FINANCIAL TIMES MONDAY JANUARY 6 2014 9 FTfm – fund analysis

down, fund performance is accord- ingly being benchmarked not against markets, but cash-plus tar- Survey: weak gets. HSBC’s Mr Rigg says his company’s benchmark is Libor plus 6 percentage points. Mr Käll- ström of First Swedish National performance is focused on achieving uncorrelated market returns from his largely macro exposure to smooth overall portfo- lio performance. fails to stop gush Increasingly, leading institu- tional investors seem to be satis- fied with realising steady absolute returns, even at the cost of signifi- of new money cant market underperformance. This was made clear in a recent global investment bank report modest historical drawdowns. that confidently stated: “Despite Research Last year, Kent Clark, Goldman new market highs, funds refuse to Sachs Asset Management’s chief chase performance”. Eric Uhlfelder and investment officer of In addition to swelling institu- Jonathan Kanterman strategies, who oversees more tional investor interest, there is than $23bn, told us: “If you can another explanation of the para- take a look behind the find any managers with good dox of rising asset flows and lack- numbers to find five -term returns and moderate lustre industry returns. volatility, let me know”. This still We asked BarclayHedge to sepa- exceptional funds rings true. rate performance from asset So why do investors seem growth between January 2010 and increasingly enamoured with September 2013, focusing on the “There’s something happening hedge funds? period after the immediate effects here.What it is ain’t exactly clear.” “At the [global] epicentre of this of the crisis were felt. We found increased pace in asset growth is that of the $228bn of net new Buffalo Springfield, the 1960s the continued expansion in size money coming in to hedge funds rock group that penned these and number of the largest single- over this time, more than half words, was certainly not writing manager firms in the US with went into managed futures (that about hedge funds in 2013. But assets of at least $1bn,” reports is, commodity trading advisors). they could have been. HedgeFund Intelligence, the Yet this sector represents less than Reports abound of money osten- industry research company. 15 per cent of industry assets. sibly gushing into the industry, During the first half of 2013, Furthermore, this strategy is set despite mediocre performance HedgeFund Intelligence found who are after more aggressive to register its third consecutive since markets melted down five this group grew in number by 18, Now 11 US­based firms returns, she says. down year, significantly underper- years ago. The least likely strate- to 287 managers, whose total are each managing The performance impact of try- forming virtually all other broad gies are seeing strong asset assets increased by $110bn to ing to capture growing institu- hedge fund strategies and the growth. And 100 companies now $1.57tn. That is more than two- more than $20bn tional demand has varied by strat- market. control 61 per cent of all assets, or thirds of all hedge fund assets – egy. Alexandre Col, group head of Net flow numbers may have $1.4tn, despite government policy the highest concentration since multi-management at Banque been greater had broad industry moves against “concentrated risk” the pre-crisis peak. Now 11 US- As an indirect result of the Privée Edmond de Rothschild, returns been more vibrant. But and entities becoming “too big to based firms are each managing financial crisis, Lisa Fridman, says: “Event-driven/activist man- the industry response to 2008 has fail”. more than $20bn. head of European research for the agers are still content in taking altered portfolio construction sys- BarclayHedge, the global indus- Asset massing by large manag- $8.8bn Paamco funds of funds, on risk in looking for outsized per- temically. try data tracker and our prime ers reflects the growing institu- sees many larger managers refo- formance with volatility.” Though one could argue hedge data source for this study, found tionalisation of the industry and cusing on so-called risk-adjusted But he sees long/ equity funds did deliver impressive rela- that since industry assets fell by relative decline in wealthy indi- performance rather than returns managers aiming lower and tar- tive outperformance that year, the nearly 30 per cent to end 2008 at vidual investors. Over the past alone, to help hold on to and geting less risk to achieve more substantial absolute hit taken by $1.66tn, investors have been decade, Citi Prime Finance, the attract long-term institutional cli- stable, less volatile performance. investors fuelled demand for more returning steadily. By the end of global hedge fund advisory, found ents. These clients tend to have “And this is even more evident reined-in exposure and risk. This the third quarter of 2013, the fig- institutional ownership of all lower sensitivity to the market. with multi-strategy funds.” further aligned hedge fund man- ure had reached $2.33tn, almost hedge fund assets has increased This shift seems to be pushing With performance expectations agement with institutional matching the all-time asset high from one-quarter to more than away rich individual investors of large funds being ratcheted demands. set at the end of 2007. two-thirds. Certainly, response to the crisis Though surrounded by negative Institutions are pouring into induced greater operational and sentiment, fixed income and large funds, says Martin Käll- Methodology Separating the wheat from the chaff performance transparency. But it emerging market fund assets have ström, portfolio manager of hedge also resulted in lower perform- increased 13.44 per cent and 19.61 funds at the $35bn First Swedish By relying only on BarclayHedge during the study period, and ance, as evidenced by five years of per cent, respectively, during the National Pension Fund. They can for this survey – the oldest and avoided funds that suspended or market-trailing returns and grow- first three quarters of the year, offer superior “investor comfort” most comprehensive hedge fund gated. Those that made the first ing correlation among strategies. reaching $318bn and $253bn. via effective transparency, dedi- database – we ensure search cut then went through a Our conclusion is that, with the Long-bias fund assets rose cated risk-management teams and parameters are precise. All 13 substantial due diligence review. performance bar having been nearly 17 per cent to more than continuous vetting by advisers data fields, including strategy, The difficulties we have reset lower and prospects of out- $175bn, suggesting investors think and consultants. assets, performance, standard encountered this year in finding sized gains more limited, inves- fairly naked equity exposure is “These funds can offer low-vola- deviation, worst drawdown, Sharpe compelling broad­strategy funds tors should be more circumspect OK, despite an ageing bull mar- tility performance that is uncorre- ratio, firm assets and fees, are forced us to expand our search about hedge fund exposure, given ket. Assets in more traditional, lated to the market, while claim- treated consistently. into niche and country­specific the risks of investing in this field. hedged long/short equity funds ing to the have the capacity to BarclayHedge started the strategies, which we normally While institutional investors have barely budged, and are now accommodate significant capital selection process by filtering 4,500 avoid because of the inherent claim large funds are helping at $174bn. inflows,” adds Mr Källström. hedge funds, and then assembling limits it places on the manager. them meet their asset allocation Meanwhile, the industry is fin- Preqin, the data provider, a list of more than 700 that run Identified as statistical , and performance models, we con- ishing its fifth consecutive year of thinks faith in these qualities is between $100m and $750m and RiverNorth primarily invests in tend exposure alone will not underperforming , cumula- the primary reason why “institu- have at least five years of verifiable closed­end funds. While its $82m improve portfolio volatility, espe- tively trailing EAFE, an index of tional investors have stayed the performance through June 2013. is slightly below our threshold, the cially taking costs and relatively non-North American developed- course with hedge funds, despite We excluded sector and firm manages nearly $2bn in this modest net returns into account. world stocks, in dollar terms by performance concerns over the commodity funds because of their asset class. We believe there are smaller 26.6 per cent and the S&P 500 by past few years”. limited exposure and tendency to AlphaGen Volantis targets small­ hedge funds out there, managing more than 62 per cent over this Market underperformance is produce outlying results. cap companies in the UK. Perfin less than $750m, that can add period. also tolerated because the market This timeframe captures one of Investimentos invests only in unique and productive exposure We experienced firsthand how has twice melted down by half in the most challenging investment Brazil. However, these equity to portfolios, with managers who difficult the search was for just little more than a decade, says environments and is the longest country funds demonstrate the know how to balance performance five proven managers (see page 10 Peter Rigg, who oversees $28bn tracked by a periodical hedge fund potential of what a good manager and risk, not just act as hedges and 11) with the following parame- and is head of alternative invest- survey. can deliver, especially in a against market uncertainty. ters: fund assets of between $100m ments at HSBC in London. Such We then screened for consistent struggling economy. Industry research widely supports and $750m; more than five years of outsized volatility is contrary to returns and low to moderate this point. performance history; consistent most institutional tolerance, volatility, with limited drawdown, More detail on the methodology double-digit annualised returns; which seeks steady growth to no change in portfolio manager[s] and due diligence is available online Jonathan Kanterman is a fund moderate to low volatility; and meet their investment mandates. manager and industry consultant 10 FINANCIAL TIMES MONDAY JANUARY 6 2014 FTfm – Hedge fund analysis

district zero-coupon bonds. These bonds were caught up in the grow- ing fear of widespread municipal The secret of fund success is , which hit California’s struggling debt especially hard. “Effective yields” had widened from 6 per cent in October 2010 to 7.5 per cent just before Mr Ades spotting a hidden opportunity started buying. In selling off, investors had ignored the fact that these bonds fund started up as markets began were issued with voter approval. Top funds melting down in autumn 2007, They were ringfenced obligations, manager Daniel Ades admits he specifically backed by the district Eric Uhlfelder and felt scared “shitless”. property taxing authority. When Jonathan Kanterman But it never showed in his per- fears eased and as “yields” fell formance. below 6.5 per cent, Mr Ades sold analyse the strategy of This opportunistic manager pro- out, delivering a 70 basis point five selected funds ceeded to generate double-digit boost to the fund. returns every year, averaging Mr Ades unlocks value by gains of 16.9 per cent, with low restructuring bonds. In March AlphaGen Volantis volatility, while turning in only 2012, Kawa established a 6 per cent Managers: Rob Giles and six negative months through June stake in a Brazos higher education Adam McConkey 2013. asset-backed , which was Strategy: UK long/short equity We found a manager who made up of senior and subordinate small­cap jumped on deep-value opportuni- government-guaranteed student ties when much of the market was loans, private loans and cash. It Volantis has been so accom- spurning these securities, holding paid around 60 cents on the dollar. plished that when its parent com- on for only a few months and Working with Brazos, Kawa cre- pany Gartmore agreed to be pur- Volantis’s Rob Giles and Adam McConkey rely on their knowledge of then selling when investors real- ated individual securities out of chased in 2011, the buyer, Hender- under­analysed small­caps ised they had panicked. these constituent parts, and resold son Global Advisors, agreed to Such well-timed, shortly held them for a gain of around 12 per sustain the fund’s operational tically in and out of the stock. ing sales, Mr Giles and Mr McCo- purchases have limited the fund’s cent in less than six months. independence. Its research and Sepura is a global leader in nkey saw a recovery play in Crest exposure to sell-offs. As a result, Mr Ades has made some wrong investments were ringfenced to Tetra digital radio products and Nicholson. its maximum drawdown has been investments, mostly involving help ensure Volantis’s continued networks used by police and The UK homebuilder emerged just 2.34 per cent. equity. But he has reduced these outperformance. emergency services. A change in from a private buyout financially While the $238m fund has expo- losses significantly since his first This $526m UK small-cap fund management in 2008 caught the sound, with an initial public offer- sure to various asset classes, it is year, which explains why the has performed like a global indus- fund’s attention. ing in early 2013 priced at £2.20. clear that the manager feels most manager keeps his eyes trained try leader, generating annualised At the end of 2009, with the The managers bought at the offer- comfortable trading debt. In fact, on sound debt when it sells off. returns of 15 per cent since it managers having sensed the ing, believing the company was when asked why a so-called started up in April 2002. Over that return of public spending, they poised to exploit pent-up housing “opportunistic” fund failed to par- time, the comparable FTSE AIM started buying shares of Sepura at demand that would be unleashed ticipate in one of the strongest (UK micro/small-cap) index was an average cost of 41p. Early the by expansionary policies. By mid- bull markets ever seen, he says: “I down an average of 0.7 per cent a following year, Sepura secured December, the shares were trading saw greater risk-reward in fixed year. one of the largest post-crisis roll- above £3.50, having boosted fund income”. Even more remarkably, manag- outs in Germany. returns by 1.7 per cent. Comparing his returns with the ers Rob Giles and Adam McCo- Company prospects have been Volantis’s performance is largely S&P 500 proved him right – every nkey’s performance has been enhanced with the US approval of driven by long diversified posi- year. achieved with low to moderate Sepura to sell in the country, and tions such as these. When manag- Kawa’s traditional trades volatility, despite the backdrop of private industries expressing inter- ers sense market uncertainty, they include deep value (crisis- the British economy’s long drawn est in the technology. Volantis has tend to ratchet back gross expo- depressed bank and auction-rate out recovery from recession. subsequently boosted its position, sure. This strategy limited losses preferreds), relative value trades Agnostic about gross domestic which now represents 1.8 per cent in 2008 to just 5.4 per cent – just (profiting from spread compres- product, the managers rely on of the portfolio. By mid-December, one-quarter the decline suffered by sion between mispriced assets), their knowledge of under-analysed the stock was above 100p, having the average hedge fund. and growth trades (where the small caps. They are quick to iden- cumulatively contributed 2.6 per market has underestimated for- tify companies with technological cent to the fund’s value. Kawa ward valuations). and market-share advantage. After Believing quantitative easing Strategy: Opportunistic debt Starting in June 2011, Mr Ades establishing a core position in a would drive down mortgage rates Manager: Daniel Ades eventually built up a 4 per cent company, the managers often boost and that expansion of loan guar- position in a basket of out-of-fa- Daniel Ades of Kawa is most returns by also trading opportunis- antees would trigger more hous- When this Miami Beach-based vour, long-date California school comfortable trading debt

FTfm select funds for 2013 survey through June 30 2013

Worst Five-year One- Three-year Five-year Annualised drawdown One-year annualised Sharpe Fund assets year annualised annualised return since since standard standard ratio past Firm assets Name of fund Start date ($m) Strategy return return return inception inception deviation deviation five years Firm City ($m) AlphaGen Volantis May 2002 526.1 Equity Long/Short 16.65 8.86 11.14 15.00 11.34 5.56 9.74 1.13 Henderson Global Investors London, UK 103,000 Equity Long/Short Index 10.68 5.39 3.30 10.10 14.25 2.57 6.16 0.51

Kawa Sep 2007 238.0 Opportunistic Debt 11.58 12.82 18.21 16.89 2.34 1.79 4.59 3.96 Kawa Capital Miami Beach, US 498 Event Driven Index 9.74 5.22 5.29 9.82 19.62 3.55 7.29 0.7

Perfin Investimentos Long Short Oct 2007 174.5 / Cash Plus 11.34 12.6 15.16 15.45 5.23 2.32 3.96 3.78 Perfin Investimentos São Paulo, Brazil 1,313 Market Neutral Index 5.36 3.13 0.80 5.59 6.26 1.52 2.60 0.24

RiverNorth Capital Partners Aug 2007 82.0 Staistical Arbitrage 9.86 12.53 22.12 22.57 7.81 2.67 9.99 2.20 RiverNorth Capital Chicago, US 2,130 Statistical Arbitrage Average * 1.58 3.31 8.42 9.09 10.07 4.46 9.33 0.85

Quaesta Capital Bond Gl Select Mar 2005 672.0 11.17 9.26 15.83 12.12 10.67 7.13 8.69 1.80 Quaesta Capital Frankfurt, Germany 3,125 Global Macro Index 4.56 2.62 2.08 8.40 6.42 3.43 4.70 0.40

Barclay Hedge Fund Index 10.09 5.67 3.26 9.43 24.09 3.31 8.44 0.37 S&P 500 Total Return Index 20.60 18.45 7.01 11.40 50.95 6.45 18.26 0.37 MSCI EAFE Index (USD) 15.15 6.73 -3.59 7.85 58.24 9.17 22.79 -0.17

* There is no formal index for statistical arbitrage. It is a sub-category involving only 5 to 7 funds over the past 5 years. Accordingly, the related performance data is an average Source: BarclayHedge, including all strategy averages FINANCIAL TIMES MONDAY JANUARY 6 2014 11 FTfm – Hedge fund analysis

Perfin Investimentos Long Short 2 per cent. Mr Rosenberg believes bogged down in debt-ceiling cri- the managers rely on statistical Manager: Ralph Rosenberg subsequent deleveraging should ses, Mr von Strachwitz has seen arbitrage to identify discounts Strategy: Equity market neutral/ drive profitability and the stock. German Bunds rally. and premiums in market prices cash plus Foreign institutional investors Quaesta saw an opportunity that they anticipate will change. would probably find the fund’s when it sensed the supercharged With more than three-quarters Perfin derived a simple way to deal equity exposure low for a long/ yen could not hold its high value of closed-end funds using leverage, with Brazil’s fickle to short fund. While the performance during the summer of 2012. Strong which averages 30 per cent to deliver consistent double-digit fee is applied only to equity-related European Central Bank support for boost yields of their dividend-pay- returns with low volatility and returns, some investors may balk the euro combined with Japanese ing holdings, yield-starved inves- drawdowns. It combines substan- at the management fee being monetary easing suggested upside tors poured into these invest- tial exposure to the country’s high applied to the fund’s hefty cash in a long euro-yen trade. After just ments. This pushed the portion of overnight interest rates, which position. But the net results of this a couple of months, Quaesta closed funds trading at a premium to 54 have averaged 10 per cent since the hybrid strategy are compelling. out this position, adding 1.6 per per cent as of September 2012. This fund started in 2007, with targeted cent to the fund. seemed rich to the managers. long and short equity positions, Quaesta Bond Global Select Around the same time, Mr von By the spring, they saw their whose net exposure ranges Strategy: Global macro Strachwitz’s team believed Span- opportunity when Ben Bernanke, between -10 per cent to 20 per cent. Manager: Christian Graf von ish and Italian sovereigns were chairman of the US Federal The latter has enhanced annual Strachwitz oversold on fears of collapsing Reserve, hinted tapering of QE was performance, ranging from 1 per domestic economies and systemic being considered. They assembled cent to more than 21.5 per cent. Perhaps the most critical thing one threat to the euro. Feeling the ECB a basket of municipal, high-yield, The fund will sometimes under- can say about this Frankfurt-based would be compelled to support emerging market and bank-loan perform the Bovespa, explains fund is that its name is a misno- these markets, the fund started funds that represented up to 52 per manager Ralph Rosenberg, as it mer. Since it started up in 2005 buying Spanish and Italian bonds. cent of RiverNorth’s gross short did in 2009 when the index was up under the management of Chris- The trades received a boost when exposure as of September 2012. 83 per cent. But when stocks tian von Strachwitz, the fund has the ECB reiterated its defence of Between May and August of the plummeted as they did in 2008 been macro focused, investing in the euro and recommitted to its RiverNorth’s Patrick Galley and following year the managers (down 41 per cent), the fund equity indices, currencies and debt sovereign bond-buying pro- Stephen O’Neill are proving the unwound this position. By the gained more than 10 per cent. Bot- to achieve steady returns of more gramme. Steady bond appreciation merits of trading in a less autumn, 90 per cent of closed-end tom line: Perfin’s cumulative than 12 per cent a year. The fund’s ensued, enhanced by an interest- crowded space funds were trading at discounts. returns have outperformed Brazil- annualised standard deviation has rate cut, which together added 4 The trade boosted the fund’s per- ian shares 136 per cent vs -20 per averaged 8.7 per cent over the past per cent to the fund by mid-2013 Stock Exchange, with no more formance by 5 per cent. cent, while the average Brazilian five years, and its worst drawdown when Mr von Strachwitz closed than about 10 firms trading around During the fourth quarter of hedge fund has been flat. was less than 11 per cent. out these positions. the inefficiencies of this asset class. 2012, fears about the pending fis- Monthly report and performance Equally compelling is this Quaesta’s staff of 24 profession- This is an obscure strategy, but cal cliff hit covered call option attribution documents reveal $672m fund’s low correlation with als maintains 15-25 investments Patrick Galley and Stephen funds, capping a year of reduced cash’s significant contribution to leading benchmarks. It has been that last from several weeks to O’Neill are proving the merits of dividend payments as premium- performance. The presentation doc- negatively correlated to the several months. They protect the trading in a less crowded space. writing income fell, having cre- ument focuses on the equity JPMorgan EMU 1-10 year bond fund’s downside through extensive Since starting up in August ated a 15 per cent discount in investing strategy, which combines index along with the Macro and daily stress testing and application 2007, the managers have racked many such funds. core and opportunistic trading, CTA fund indices. Its equity tilt is of strict stop-losses to prevent indi- up annualised gains of more than Seen as a temporary phenome- often involving the same stock. captured in the fund’s modest cor- vidual trades from dragging down 22.5 per cent a year through to non, Mr Galley and Mr O’Neill Dufry South America, the relation to the S&P 500 (0.32) and the fund by more than 1-3 per cent. June 2013, with a trailing five-year established a 17 per cent long regional airport retail concession- DJ Euro Stoxx 50 (0.43). So far, it has worked well. annualised standard deviation position in a basket of these funds aire, was an early core holding. In Such nonconforming numbers that is under 10 and a worst draw- by January 2013. The discount April 2010 the subsidiary was one come as no surprise once you RiverNorth Capital Partners down that is less than 8 per cent. quickly closed as budgetary fears of many absorbed by its Swiss understand the manager’s mantra. Strategy: Statistical arbitrage Closed-end funds offer unique subsided. By September the man- parent. Consolidation has created “Regardless of how attractive, we Managers: Patrick Galley and trading opportunities because their agers unwound the bulk of the a global leader that is capturing avoid crowded trades,” explains Stephen O’Neill market prices deviate significantly position, adding 3 per cent to the benefits associated with the Mr von Strachwitz. His contrarian from their net asset values. With returns. steady rise in passenger travel. posture is achieved through inde- Closed-end funds, the primary such funds built around specific Without a down calendar year, Because the Swiss parent trades pendent research and analysis, security RiverNorth trades, have asset classes, their market prices having gained more than 21 per in São Paulo, the fund has which he says helps him identify been around for decades. There are are moved by underlying valua- cent when markets collapsed in retained its 2.5 per cent exposure. where the market is heading. around 600 such exchange traded tions and sentiment towards the 2008, the managers have found a Over the past five years, annu- For instance, when the US gov- funds, representing one out of five asset class. niche that significantly topped alised top-line growth has been ernment periodically becomes securities listed on the New York Being able to go long and short, more familiar, crowded strategies. running at 10 per cent and under- lying earnings growth at 13 per cent. Since consolidation, this has Record so far Tracking the performance of selected funds from previous years helped push shares up from R$150 ($63) to R$402 in mid-December, Several years of performance is strategies and in absolute terms exposure was effectively hedged. down 7.7 per cent, mainly due to adding an average of 55bp a year required to make a fair assessment over the past 12 months through The performance of developed­ its performance in May 2013, when to the fund’s performance. of our thesis that investors can June 2013. GAM Talentum market­focused Parus was driven it lost an extraordinary 9 per cent. Cosan, another original core realise superior and operationally Emerging Long/Short Equity fund by its bullish bottom­up approach, Omni Macro fund’s conviction holding that also represents 2.5 less risky returns through refined paced the way, rising more than 15 especially in financials, which that quantitative easing was setting per cent of the fund, was Brazil’s research and due diligence. But per cent, followed by the Parus accounted for 70 per cent of up a bearish scenario for a richly leading sugar cane and ethanol here is what we have found so far. [long/short equity] fund, which performance. priced market proved costly as producer. Between 2009 and 2012, With two years under our belts, was up more than 12 per cent. Two other funds we cited were stocks continued to rally, it decided to leverage its cash flow the five original funds we selected Talentum’s gains were founded hurt by their defensive postures. generating a loss of nearly 6 per to transform itself through acqui- in 2011 have almost doubled the in the fund’s predominantly long LJM Preservation and Growth, an cent over the trailing year. sitions into a transport and performance of the average hedge positions, spread across a variety options strategy fund that had an energy infrastructure and renewa- fund, rising an average of 5.1 per of countries and industries. And extremely consistent record More details on our performance ble fuels leader. cent a year versus the potentially damaging currency throughout its six­year history, was is available online Though now burdened with BarclayHedge Fund Index. They R$9.8bn in debt, the market has have also outperformed the MSCI Selected funds rewarded Cosan’s synergies by EAFE Index, which was up 1.58 per Total return indices (rebased) pushing up the stock from R$25 to cent. But we underperformed the R$40 over the past four years. S&P 500, which had gained an 1300 This has boosted fund returns by average of 12.77 per cent. Our top­performing funds were Barclay Hedge Fund Index the Harvest Small­Cap [long/short 1200 MSCI EAFE Gross Index (USD) equity] Strategy (+10.65 per cent S&P 500 Total Return Index per annum) and the Steelhead FT Select 5 Hedge Funds (2011) Pathfinder 1100 fund (+8.21 per cent). Our worst and only cumulatively negative performance from 2011 was the 1000 Forum Global Opportunities [macro] fund (­2.99 per cent), which was hurt by its high­ 900 conviction short position of emerging­market credits, which the manager still thinks will play out. 800 Three of the five funds we Jun 2011 20122013 Jun selected in 2012 have performed Christian von Strachwitz’s Quaesta very well, both relative to their Source: BarclayHedge invests with a contrarian posture