, where is the core of the operation located? It is very different from 20 years ago. Gus Black Abigail Bell 57 PARTNER CONTENT CITCO Technology and independence remain fund admin buzzwords

he pace of change does close to our clients, understanding their bank or institution. Asset servicing is not look set to slow in the needs and aligning our strategy to that our core business, as a result we under- T next 20 years, says Declan of our clients has been critical. stand clearly our risks and there are no Quilligan, European head conflicts of interest. Even if acting as Declan of hedge funds in Citco’s fund services What is the most important industry independent valuer under AIFMD is not Quilligan division. change you have observed in the last commonplace amongst service provid- 20 years? ers, we understand the risks involved – How has hedge fund administration DQ: The shift towards independence and the benefits to clients and investors changed in the last 20 years? stands out. When I joined the Citco – and are happy to offer this service. DQ: Fund administration has been group of companies in 1996, it was in transformed in several ways, not least the era of the so-called “10 Command- Do the events of the last decade make the extent of services provided to the ments” where offshore funds managed you confident or worried for the future hedge fund industry and the technology by US managers had to have their of hedge funds? and tools required. As the industry has administration performed outside of DQ: I’m very confident. The industry grown significantly, the trend has been the US to avoid the fund being subject bounced back from 2008 and investors to outsource more to top-tier admin to US taxation. Upon its repeal a year continue to show faith in the industry to firms, which have earned the trust of in- later, independence in the NAV-striking hit their return targets. Start-up activity vestment managers. In the nineties, not process, especially for US LP structures is not at historically high levels but we every fund structure used an independ- was viewed as a “nice-to-have” rather are seeing more activity and some ped- ent fund admin – now it is highly unusual than an essential. The change towards igree names launch. Producing good not to. The trend towards independent independence has been driven main- performance has been more difficult admin has been driven by many factors: ly by the shift towards institutional in the era of low interest rates but a their enhanced capabilities and technol- allocators, which now dominate the changing market environment should ogy; regulation; and a changing investor investor base. Transparency reporting provide better trading opportunities. base with strict requirements for inde- has become common practice with in- Assets are still near record highs. With pendent calculation of valuations. stitutions who demand it from adminis- investment in technology so critically trators independent of the investment important, I am guarded that increasing In what ways has fund admin remained manager. There is no tolerance what- focus on total expense ratios should not the same? soever for operational risk – excellence lead to a race to the bottom in terms of DQ: The critical importance of technolo- in operations is essential for managers fees. Nevertheless, the industry contin- gy, and the need to remain at the cutting and their administrator. ues to brim with talent and is continual- edge of innovation, have not changed. ly innovating – I have no doubt it has an By focusing on proprietary solutions and In what ways has fund admin grown? exceptionally bright future. core systems, we have led the changes DQ: There has been significant con- in the industry when it comes to techno- solidation in the fund admin sector, What is your priority now? logical innovations. We launched Æxeo with M&A deals regularly reshaping DQ: We intend to remain at the fore- Technology in 2002, our proprietary the rankings. Consolidation continues front of all technological changes while front-to-back technology, and Æxeo In- apace with admins affiliated with -in continuing to provide industry leading vestor (AXI) transfer agency and alloca- vestment banks selling out, given the service. Data is so critical these days, tion system in 2009. More recently, we challenges and perceived conflicts. hence us concentrating on a data ser- have launched CitcoOne, our new web Our strategy has been to grow organ- vices offering. Ensuring data is used in portal and our Citco Waterfall and Citco ically and not to have to deal with the an efficient, secure and timely fashion Treasury technologies, while our latest distractions of integrating teams and is critical. We are actively implementing technology CitcoConnect helps inves- technologies etc. We have carried out a machine-learning and artificial intelli- tors manage their allocations through a limited number of deals over the years gence solutions. Citco group companies secure online environment. Technology but only for strategic reasons. We also have had a ringside seat for all the twists and our people were the key factors believe our position as an “independ- and turns for as long as EuroHedge has for clients and prospects 20 years ago ent” provider is enhanced by the fact been covering hedge funds and we are and that remains unchanged. Staying we are not part of a larger investment preparing now for the next 20 years.

EUROHEDGE 1999-2019 57 58 PARTNER CONTENT RFA AND KPMG Ops: past, present and future eorge Ralph, managing with their data and systems onsite. To- hedge fund management means data EMEA director of man- day, the opposite is true and physical breaches can be disastrous. G aged IT service provider infrastructure is seen as posing a greater With the move to cloud-based sys- RFA, on the hedge fund risk and management challenge. tems and services comes the need for George industry’s tech progression – and its Software-as-a-service offers secure next generation security solutions. Ralph future challenges. access to systems and straightforward The introduction of artificial intelli- end-user experience, which is crucial. gence and machine learning tech- When it comes to the technology used Hedge funds only really want to focus nologies into cybersecurity solutions by hedge funds, the landscape is un- on one thing; trading. They don’t want means that data and systems are recognisable from 20 years ago. Back the distractions of operational issues protected wherever they are, from the then, most hedge funds would have and worries. Many managers I speak edge to the core of a firm’s operations had an IT manager or technician in- to aren’t interested in how things are and wherever the user goes. Our man- house to look after the internal servers done, which vendors are used, or how aged detection and response service and storage systems, which handled the technology operates. Their main protects against known and unknown data, email and website systems. IT concern is the end-result; systems that threats and even pre-empts threats was complex, bulky and expensive. It are secure and efficient and data that before they happen. was a huge effort. is protected. In addition, the EU’s GDPR regu- Thankfully, times have changed and We also find that where manual lation has provided another layer of the technology needed on-site is now processes can be automated, firms are complexity around data protection minimal. Data and systems are moving able to improve the user experience and firms cannot afford to fall short, to the cloud and are now more scalable and improve the efficiency and profit- running the risk of huge fines and risk and flexible than ever before. This tran- ability of their business. However, all to their reputation. In such a tightly sition to offsite cloud services has not of this increases the reliance on data, controlled and regulated environ- been without issues and we experienced which means that adequate data se- ment, it is essential that firms have initial resistance to the idea of running IT curity solutions are critical. The com- adequately future-proofed their tech- systems remotely. Many firms felt safer plex and highly competitive nature of nology systems.

nterprise risk management hedge funds sometimes behind other ation early on in a mangers life cycle. will be an important ingre- areas of asset management in terms of Why are these things so important? E dient for success, says Dan managing enterprise risk. Aside from the obvious – managing Page, head of asset man- Sensible business management has risk sensibly will reduce the chances of Dan Page agement advisory with KPMG Ireland. become even more important as the things going wrong – if businesses are industry has diversified, with hedge better run, they have a greater chance Europe’s hedge fund industry has en- funds increasingly running their strate- of creating equity value. The hedge joyed a stellar ride over the past two gies in different formats, such as Ucits, fund industry has a mixed record when decades, led by a “golden generation” or starting long-only or other versions. it comes to takeovers, with the superb of founders such as Sir Paul Ruddock These moves, while logical, can easily Marshall Wace/KKR deal the exception and Alan Howard, who helped create create a less straightforward opera- rather than the rule. Managers who a hedge fund industry worthy of the tional environment than may appear want to sell stakes in their businesses name. at the first assessment and as a result need to have industry-leading opera- But what about the next generation? present a series of risks of which man- tions, as well as performance. We are consumed by the question of agers may be unaware. This is important for the next gener- who is best positioned to flourish in the Take an issue as core to enterprise ation of start-ups, too. Aside from the next 20 years – and believe that strong risk as vendor management; hedge performance potential, seeders and enterprise risk management will prove funds and their boards do not com- other backers of emerging managers the key to success in the industry’s next monly review the fit for purpose nature need to be convinced the enterprise is chapter. of their funds vendor relationships in watertight from a business manage- The industry has significantly raised a formal and independent manner; a ment and operational risk perspective. its operational game in recent years, practice commonplace in other sec- It may sound less sexy than dou- partly due to the rise of institutions tors. Constant and consistent vigilance ble-digit returns, but enterprise risk and their more sophisticated demands on services and pricing is key to a solid management will prove every bit as as hedge fund allocators. But there governance framework. Similarly, suc- important as performance for Europe- remains room for improvement, with cession is rarely an ingrained consider- an hedge funds in the next 20 years. LET’S OPEN PERSPEC- TIVES. To select the best Alternative UCITS, nothing beats experience.

A PIONEER IN FUND AWARDED LEADING UCITS IN THE TOP 10 OF SELECTION FOR 20 YEARS MANAGER SELECTION* UCITS PLATFORM**

Visit lyxor.com or contact [email protected]

CREATING SOLUTIONS FOR YOUR FUTURE.

*Hedge Fund Journal Awards 2018 ** HFM Week’s Top 10 UCITS Platform 2018 Lyxor group is composed notably of two subsidiaries: Lyxor Asset Management S.A.S and Lyxor International Asset Management S.A.S.

THIS COMMUNICATION IS FOR PROFESSIONAL CLIENTS ONLY AND IS NOT DIRECTED AT RETAIL CLIENTS. Not all advisory or management services are available in all jurisdictions due to regulatory restrictions. Lyxor Asset Management (Lyxor AM) disclaims any liability for any direct, indirect, consequential or other losses or damages, including loss of profi ts, incurred by you or by any third party that may arise from any reliance on this document. Lyxor Asset Management, Société par actions simplifi ée, having its registered offi ce at Tours Société Générale, 17 cours Valmy, 92800 Puteaux (France), 418 862 215 RCS Nanterre, is authorised and regulated by the Autorité des marchés fi nanciers (AMF). This communication is issued in the UK by Lyxor Asset Management UK LLP, which is authorised by the Financial Conduct Authority in the UK under Registration Number 435658. EUROHEDGE • 203 x 273 mm • PP • Visuel : Societe Generale • Remise le 28/11 OM - BAT

THE FUTURE IS YOURS TO CRAFT

Pioneering positive impact solutions, we help clients leverage their sustainable footprint.

Societe Generale is a founding member of the positive impact initiative steering group of the United Nations Environment Programme (UNEP). Societe Generale is a French credit institution (bank) that is authorised and supervised by the European Central Bank (ECB) and the Autorité de Contrôle Prudentiel et de Résolution (ACPR) (the French Prudential Control and Resolution Authority) and regulated by the Autorité des Marchés Financiers (the French financial markets regulator) (AMF). This document is issued in the U.K. by the London Branch of Societe Generale. Societe Generale London Branch is authorised by the ECB, the ACPR and the Prudential Regulation Authority (PRA) and subject to limited regulation by the Financial Conduct Authority (FCA) and the PRA. Details about the extent of our authorisation, supervision and regulation by the above mentioned authorities are available from us on request. ©Getty Images – November 2018.

SGEN_1810382_SPIF_203x273_EuroHedge.indd 1 28/11/2018 14:53