Paul Westhead, CEO, Rimrock Capital Management
Rimrock is a California-based hedge fund manager with over USD 1.4 billion of assets under management. We’ve been running our flagship Rimrock High Income PLUS strategy for more than 11 years, and over that time we’ve been able to generate an 11.2% net annualized rate of return with no down calendar years. We are 100% employee owned and the five Principals have over USD 60 million of our own capital invested in our funds. Dave Edington formed Rimrock in 1999, following his departure from PIMCO where he was one of the senior portfolio managers responsible for over USD 30 billion of fixed income assets across a variety of strategies. In establishing Rimrock, Dave’s main objective was to pursue a strategy for his own personal assets that would draw upon his vast experience as a bond market investor and generate attractive risk-adjusted returns in all market environments. Over time, he was joined by some of his former PIMCO colleagues, including myself, and we started accepting client capital in late 2004. In 2007, we launched the Rimrock Low Volatility strategy, which is designed to generate most of the return that we target in our flagship strategy, but with lesser volatility. Then, starting in 2008, we launched a series of closed-end distressed mortgage strategies, which had a five year legal life that included a two year investment period followed by liquidation. The first two strategies have already been liquidated and all capital returned, with the 2008 strategy returning 14% net IRR and 1.4x cash multiple, while the 2009 strategy generated a 44% net IRR and a 1.9x cash multiple. The third strategy, the High Quality ABS Opportunities strategy, still has about 9 months left in the investment period and is up 15%. Over time, we have been fortunate to attract great investing partners, including some of the leading US endowments and foundations, as well as corporate pension funds and high net worth families. We’re also very pleased to have a small number of Japanese partners in our funds, and we look forward to adding some additional Japanese partners in the years to come. Today, Rimrock has 21 employees, all but one is based in beautiful San Juan Capistrano, California, which is halfway between Los Angeles and San Diego.
Briefly describe your investment strategies and why they differ from what other fund managers are doing.
At Rimrock, our strategy is designed to exploit structural and technical inefficiencies in the fixed income market, especially in the short-end of the yield curve, and to enhance a strategy’s risk-adjusted returns through the use of hedging, modest leverage and select longer-term total return investments. We have the ability to cut across all sectors of the fixed income market in our search for value, so our High Income PLUS and Low Volatility strategies will have different sector exposure dependent upon the market environment. We look to use the cheapest and most liquid securities to affect our hedges, including those designed to hedge our spread and default risk, duration, convexity and volatility. I think we are different than most other credit managers in that we do have the ability and the expertise to invest across all sectors of the fixed income market, ranging from mortgages to high yield corporates to emerging market debt. I also think we are different in our approach to risk, which is long-term oriented and focused on capital-at-risk, as opposed to price or performance volatility.
What investment themes do you see as the most attractive at the moment?
Mortgages continue to offer the best relative value, especially older vintage non-agency mortgages. We have been involved in the mortgage sector for 20 plus years, going back to our days at PIMCO, and it takes a patient and experienced hand to successfully operate in this sector. Today, we can still find bonds that offer 7% to 11% yields with little to no principal risk, which will hold up significantly better than a high yield or emerging market bond if the global economy were to experience a double dip.
How has your approach to risk management changed in recent times?
We manage risk by thinking. We are not beholden to a black box, or any single risk measure. We use a series of risk measures, ranging from the standard fixed income measures like duration, spread duration and convexity, but we also use a proprietary system that we call Three Sigma PLUS. For every security in the portfolio, we attempt to measure the forward looking volatility (ex-ante), using options pricing, over a one year period, as opposed to most VAR-based models with use historical volatility (ex-post) and limit the time horizon to only two weeks or one month. We then calculate a three standard deviation move over that one year horizon, which we feel gives us a very conservative measure of our capital at risk. The “PLUS” in our Three Sigma PLUS approach allows us to make a conservative only override of the mechanical calculation. That’s the thinking part. We’re proud of the fact that we were able to generate a positive return in 2008, but more importantly, the Global Financial Crisis demonstrated that our approach to risk management was successful.
Do you see changes in regulation as a threat or an opportunity?
We view the potential changes as an opportunity, because it will force other funds to provide their clients with the transparency they deserve.
Fundraising in Asia: as Asian investors increase their hedge fund allocations, do you think that smaller boutique managers will have an increased chance of getting allocations or will big global fund managers get most of the assets?
Unfortunately, the latter. I think there is a bias towards the larger managers, because there is a perception of “safety.” As a boutique manager that has been around for 11 plus years, we’ve seen a number of bigger and more popular managers come and go, and we would hope that investors would be willing to work with the smaller managers. They will be more likely to differentiate themselves from their competitors and peers and will have a greater opportunity to build a real partnership with the manager, as opposed to being just one more client for the larger manager.
What would you have done if you hadn’t been running a fund management company?
History teacher and basketball coach.