Dechert Partner, Stuart Martin, received The Hedge Fund Journal’s 2017 award for “Law and Practice: Outstanding Contribution”. During his career, Martin has repeatedly been associated with ground-breaking legal work. Following the post “Big Bang” regulatory reforms in the late 80s, he worked on the fledgling offshore fund structures, acted on the first UK unit trust to be authorised under the new Financial Services Act legislation and worked with clients closely associated with the developing offshore fund industry, including the foundation of Dublin’s fund and asset administration industry. As part of Dechert’s nascent London team, he led the work on adapting US style master feeder structures for the London market and has played a leading part in the development of alternative fund structures in liquid and less liquid asset classes, including funds and structures investing in emerging markets and credit. More recently, he has been heavily involved in the development of alternative fund structures focused on loan origination.
Four big-picture themes – real-time risk, regulation, speed, and customisation – are driving forces behind the myriad features of Imagine’s offering. Imagine creates the market-leading technologies that help firms adapt to and succeed amidst the twin challenges of ever-faster markets and increasingly complex regulations. Imagine won The Hedge Fund Journal’s 2016 and 2017 award for ‘Best Real Time Portfolio, Risk and Regulatory Solutions’ and we revisited the firm’s New York offices to catch up on how Imagine is serving the industry.
Hamlin Lovell: How has your real-time risk offering evolved?
Scott Sherman: From the very beginning some 23 years ago, we have offered real-time risk management products and solutions. Our first product was geared to the listed equity options markets – which, at the time, were (and still are) among the most demanding in terms of speed and depth of analytics. Over the years, we have expanded our offering across all asset classes while still maintaining the same level of performance and best-of-breed risk analysis. Originally an enterprise locally-hosted product, we were the first to deliver a cloud-based turnkey solution back in 2000, before the adoption of the “cloud” terminology.
In 2017 Richard Perry got The Hedge Fund Journal’s “Outstanding Contribution” award for Hedge Funds – Law and Practice; a gong that Simmons & Simmons’ partner, Iain Cullen, has also received in previous years. Perry’s legal career began at Stephenson Harwood, where he qualified in 1990, after reading law at King’s College London. As a newly qualified assistant solicitor working with Andrew Sutch, his focus quickly transitioned from corporate transactional to investment fund work. By 1994 Perry had set his sights on the then emerging European hedge fund industry, and was lured to Simmons & Simmons by its strong reputation in the space. Perry rapidly made partner in 1999.
Generalisations can be dangerous in European credit markets, because any rule has exceptions and it is precisely the anomalies that provide the greatest opportunities. Headline yields for European high yield are well below those for US high yield, but the tables can be turned for mezzanine structured credit, which pays significantly more in Europe than the US. Many segments of direct lending have seen yield compression as tens of billions have been deployed, but a number of niches can still command premium returns and AIMA’s survey Financing the Economy 2016 found that eight of the nine most attractive destinations for private credit were in Europe. Plain vanilla trade finance may now pay as little as 2-3%, but again there are sleeves in the space that offer double digit yields. In consumer debt, whole loans of high quality may only offer high single digit yields, but expertise in acquiring, warehousing and structuring these assets can generate much higher returns. At the same time, Chenavari has more liquid strategies, including a UCITS, with lower return targets and “private wealth managers are quite happy with high single digit returns which have been steadily delivered over the years,” says founder, CEO and co-CIO, Loic Fery.
He is proud of the firm’s first ten years, which have seen the company “build a solid infrastructure and assemble a talent pool to cover the full spectrum of credit assets, something quite unique in Europe”. Chenavari’s reach spans the most liquid indices, options and derivatives, to subordinated bank papers such as contingent convertibles, through to leveraged loans, structured credit, asset backed securities, private debt, bilateral loans with multi-year maturities, and a spectrum of verticals in speciality finance.
Aspect Capital celebrates its 20th anniversary this year. The firm’s CEO Anthony Todd reckons that investors have had it too easy for the past 20 years, when a straightforward 60% equities, 40% bonds, portfolio – and indeed a risk parity approach that might have applied substantial leverage to the bond sleeve – generated remarkable returns. “Now, with compressed yields and potentially stretched equity valuations, there is deep concern about where to find steady returns of 4-6% above cash over the next cycle. That’s where quantitative multi-strategy approaches play a role,” he argues.
Aspect was founded in 1997, though its principals had been among the founding fathers of Europe’s CTA industry in the 1980s, and for many years the firm only did medium term trend-following, via its flagship Aspect Diversified programme, albeit with a growing number of “modulating factors” which now form a new product. “This strategy provides portfolio diversification, risk mitigation, and crisis risk offsets,” says Todd.
Sissener’s assets have grown to over two billion Norwegian Krone, which is approximately $250 million at current exchange rates. Nearly all of the investor base is Norwegian, high net worth individuals. Most are based in Norway but there are a few expatriates. Sissener has, thus far, done very little marketing outside Norway, and has not yet registered the fund for sale in many other EU countries. Having passed the five year mark that many institutions insist on, Sissener is now seeing inflows ramp up and some local pension funds have started allocating. All of the firm’s assets are now in the UCITS fund. When the company started eight years ago, assets were in unlisted closed ended funds for the first few years.
The ultimate goal of an investor should be to identify and exploit attractive risk premia in capital markets. Risk premia and factor exposures have been intensively discussed in academic literature as a framework for decision-making processes in the area of Absolute Return and Hedge Fund investing. However, to practically extract a risk premium and to offer market participants an attractive investment opportunity requires a very structured approach. This article provides an insight on how to efficiently harvest the volatility risk premium in the US stock market (S&P500) through a regulated (UCITS IV) investment vehicle (OptoFlex I - ISIN: LU0834815101).
We define the attractiveness of a risk premium by its magnitude, stability and liquidity. Magnitude measured as the expected return implying whether a certain risk should be considered to be taken by an investor to receive a premium. As drawdowns of an investment should be minimised, the stability of a risk premium is important as well. Sufficient trading liquidity of a risk premium is also required to provide flexibility for potential exposure adjustment in case desired. Assuming that an available risk premium combines all three of the above we expect an investor to be adequately paid for taking such a risk in capital markets.
Below we demonstrate that the volatility risk premium in the US stock market (S&P500) is characterised by all three criteria defined above. The return expectation from harvesting the volatility risk premium is not only attractive in terms of the dimension, but also very stable in comparison to other capital market risk premia. Finally, the S&P500 volatility risk premium can be captured very efficiently in the most liquid derivative markets globally.
Finisterre’s emerging markets macro UCITS strategy won The Hedge Fund Journal’s UCITS Hedge award for best risk-adjusted returns over a three-year period ending in 2016, in the emerging market macro category. Finisterre was founded in 2002 and the firm, which runs approximately $3 billion and belongs to The Hedge Fund Journal’s “Europe 50” ranking of the largest 50 hedge fund managers in Europe (including the UK), launched the UCITS in 2013. Its investment objective is to generate absolute returns, while controlling volatility, within a robust risk framework. While Finisterre does run separate long-biased EMD strategies, the macro UCITS strategy has no long bias nor any requirement to generate positive carry. It can be net short, and/or can run with negative carry. For most of its history since 2013, the strategy has stayed within a relatively narrow range of interest rate, and credit spread, sensitivity as shown in Fig.1.
Interest rate and credit spread sensitivity
Like all Finisterre strategies, the macro UCITS employs an active and unconstrained investment approach, and for this strategy benchmarks or indices are not relevant. Thus the strategy has a broader, and more flexible, mandate than some emerging markets UCITS strategies. It employs a dynamic and opportunistic mix of long, short and relative value trades, taking views on individual countries’ government bond, interest rate, currency and occasionally equity, markets, in both emerging and developed economies.
The Goldman Sachs Global Multi-Manager Alternatives Portfolio (GMMAP) received The Hedge Fund Journal’s UCITS Hedge award for “Best Performing Fund in 2016 (Multi-Manager - Liquid Alternatives category)” over a one year period ending in December 2016, based on its risk-adjusted returns. In absolute terms, GMMAP has also performed well, outpacing the HFRX Global Hedge Fund Index, as shown in Fig.1.
“We designed the product to offer investors access to a diversified, multi-strategy portfolio of high quality hedge funds and other investment managers, with daily liquidity and appropriate fees,” says GSAM Managing Director, Robert Mullane, who sits in Goldman Sachs’ London offices on Fleet Street. GMMAP assets have already doubled to $600 million since this particular product was launched in December 2015. Additionally, the start of the GMMAP strategy, managed by the Alternative Investments & Manager Selection (AIMS) Group, conceptually dates back to 2013, “when we launched the same strategy for GSAM’s US clients,” Mullane recalls.
The US strategy, which is run from New York by Kent Clark, Betsy Gorton and Ryan Roderick, currently contains eight of the nine managers in the UCITS. The GMMAP strategy was more of a product evolution than a fresh launch. It might seem bold for GSAM, which has been structuring UCITS for over 20 years, to have jettisoned its award-winning former fund of alternative UCITS funds. The firm felt that a fairly radical restructuring of the fund of funds business model was timely. “We wanted to evolve to a more innovative solution, and it has been well received by third party distributors, private banks and even pension funds,” explains Mullane.
Have commodities had a capitulation moment? Several banks (Barclays, Deutsche Bank, JP Morgan) have ceased making markets in them, multiple funds have shut down, and some investors have also thrown in the towel. Yet some of the most seasoned commodity market traders have a more constructive outlook: “You do not need another boom and bust period like the one we saw from 2001 to 2011 to find compelling investment opportunities,” says Ballymena’s lead Portfolio Manager Oliver Kinsey.
Ballymena is an actively managed agricultural commodity hedge fund, which trades opportunistically on the long or short side. At the present time, however, Kinsey views commodities – even from a long-only angle – as relatively attractive. Kinsey reckons “the chances of heightened volatility in traditional asset classes (equity and fixed income) is certainly rising and we may even see an equity market correction. There are only two instances in history of a longer bull run for the S&P 500 without a 20% correction. One ended in 1929 and the other when the tech bubble burst in 2000. We are not necessarily predicting an implosion of traditional asset classes but feel they inevitably see much greater two-sided volatility in the future, a scenario where macro and commodity specialists could do relatively well.”
It may have gone somewhat unnoticed but commodity long-only indices were up in 2016 and the tide could certainly be turning for this space.
Kinsey sees scope for CTAs and long/short discretionary commodity trading funds to generate “crisis alpha”. But commodities can also thrive in more benign financial markets and could perform well even if equities continue melting up. “Equities are on a sugar rush after Trump, but if the reflation story is true, then that is very good for commodities in general,” Kinsey argues.