Alvin Fan, OP Investment Management
HFC’s Stefan Nilsson decided to have a chat with Alvin Fan about the evolution of Hong Kong asset management house OP Investment Management. “Entrepreneurship is in our blood” says the OPIM CEO of how they help fund managers to launch funds without much of the hassle normally associated with setting up a fund business.
Alvin Fan is CEO of OP Investment Management where he is responsible for the company’s overall strategy. He has over 15 years’ experience in finance and strategy – spanning across managerial, private equity and fund of funds. Alvin was previously Director of Incubated Funds and Head of Investor Relations at OP Financial Investments Ltd, a Hong Kong listed Investment Company, where he was responsible for monitoring the company’s portfolio of public equity investments. Prior to joining OP, Alvin was working in private equity focusing on distressed assets and property. Alvin received his Master’s degree in Business Administration from the Ivey School of Business (University of Western Ontario, Canada).
Tell us the story about OP Investment Management and how your business model has evolved over the years.
For starters, OPIM is part of the Oriental Patron Financial Group which provides a broader scope of investment services, like M&A advisory, corporate finance, brokerage, etc. Although the company’s been around since 1993, we didn’t make a name for ourselves in asset management until around 2008 when we landed an oil and gas direct investment mandate with China’s sovereign fund, CIC. Around the same time, the group launched a JV with one of the largest fixed income managers in PRC to create CSOP, which is now running a very successful RQFII and ETF business. I heard they just opened their New York office. After these two successes, we were asked by a few friends in the industry to help them build their own funds and asset management companies from the ground up. These were really talented managers from deep buy-side background larger houses, but they were missing the AUM threshold that could sustain a business. It turns out there was a real need for fund business management – not just legal and licensing. These were managers who came out of bigger companies. They only ran the book. They didn’t have to think about regulation, settlements, reconciliation, or operational risk management. They’d stepped out of their ecosystem and now plunged themselves into the entrepreneur’s world. Who do you hire? What is AML? How do I review a rental agreement? How do I build an investor data center? What’s an AIMA DDQ supposed to look like? These were decisions that were previously deliberated by entire teams, now resting on the shoulders of the fund manager. Managers needed a fully functioning professional team and compliance oversight. This was when we made the conscious decision to convert OPIM into a business that partners with managers to build out strategies and early track record. To date we’ve launched around 30 funds with emerging managers. Not all survived and some have graduated and gone independent, but we now manage and advise over 17 funds.
You now have a big focus on your growing fund platform. What can you tell us about this business?
Yeah, it’s been a great year. In the first half of 2016 alone, we’ve launched about seven new funds. A few years ago, we took a step back from the traditional model and spent time talking to managers and looked at the issues that were either barriers to launch or critical challenges. What kept them up at night? What makes the first year so difficult for these managers? Firstly, we found out that managers needed to time the launch of their fund so that they could have a more predictable first year track record. Taking a long-short manager for example, typically, he would want to launch near the bottom of the market or just slightly past the inflection point. We’ve seen managers take up to nine months to launch their product and this very well means the difference between an outstanding first year and an abysmal one. Point in case, are some of the China-focused managers who started the process in September 2014 and didn’t get their product up until mid-June 2015. They were forced to forfeit the entire boom of the first half of 2015 and are having a hard time raising capital, well under budget. The second major finding is more obvious – the AUM threshold. Standalone funds don’t really break-even until you’re at least $20 million. So we got together with some great partners and we put together the Sunrise SPC platform that has all the bells and whistles of a solid structure that we would want if we were to put OPIM’s name on it. And since we’ve invested in it ourselves and prebuilt all the agreements, all the middle and back office support included, clients can just plug in and start investing. It also means we can reduce the launch time of a fund from three-five months to just six weeks. Not only can funds launch on time and maximise their track record, but they can break even with only $6 million.
What’s different about OP Investment Management compared to many other fund platforms?
Structurally, we’re part of a much larger investment group; so we’re not suddenly going to disappear overnight. From an investor perspective, this is a key concern. In terms of experience, we’ve also walked a mile in your shoes, and we approach every fund as a business. If you look at the history of Oriental Patron and what we’ve done to help companies grow, you’ll see that entrepreneurship is in our blood. Secondly, we take risk very seriously. We build policies to firewall every manager from each other like tenants in an office building. Rules are put in place to ensure the safety of all. It’s more than just a cubicle and phone line, it’s about taking a good look at the fund’s positioning and marketing and giving managers the insight to help them avoid costly mistakes they’d otherwise make if they were on their own.
What type of fund managers are you working with and what type of managers are you looking to add?
We don’t have a check list pre-requisite, but generally we really like to work with like-minded people. They can come from the buy or sell-side, or in some cases even non-financial background but with a phenomenal trading strategy. One thing everyone has in common is a deep respect for risk. We can’t work with managers who treat their counterparties as just vendors. Under one regulatory framework, we’re all in the same boat, but it also means that we’re operating as a team. At OPIM, everyone onboard understands two things: 1) that this is a regulated business where everyone plays by the rules, which in itself is a fortification; and 2) we’re building enterprise value together.
In your opinion, what makes a great portfolio manager? What kind of skills and background are preferred?
A strong toolkit in managing risks is vital of course, but mental stamina, especially with managers who are on their own, having the emotional endurance is very important. Things happen on and off the books that can rattle even the most seasoned investors and I think it’s important to have the steel to keep moving forward. Whether it be sudden drawdowns, cash flow or life problems, the manager needs to have both vision and discipline, non-monetary resources he’ll be investing into the business for at least three years. I’m not saying that a bigger team is better, because it’s not. Sometimes having too many cooks in the kitchen ruins enterprise value and destroys relationships. What we remind single managers coming aboard is that they literally go from a team of one to a team of 20 overnight.
What are your thoughts about China’s emerging hedge fund industry? Can managers in mainland China succeed in becoming more institutional quality managers?
After the fallout from the 2015 crashes, China is undergoing a profound change in regulation, even going to far as to seek consultation and best practices with foreign regulators like the UK and the SFC. They’re shaking things up, adding legal requirements, fitness and proper tests, all the elements we’re used to here in Hong Kong. AMAC’s an SRO but it’s pretty clear you can’t run a scalable business without their badge. Changes to interfaces between quants and the exchange last year were tremendous and it’s definitely hobbled some of the looser teams. What’s interesting is how this is really benefiting quality managers. A year ago, you couldn’t tell the difference between the pretenders and the craftsmen. They were generating the same return under the same loose regulatory frame work. We just came back from a four day roadshow in Shanghai, and we’ve discovered that the ones who’ve survived 2015 are doing immensely well onshore. A lot of them tend to have some back ground on Wall Street or in a more developed market, in their previous incarnation as a portfolio manager or even an analyst. They might have come back to PRC a few years ago to start building a career in China’s nascent industry. Suddenly, using Buffett’s metaphor, the tide goes out, and you can see who’s been swimming naked. The investors see this too and they pile into the quality products. We’re seeing this trend especially in the quants – these teams had outstanding performance year on year, but this year, they’re raising assets faster than ever.
If you hadn’t been working in the fund management business, what would you have been doing?
Gosh, I don’t know. I’m hugely influenced by my father’s generation – banking, property and venture capital. Sounds very Hong Kong, doesn’t it? Even though I’m a huge tech geek, I’d probably float into one of those spaces. Looking back, I’ve always been more passionate about the business than the portfolio side. In my previous life in private equity, my peers and I used to always share our “business envy”, that as financiers, we’d always wonder what it’d be like to be on the investee side – building a brand or innovation. Now, we I get the best of both worlds. We get to work with amazingly talented managers who are very smart with incredible visions. At the same time, I love walking clients through the building process; it’s the best part of what we do. The thrill of the startup is palpable every day we come to work. I don’t know. I’m a great singer. Maybe a rock star… Or an Uber driver?