Less Reverie, More Realism

A recently published survey from the Alternative Investment Management Association (AIMA) and broker GPP has reported that, despite what might be considered relatively low levels of assets for a hedge fund, there is still scope for small funds to break even or indeed make a profit, with less than $100 million in assets under management.

Take Devet Capital: it was formed in 2014 when its founders, Irene Perdomo and Leonardo Marroni, created a product which they felt was of significant value and that they believed they could bring to the market themselves. Therefore, they created their fund, identifying from the outset that its ultimate success would be determined as much by the streamlined nature of their business model as by the strength of the product. The innovative nature of their product, combined with their enthusiasm and determination to create a modern and unique hedge fund, drew early interest.

Having met while working together at Barclays, and having co-authored a finance textbook published by Wiley (Pricing and Hedging Financial Derivatives: A Guide for Practitioners), Perdomo and Marroni launched the strategy with their own funds. And they remain invested.

Their objective was to allow the fund to blossom by minimising overheads. They recognised how much of a pitfall there was to over-spending at an early stage in their development and focused on achieving the correct balance between a robust and credible infrastructure, capable of gaining the confidence of investors, and an operating model that would be efficient and effective.

Arqaam Global Macro Fund Launches

Arqaam Capital UK Investment Management Limited, which launched the Arqaam Global Macro Fund (AGMF)* on March 1 2017, pursues an eclectic, multi-strategy approach that capitalises on Chief Investment Officer Areski Iberrakene’s 20-year track record managing global trading teams and proprietary trading desks at investment banks. AGMF aims to capture multiple risk premia, and other market inefficiencies, covering in broad terms three strategies: Risk Premia, Relative Value and Tail Risk – with a current concentration across Equities, FX and Commodities. The manager has sought to combine strategies that are not merely lowly correlated – but many which have historically been negatively correlated – to obtain the holy grail of hedge fund investing: an ‘all weather’ return profile that is itself lowly correlated to conventional asset classes.

The objective is to deliver returns around 12% with volatility below 8%, equating to a Sharpe ratio of near 1.5 at current levels of interest rates. This is no mean feat as none of the major hedge fund strategy indices have sustained such levels of risk-adjusted returns through a full cycle or a multi-year period. Yet the AGMF strategy has attained its targeted risk-adjusted returns during the running of a recorded paper portfolio and benchmark portfolio. An independent third party recorded 6,000 hypothetical trades, generating annualised returns of 10.55% with annualised volatility of 3.43% between July 2013 and February 2017. The first 22 months of this track record were validated by an audit firm while the next 22 months used AGMF’s systematic models.

Pierre Lagrange: 32 Years in Finance

With over 32 years in finance Pierre Lagrange, Senior Adviser to Man Group (one of The Hedge Fund Journal’s ‘Europe 50’ managers), has been a bond salesman and trader, a private client stockbroker, an equity portfolio manager, a founder and entrepreneur, and a manager. His current role involves championing the application of cutting edge technology to the discretionary investment process at Man GLG.

Lagrange’s career trajectory did not follow any preconceived game plan and each episode, like his first step into finance, involved some serendipitous accidents as well as proactive choices. Lagrange had studied a hybrid business and engineering degree conceived by chemicals entrepreneur Ernest Solvay, at whose eponymous Brussels university he studied. The course was designed to prepare students for what was in 1980s Belgium one of the most sought after careers: working for a US chemicals company. The trainees who landed these roles could specialise in engineering or finance – and after having chosen the latter, there arose an opportunity for Lagrange to dive in at the deep end of company finance, gathering financial data from all over Belgium and upstreaming it via a chemical company parent to the overarching owner in the US. But “being several steps removed from the core objective of the business and remote from the main action” was already frustrating Lagrange, and so circled back to potential employers he had previously been in conversation with.

Broadridge Continues to Partner with the Hedge Fund Industry

Broadridge continues to build out its buy side offensive, encompassing the entirety of the buy side well beyond just hedge funds. “Many buy side firms are unfamiliar with the depth of Broadridge’s asset management capabilities, so there is a great opportunity for us to expand this business,” says Eric Bernstein, who joined in May 2017 as President of Broadridge asset management solutions. He expects Broadridge could make real strides in market share. “Leveraging our data, technology and people, we feel that the ingredients are there for us to significantly enhance our market share and continue to move upmarket to serve the largest firms globally.”

Indeed, Bernstein arrived on the job just a week after Broadridge announced the on-boarding of Philippe Jabre’s Geneva-headquartered firm, which has been profiled in The Hedge Fund Journal. Jabre Capital Partners is one of Switzerland’s largest hedge fund managers – ranking in The Hedge Fund Journal’s ‘Europe 50’ as one of the most sizeable hedge funds in Europe – and runs liquid alternatives UCITS funds, as well as offshore vehicles. Another recent client win, announced in August 2017, was the global, multi-billion, multi-strategy hedge fund, Whitebox Advisors. Broadridge’s platform will provide a comprehensive, fully hosted and integrated platform of trading, portfolio management, reference data, reconciliation and data warehouse solutions to manage Whitebox’s front, middle and back office operations. Broadridge will also host Advent Geneva and integrate Geneva with Broadridge’s data warehouse, HTML 5-based reporting solution and order, portfolio and risk management systems, which are based on the foundation of Broadridge’s central security master and pricing solutions.

Garraway Financial Trends UCITS

Earlier this year Garraway Financial Trends UCITS received The Hedge Fund Journal’s ‘UCITS Hedge’ award for best performing trend-following CTA under $100 million at the strategy level, based on its risk-adjusted returns in 2016. As at July 31st 2017 the strategy runs $32 million, and the fund has just passed its three-year anniversary since this new strategy was implemented, though lead portfolio manager, Darran Goodwin, has been developing managed futures strategies for nearly ten years.

Garraway was amongst the top performing systematic hedge fund strategies in absolute as well as risk-adjusted terms in 2016, a year when volatility around Brexit, Trump and other events wrong-footed some systematic and quantitative strategies (not to mention many discretionary macro traders). Garraway’s model latched onto some of the largest market moves. Goodwin likes to be transparent on performance attribution and the biggest contributors were trades that were long the Japanese Yen, short the British Pound, and long government bonds. The short British Pound positions could be perceived as basically Brexit trades but as a trend-follower, Garraway was not short of ‘cable’ - the British Pound versus the US dollar – going into Brexit. The strategy was however short the Pound against the Yen before the vote, which illustrates the benefits of Garraway’s selection of markets including ‘cross-rates’: trading non-USD currencies against one another, as well as versus the USD.

Indeed, its investment universe is one element that distinguishes Garraway from other CTAs. While some CTAs trade as many as 400 or more markets (or even 700 plus including synthetic markets such as spreads), Garraway in July 2017 is trading 36, carefully chosen, markets. What makes Garraway still more selective is that the strategy does not have positions in all markets at all times.

Multicultural Mid-Cap Stock Picker

The Hedge Fund Journal was quick off the mark in identifying the potential of Portland Hill. We first interviewed the firm’s Harvard and Goldman Sachs-trained founder and CIO, Thierry Lucas, in June 2012 when he launched the company. He went on to be featured in the 2014 edition of The Hedge Fund Journal’s biennial ‘Tomorrow’s Titans’ survey in association with EY and the firm has also received numerous awards. The Portland Hill Overseas Fund won The Hedge Fund Journal’s 2016 performance award, whilst the firm’s UCITS, which launched in September 2014, received one of The Hedge Fund Journal’s 2017 UCITS Hedge awards.

These awards are based on risk-adjusted returns. Portland Hill’s flagship strategy has delivered positive performance every year. It has returned approximately +74.5% net in the five years since inception, +11.2% net annualised, which is consistent with the stated performance target of high single-digit to low double-digit returns. Portland Hill’s returns have outperformed hedge fund indices of similar strategies by more than 40% since launch (as shown in Fig.1). Returns are also defined by constrained volatility, low drawdowns and low correlation to equity markets. “We have protected capital in challenging years and delivered double-digit returns in the good years,” reflects Lucas. It is on the back of this track record that Portland Hill has been able to grow its firm-wide AuMs to over $1bn.

AC Tiger Value Fund Approaches 10 Years

After many years playing the role of Cinderella, European equities began to get net inflows in 2017. The asset class is amongst the least efficient global equity markets, with a higher proportion of active long-only managers outperforming indices than in other regions. Small and mid-cap stocks in Europe may exhibit even greater inefficiency, given little or no sell side analyst coverage, and limited buy side following. The AC Tiger Value Fund, which is available on Aquila Capital’s Associated Manager Platform, is a long/short AIF strategy mainly trading small and mid-cap stocks, which have outperformed the broad, large cap dominated, indices since 2009.

Alpha and asymmetry
The past eight years of rising markets have provided some tailwind for any net long strategy. But the fund’s Investment Advisor – Tiger Asset Management – is not a beta jockey and nor does it use leverage to enhance returns. When The Hedge Fund Journal met with the fund in June 2017, the gross exposure was at 84% and the net long exposure was at 35%. The strategy has outperformed the long only equity indices with low gross exposure, low net exposure, moderate volatility and low market correlation. The AC Tiger Value Fund has annualised at over 11% while maintaining volatility below 7%, as shown in Fig.1.

FORT Investment Management

Among CTAs, Washington DC area and New York-based FORT is highly unusual in that its absolute performance since 2008 has been very similar to its numbers in the 15 years from 1993 to 2008, when expressed as a spread over risk free rates. This persistent outperformance has propelled the strategy’s returns further ahead of the SG CTA index (of which FORT Global Contrarian has been a constituent since 2016). What is more distinctive is that FORT’s absolute risk-adjusted returns have actually been higher post-crisis than pre-crisis. “It cannot just be luck to have outperformed the CTA index on average for more than 20 years,” says co-founder, Dr Sanjiv Kumar. Part of the superior returns are attributable to FORT’s somewhat differentiated trend following strategies having outpaced most others, but FORT has also developed trend-anticipating and non-trend strategies that contribute to its various multi-strategy offerings. A summary of the standard program suite is shown in Table 1 (other combinations can be customised).

Though FORT’s strategies are 100% systematic and quantitative, Kumar argues that the founders’ heritage in discretionary macro provides a different perspective from the mainly Chicago-oriented exchanges and brokerages that spawned many CTAs. Kumar, and co-founder Dr Yves Balcer, managed $25 billion fixed income portfolios for the World Bank, employing a discretionary macro approach. A background in academia is another differentiator, as both founders pursued PhDs before moving into portfolio management.

EY Targets Global Gender Parity by 2030

EY has sponsored The Hedge Fund Journal’s biennial “50 Leading Women in Hedge Funds” survey since 2011. The latest edition was published in 2017 and honorees included EY’s UK Hedge Funds Sector Co-Leader, Zeynep Meric-Smith. Retaining and promoting women is one dimension of diversity monitored by Diversity Inc, which in 2017 awarded EY the highest ranking in its Top 50 list of US firms. EY has been steadily climbing up this league table for over 15 years. EY has made it into the top 10 for the past 8 years and the top 50 since 2001, in addition to earning a whole host of other accolades from Diversity Inc.

This trophy is among a long list of diversity awards EY has received around the world, in countries including Canada, Mexico, the UK, Germany, Switzerland, Hong Kong, Singapore and Australia. EY also has councils and committees devoted to D&I. EY already appears to be amongst the most progressive companies on diversity metrics but is striving for greater achievements on this front.

EY’s pledge for parity was originally a US-focused one related to remuneration (the White House Equal Pay pledge) but has now gone global with EY’s global Chairman, Mark Weinberger, signing up to Paradigm for Parity (P4P) for the whole firm. P4P aims for 50% of the firm’s senior leadership to be women by 2030; currently, approximately 50% of the trainee intake are women but the percentage at partner level is not yet there.

Disappointed With Hedge Funds?

Investors who focus on the most recent month, quarter or even year of performance for hedge funds should take a step back and consider the perspective of Dixon Boardman, a seasoned pro who has spent nearly three decades investing in alternatives. According to his long experience, “just when the crowd counts an asset class as out is when it often turns around.”  The catalyst for such a sea change? Boardman expects markets to become increasingly driven by fundamentals rather than excess liquidity.  “We are on the cusp of a resurgence for stock picking. Good hedge fund managers have the potential to outperform by identifying the ‘winners’ and ‘losers’ in sectors undergoing secular change.”

As Optima enters its 30th year of operations, the characteristic bonhomie of Boardman, its founder, is not impaired by the perception that the recent performance of the hedge fund, and fund of funds, strategies, has been lacklustre. Industry performance for 2016 was 5.48%, according to The Hedge Fund Journal Hedge Fund Index, as calculated by Blue Lion Research; various other indices were one or two percent either side of this. When expressed as a spread over risk free rates near zero, these levels of returns do in fact match the targets of certain institutional investors, including some pension funds. European investors in general, and insurance companies in particular, may have relatively undemanding benchmarks. However, the social circles in which Boardman moves include the great and the good of the United States, for whom hedge fund returns have latterly lagged expectations. US pension funds and other US institutional investors tend to have absolute return targets of 7% or 8% that hedge funds, on average, have not met post-crisis. The Preqin All-Strategies Hedge Fund Benchmark made 7.4% in 2016 – but that was its best year since 2013.


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