Profile

Ares Management Direct Lending

Ares Management is one of the world’s largest alternative credit managers and direct lenders. It manages more than $100 billion, of which approximately two-thirds is across a variety of credit strategies with more than half of that – around $41 billion – is direct lending. This year, Ares marks the 20th anniversary of its founding in 1997.

Having established itself in the United States as a leader in direct lending, Ares brought its direct lending expertise to Europe in 2007 as a natural complement to its US business. The firm viewed European non-bank lending as a vital and growing component of the debt capital markets, a trend that accelerated with the global financial crisis.

Ares Credit Group Managing Director Daniel Sinclair was invited to speak at the SYZ Hedge Funds Day, held in Zurich on October 31, 2017. SYZ invests in selected hedge funds, including direct lending strategies, alongside its clients. Sinclair set out Ares’ investment thesis for European Direct Lending in a presentation entitled, “The Evolution of the Direct Lending Opportunity in Europe”.

Pre-crisis, Sinclair recalls how “…the European lending market was overbanked for mid-sized companies – whether they were management-owned or sponsor-owned. Banks were doing a great job”. At that time, Sinclair was in the Financial Sponsors Group at Barclays PLC, where he originated and executed mid-market leveraged finance deals.

A decade of European direct lending
In 2007, Ares was arguably the first true direct lending platform in Europe. The firm identified the opportunity in Europe for non-bank lenders to play a pivotal part in the growth of capital markets.

Man AHL Marks 30 Years

European CTA pioneer, Man AHL, turned 30 this year. Over this period, managed futures – and Man AHL strategies – have generated better risk-adjusted returns than world equities, and with smaller drawdowns. In particular, managed futures have sometimes produced substantial positive returns, during crisis periods when equities crashed. The TMT bubble bursting between 2000 and 2003, the Russia/LTCM crisis in 1998, the credit crisis in 2008, the European sovereign debt crisis in 2011, are all good examples of how CTAs zigged when equities zagged.

There are sound reasons to think that trend-following alpha could be persistent and sustainable, over the long run. Man AHL’s Head of Client Portfolio Management, Graham Robertson, enumerates “behavioural finance teaches us that humans fall prey to biases, such as selling winners too early. Slow dissemination of, and under-reaction to, new information means it can take weeks or months to percolate into markets. And long-term macro cycles – both in terms of monetary policy and business cycles – move very slowly, again over multi-year periods.”

Aspect Launches Alternative Markets Fund

The imperative to diversify is viewed with increasing urgency by investors, including Aspect Capital CEO Anthony Todd. He does not expect that the past decade of historically very high returns from equities and bonds is likely to be repeated in the coming years.

Higher correlations between and within markets and asset classes, post-crisis, have also forced investors and managers to widen and deepen their search for new sources of diversification. Applying trend-following models to new markets is one research avenue that has yielded rewards for a number of systematic managers. Trend-following in alternative markets exhibits the hallmark CTA quality of low and asymmetric correlations to traditional long only assets – meaning that traditional ‘crisis alpha’ remains intact.  It also provides another layer of diversification because momentum strategies in alternative markets have only a moderate correlation – of around 0.6 – to those in traditional liquid futures markets.

Aspect, which has grown assets to $7 billion on the back of inflows and performance, has been broadening the scope and breadth of markets traded for many years, and just over half of the 160 markets traded in Aspect Alternative Markets Fund (‘AAMF’) – namely emerging market currencies, including non-deliverable forwards (‘NDFs’), and interest rate swaps – are already traded in other Aspect strategies, such as the 20-year old flagship Aspect Diversified, and the recently launched Aspect Systematic Global Macro.

Kairos’ Federico Riggio: Shooting the Lights Out

The Hedge Fund Journal has been aware of Federico Riggio’s fund management prowess for nearly ten years, initially during his co-management of top performing Italian equity long/short strategies at Kairos. The precocious analyst was thrown in at the deep end, becoming a co-portfolio manager just a year after he joined Kairos in 2009 – straight after graduating. Riggio, who is now CIO of KIM Ltd. Single Manager Funds and the manager of the Pegasus strategy, first appeared in THFJ in 2014, when he featured in our biennial ‘Tomorrow’s Titans’ survey of rising star hedge fund managers, in association with EY.

Kairos Group, which was set up 18 years ago in the early days of the hedge fund industry in Europe, is one of the leading alternative investment managers in Europe, now running around €11 billion in different absolute return products. The firm has a solid and stable investor base made of high net worth individuals and family offices primarily in Europe and Asia, but over time has developed strong relationship with various sophisticated institutional investors, among which are one of the largest sovereign wealth funds in the world, one of the biggest Asian asset managers, two of the largest insurance groups in Europe and several pension funds and foundations. Riggio’s Pegasus strategy manages more than €1.5 billion and generated a stellar 52.99% return during its maiden year of 2014. The stellar returns were generated through a variety of winning trades, some of which were reviewed in our 2015 profile: for instance an Italian non-life insurers trading below book value; Fiat’s spinoff of Ferrari and a takeover bid for Vienna Airport. This year Riggio is back on track to repeat such an amazing result despite the significant growth in AUM of the fund from the initial internal seed of around €40 million from the Kairos’ partners.

Tages PSAM Credit Fund UCITS

PSAM celebrates its 20th year in 2017 and founder, Peter Schoenfeld, has been investing around corporate events for 40 years, heading up proprietary trading in banks before starting PSAM in 1997

From the outset, PSAM has had offices in London and New York. The firm invests globally, across US, European and Asian markets, and is often involved in deals with a cross-border dimension. PSAM has 45 employees including nine partners. The analytical style and compensation structure of the investment team encourages collaboration and promotes synergies.

PSAM focuses on event driven situations and invests in three main strategies: merger arbitrage, stressed and distressed credit and special situations. They seek out investments that can be impacted by complex and transformational corporate events, such as mergers, spin-offs, bankruptcies, liquidations and insolvencies. Exogenous factors like tax and regulatory changes can sometimes be critical. PSAM dynamically moves capital amongst these sub-strategies in their multi-event portfolios.

PSAM pursues activism to defend its interests as a shareholder or creditor. The firm has the gravitas to win an audience with - and win over - company boards, management and investors. PSAM has been both a discreet and a public activist. For instance, in 2011, PSAM began a private dialogue with Yahoo’s board around realising value from its Alibaba and Yahoo Japan stakes, years before other activists became involved. In 2013, PSAM’s proposed reconfiguration of the Deutsche Telekom AG/MetroPCS merger - articulated in a public proxy fight - proved to be very close to a blueprint for the final deal structure. In 2015, PSAM entered into another proxy fight, publishing a white paper arguing that Vivendi was sitting on too much cash, and attained the aim of Vivendi returning more capital to investors.

Tomorrow's Titans 2010-2016: Revisited

Our four biennial Tomorrow’s Titans surveys – published in 2010, 2012, 2014 and 2016 in association with EY – contained in total 180 names who, together with our extended network, we judged to be rising stars with strong potential to generate high returns and grow assets. Many of them attained these aims. Despite complaints about rising barriers to entry in the hedge fund industry, it is still possible to start with tens of millions in assets, and grow to billions, within a few years. Growth drivers vary.

Asset growth can be driven by liquid alternatives vehicles such as UCITS and ’40 Act (and in some cases, such as Algebris, by long only strategies in addition to hedge fund strategies). Systematica has set up a UCITS for the equity market neutral strategy managed by Gregoire Dooms. Karya Macro has a UCITS on the Rothschild R-platform. Atreaus Macro’s UCITS sits on the Tages International Funds platform. Chenavari runs a UCITS on the Lyxor platform. One manager, Boaz Weinstein of Saba Capital, manages an Exchange Traded Fund (ETF).

Award winners
Managers with funds that have won of The Hedge Fund Journal’s UCITS Hedge awards, include Ashwin Vasan’s Trend Capital, on the UBP platform; Neil Toft’s Mygale, on the ML platform; Ben Wallace of Henderson; Thierry Lucas’ Portland Hill; and Elif Aktug of Pictet. (Other performance awards, for non-UCITS funds, have been won by managers including Tony Chedraoui’s Tyrus Capital). The vast majority of Titans – over 90% – have not yet launched a UCITS or other liquid alternatives vehicle however.

Thematic & Concentrated

Discretionary macro strategy Light Sky Macro (‘Light Sky’) has rapidly raised assets, surpassing USD 1.5 billion within six months of launching in 2017. Its founder, Ben Melkman, had always wanted to set up his own business – an entrepreneurial streak that is in his blood as his family ran small businesses. “I want to create a culture, build a long-term team, and develop independent research and structuring expertise,” he says.

Although Melkman is the CIO and sole PM, this does not mean that the firm is a one-man band. In pursuing a concentrated and high conviction strategy, Melkman is supported by a team of seasoned executives and a robust research department dedicated to enhancing the entire investment process and business management.

Unconstrained and opportunistic
Melkman has always had an open investment style and his mandate at Light Sky is no different. He takes exception to the view that there have been limited opportunities in the macro space over the last 5-7 years: "Sure, if you define macro as the Fed funds rate, opportunities have been limited. But if you define macro as the ability to invest across regions, products and asset classes – there is always something to do."

Independent research
Melkman is now the architect of a firm that can leverage its resources to pursue broad but finely targeted opportunities, ranging from the sequencing of the ECB exit to the fair value of the Egyptian pound. Fundamental research is led by Alberto Ades who was previously Head of Global Emerging Markets Fixed Income and FX Strategy, and Co-head of Global Economics, at Bank of America Merrill Lynch (‘BAML’) and earlier at Citi and Goldman Sachs.

The Original Big Data Strategy

Kempen’s hedge fund solutions franchise has continued to mature since The Hedge Fund Journal last profiled the offering in 2013. Assets have grown to over $1.3 billion, from a mixture of steady performance, net inflows and the launch of a new multi-manager solution in structured credit: Diversified Structured Credit Pool (‘DSCP’). Kempen’s team is expanding. Alongside the two co-heads of Hedge Fund Solutions, Remko van der Erf and Michiel Meeuwissen, Kempen hired industry stalwart, Igor Puljic in 2013, who was previously Deputy CIO at Key Asset Management, as Senior Portfolio Manager, and Jeanne Spronck, who wrote her thesis on hedge fund replication, managed futures and alternative risk premia, as Portfolio Manager in 2016. Kempen is currently seeking to hire a fifth hedge fund manager selection specialist. The four-strong full-time hedge fund team are supported by an advisory board of five, which has recently added Mark Smith, formerly an event-driven and merger arbitrage manager at Gruss. The hedge fund specialists also draw on expertise elsewhere in Kempen. There are 17 other manager selection professionals, covering traditional strategies, private debt, real estate and private equity; equity and credit analysts looking at single securities; trade execution, fund structuring, operations professionals; a risk team of eleven, and legal and compliance.

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.

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