MPI ties up with Eurekahedge & BarclayHedge

Markov Processes International (MPI) and their clients contend that to stay relevant, indices should be representative and investable. There are reasons to question whether some existing indices meet either or both criteria, and clearly conflicts exist between the two objectives. Most existing indices are all inclusive, equally weighted and comprised of hard closed funds and a long tail of small funds, but it is not possible to access hard closed funds and not practical to maintain miniscule investments in transient cohorts of thousands of tiny funds.

MPI are also of the opinion that selection/non-reporting bias, survivorship bias, and backfill or instant history bias can all serve to artificially inflate index returns, which are often higher for non-investable than for investable hedge fund indices. According to MPI, these biases can be overcome by building a representative index comprised of a selective group of the largest funds.

“There still remains the challenge of making the index investable,” argues MPI’s Executive Vice President and Head of Institutional Solutions, Rohtas Handa. Historically, that is the step that has been missing, he adds. “Some of these indices, were not originally designed to be investable.” He elaborates that “they have often lacked stability with too much turnover, have been equally weighted, and have had over-representation of smaller managers, which is not a good model for how institutions actually invest.”

Tomorrow's Titans Revisited: Jonathan Berger’s Birch Grove

Birch Grove Capital’s founder, Jonathan Berger, was selected for The Hedge Fund Journal’s biennial 2014 ‘Tomorrow’s Titans’ survey, sponsored by EY. Since launch in 2013, the firm’s assets have grown from USD 300 million to USD 1 billion as the investor base has filled out, and more granular strategy solutions have been devised in response to client needs. “We have the capacity to be larger but there is no specific target for assets. Assets are a consequence of the market opportunities that exist and how that lines up with investor demand,” says Berger. There are now five offerings, and other sub-strategies could be carved out of the multi-strategy repertoire.

The first and flagship strategy is unconstrained, multi-strategy credit, (profiled by us in June 2016 under the title ‘Birch Grove’s Versatile Credit Strategy’) and pursuing event driven long/short, directional long/short, credit relative value, capital structure arbitrage and structured credit, across the entire corporate capital structure. The strategy has outperformed the HFRI hedge fund index by 13% with about a quarter of the volatility. “It is a consistent and repeatable approach designed to produce low volatility returns for institutional investors,” says Berger.

Houlihan Lokey's Hedge Fund Practice

Houlihan Lokey is a global boutique investment bank that aims to offer independent advice and does not burden clients with the balance sheet conflicts that plague some bulge bracket firms. “We put the client first and use intellectual rather than financial capital,” says Head of Houlihan Lokey’s Hedge Fund Coverage practice, Mark Goldman.

Houlihan Lokey has more than 1,200 people across 24 offices globally and takes pride in being nimble – both in acting for clients and when hiring staff. “Our restructuring group employs world class home-grown talent. We have also bought boutiques that have a complementary cultural fit. As a few examples, we just hired a co-head for our FIG group from Barclays and an oil and gas specialist from Deutsche Bank, and we acquired Black Stone IP to create our Tech+IP franchise,” says Goldman. Most recently, the firm announced that it has agreed to acquire Quayle Munro, an advisory firm which specialises in data and analytics, to establish a Data & Analytics Group in Corporate Finance.

Houlihan Lokey’s hedge fund practice grew from its financial restructuring franchise. It has broadened out into financial advisory (due diligence, fairness opinions, and valuations, where the firm has its roots), corporate finance, M&A, and capital markets. The growing focus spans the full life cycle for hedge fund managers of all sizes, from seeding, to mergers and acquisitions, sourcing deals, advice on quoted vehicles such as business development companies (BDCs) or permanent capital vehicles (PCVs), sourcing and disposing of illiquid securities, and fund liquidations. “We expanded our must-have relationship among creditors to other parts of our firm, growing our firm while continuing to focus on serving our clients,” says Goldman. Houlihan Lokey’s valuation practice – which we devote an extended profile to, see below – is busier than ever.

Tomorrow's Titans Revisited: Andurand

Andurand Capital Management LP’s long-term business vision has always been to create an energy asset manager in the broadest sense, including alternative and renewable energy as well as fossil fuel based energy – and covering multiple asset classes.

Andurand is now a global firm managing $1.2 billion as of December 2017 with 27 staff across three offices: London, Malta and New York, which has three staff mainly carrying out research for the commodity futures strategy with one analyst also looking at alternative energy, which is more relevant for the new equity strategy. This new equity long/short strategy using commodity equities to express both directional views on commodity prices, and security-specific views on companies, is one of two distinctive new offerings rolled out in 2017. The other is a UCITS version of the commodity futures trading strategy that is the latest episode in Pierre Andurand’s energy trading career that has generated cumulative returns of approximately 3,700%, with the Andurand Commodities Fund up 114.5% from inception in February 2013 to December 2017. All Andurand strategies are discretionary and fundamental. In early 2018, Andurand is bullish on energy prices and on selected energy equities, which arguably do not even discount current oil prices, let alone expected increases.

Raising oil price forecast
Multiple developments during 2017 have emboldened Pierre Andurand in his call for higher oil prices, and led the firm to increase its level and range of price forecasts. The technical dynamics of the oil market meant that it took longer than expected for the fundamental thesis to play out however.

Citadel's Data Open Showcases Innovative Recruitment Approach

Citadel’s inaugural ‘Data Open’ datathon series – a data analysis marathon comprised of regional ‘Data Opens’, culminating in the ‘Data Open Championship’ held in November 2017 at the New York Stock Exchange – was “a fantastic first year and a huge success.We have met exceptional candidates and already made dozens of job offers. The Data Open has more than delivered on its aims of hiring the most talented data science and STEM students,” says Citadel’s Head of Talent Strategy, Justin Pinchback.

Founded in 1990, Citadel is one of the world’s oldest and most successful hedge fund firms. The multi-strategy firm manages over USD 27 billion in capital for a variety of partners, including corporate pensions, endowments, foundations, public institutions, and sovereign wealth funds.

US and global roll out
The ground-breaking talent discovery and assessment programme drew students from roughly twenty top-tier universities in the US, Canada, UK and Ireland. The concept is now being rolled out in additional cities across the US and globally. In 2018, Citadel will be reaching out to a wider group of US universities, and adding some in continental Europe and Asia, including top institutions in France, Switzerland and China. “Talent has no borders. We want the best intellectual athletes and we are relentless in pursuit of that talent,” enthuses Pinchback, who previously worked at Bridgewater, Bain, Goldman Sachs and Moody’s. In 2017, all datathons were conducted in English, but Citadel, which has a long history of hiring talented people from around the world, expects local languages, such as Mandarin in China, or French in France, may be used in 2018.

Atlantic Investment Management

Since 1992, Atlantic’s flagship Cambrian US equity strategy has made 4,271% net of fees, against 1,013% for the US equity market. Cambrian has annualised at 19% gross; the difference in net annualised returns is 16% versus 10% for the market. At half the market exposure, Atlantic’s hedge fund strategy has kept up with the S&P 500, annualising at around 10% since 1993. The gap in holdings is far greater. The six or seven stocks in Cambrian US would be just over 1% of the five hundred S&P 500 stocks, but Atlantic casts its net wider than the S&P 500. Its Cambrian Global fund typically has 18 positions, well under 1% of the world equity universe. Atlantic filters its global investment universe down to about 1,400 mid-cap value stocks in specific industrial sectors (500 in the US, 300 in Europe, 250 in Japan and 350 in Asia ex-Japan), but only owns around fifty of them at any time, across all of its global and regional vehicles. Atlantic belongs to a rare breed of highly concentrated equity managers, but is distinguished, in addition to its exceptional long-term performance, from its few peers by a resolute commitment to liquidity.  

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.


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