Singapore Hedge Funds Club
Evening Reception, 26 Mar 2019
Hong Kong Hedge Funds Club
Evening Reception, 11 Apr 2019
Singapore Hedge Funds Club
Evening Reception, 3 Sep 2019
Hong Kong Hedge Funds Club
Evening Reception, 7 Nov 2019
Tokyo Hedge Funds Club
Year-End Reception, 2 Dec 2019
5 Feb 2019
Seiji Inoue has left his role as head of Point72 Asset Management’s Tokyo office, reportedly t...
4 Feb 2019
Rebecca French (formerly Ward) has rejoined MKP Capital as a director of client solutions in its Sin...
15 Jan 2019
According to Eurekahedge, hedge fund managers focusing on Asia Pacific have been suffering from the ...
15 Jan 2019
The Eurekahedge Hedge Fund Index was down 3.85% in 2018, outperforming the MSCI AC World Index (Loca...
26 Dec 2018
According to the FT, Citi’s prime brokerage has started to offboard smaller hedge fund clients...
23 Nov 2018
Hedge funds were down 2.15% for the year in the 10 months to end of October. This is their weakest p...
Shout It Out Loud
Hedge fund industry interviews
In addition to our daily news feed, Hedge Funds Club’s Shout it out loud publishes interviews with interesting hedge fund managers and other senior industry figures that have something to say.
Hedge funds and other market participants are paying close attention to the changes going on in the Treasury markets and the role of futures. HFC’s Stefan Nilsson recently had a chat about this and other trends in the FX and rates space with CME Group’s Ravi Pandit.
Singapore-based Ravi Pandit serves as Executive Director, Foreign Exchange and Interest Rate Products, Asia Pacific, for CME Group. He is responsible for expanding CME Group’s existing FX and interest rate business and developing new opportunities across the region. Pandit joined CME Group in 2015 and has 25 years of experience in the financial markets. Prior to joining CME Group, Pandit was a consultant to Singapore Exchange, where he provided strategic advice and project management for its launch of listed FX futures. Before that, Pandit worked for 12 years in Dresdner Bank and subsequently Commerzbank post-merger, where he headed up the local markets trading team and helped build up its Asian presence in interest rate and FX derivatives trading. Pandit also worked in various trading roles at Barclays Bank in Hong Kong, Singapore and Tokyo, and in operations and technology at Citibank in Hong Kong and Mumbai. Pandit holds a master’s degree in Chemical Engineering from Syracuse University and an MBA in Finance from the University of California, Berkeley.
What is your outlook for the treasury market? Will we see futures having a significant impact on the cash markets?
Treasury cash market liquidity has been impacted by banking regulations such as the leverage ratio and consequent lack of growth in bank balance sheet. This can be evidenced by negative swap spreads which have persisted since September 2015, shrinkage of the repo market, and increasing price impact of trades. In the face of these challenges, Treasury futures offer market participants a capital efficient, off-balance sheet instrument for exposure to Treasuries. We have seen reports by market commentators which talk about how the liquidity in Treasury futures has become comparable to, if not superior to, liquidity in the cash Treasury securities markets, and that futures are especially resilient during non-US trading hours. Treasury futures daily volumes are now 77.8% of the cash market (on a 52-week moving average), up from 56% in 2012. This shift is expected to continue as participants realise the value proposition provided by Treasury futures from a round-the clock liquidity and capital efficiency perspective.
How can treasury notes be used as effective hedging tools?
Treasury futures provide an effective risk management tool that is liquid 24 hours a day. These instruments are listed with a variety of maturities, based on current market conditions. Their effective durations are approximately 2, 5, 7, 10, 20 and 25 years. Additionally, participants needing exposure at another maturity point can use a combination of these instruments to create a hedge. In a basic hedging strategy, Treasury futures can be bought – to hedge for a short cash bond or paid IRS position – or sold – to hedge for a long cash bond or received IRS position. The number of futures to be used for hedging is generally determined by matching the BPV (basis point value) of the Treasury futures contract to be used, with that of the underlying exposure being hedged. Besides directional hedging of a single exposure or a portfolio, Treasury futures can also be used to trade spreads versus other assets, such as corporate bonds or interest rate swaps, as well as targeting curve exposure for relative value positions, such as 5-year versus 10-year spread. In response to strong client demand, in January 2016 CME Group introduced the Ultra 10-Year Future, providing close proxy for cash 10-year Treasury note exposures, with an innovative application of the classic deliverable basket structure of Treasury Futures. This capital efficient instrument is highly complementary to existing benchmarks, enabling new spread and curve trading opportunities. In the 10 months since launch, we have seen wide market adoption with over 300 clients participating globally and open interest growing to 250,000 contracts.
What has the impact of uncleared margin rules been on bilateral trades?
Uncleared margin rules, imposed by the BCBS, have been implemented starting from September 2016 in a phased manner and are expected to cover most counterparties in all major jurisdictions by September 2020. The main thrust of the rules is the imposition of initial margin and variation margin for all non-centrally cleared derivatives. The imposition of the rules is expected to increase the cost of trading bilaterally on an uncleared basis due to the cost of posting initial margin with all bilateral counterparties – netting benefits are not achievable for bilateral trades – as well as the operational complexities of calculating and settling these margins. In the rates and FX products space, the products most likely to be affected include non-deliverable forwards (NDFs), FX options, cross currency swaps, swaptions, other OTC options and inflation swaps. Where the cost of trading bilaterally becomes prohibitive, we could see these market shrink or migrate to a centrally cleared or listed alternatives.
What other major trends are you seeing or expecting in the rates and FX space?
There is a great deal of interest from market participants in looking for capital efficient listed or centrally cleared solutions for replicating bilateral OTC trading. This has resulted in a significant increase in the clearing of non-mandated products. CME has seen evidence of this in the tremendous uptake of interest rate swaps denominated in Mexican peso and Brazilian real, and is beginning to see increased interest in clearing U.S. dollar swaptions and clearing FX non-deliverable forwards clearing. CME is also working on solutions to help reduce the margin impact for other products affected by regulations, including OTC FX options, additional interest rate swap currencies and a solution for clearing the repo market. We also expect a parallel increase in trading of listed FX and rates options, given the growing number of participants using these standardised instruments for managing risk. Related to the trends in OTC products is the evolution of the execution models as a result of growing client demand for more centralised and efficient forms of price discovery. History shows that when products begin trading electronically, the increased transparency and access expands the overall client base, particularly from international markets, and therefore the liquidity and trading volumes improve as a result. We have seen this trend manifest itself in listed interest rate options, where new firms have started participating in the electronic markets and, as a result, the percentage of options traded electronically has increased. In October 2016, this metric reached over 73% for Treasury options and 25% for Eurodollar options, a substantial uptick from a year ago.
Australian fund manager Global Commodities Limited has a long history of managing commodities in its long-only flagship strategy. Now the firm has a long/short strategy as well. HFC’s Stefan Nilsson had a chat with portfolio manager Dr. Gavin Bowden about the new alpha strategy.
What can you tell us about Global Commodities’ new risk premia long/short strategy?
Global Commodities has a long track record actively managing commodity beta. However, we were often asked by investors if we could apply our strategy in a market-neutral approach to reduce the volatility associated with the commodity asset class. Historically, we have successfully captured commodity risk premia with our flagship Active Global Commodities (AGC) strategy, but reducing dependence on the economic cycle and isolating commodity alpha was something that was attractive to some of the investors we were speaking with. This was the catalyst that resulted in the long/short version of our commodity program. We call this approach the Global Commodities Risk Premia (GCRP) strategy. GCRP is an absolute return strategy designed to capture commodity factor premia over time. In the current zero interest-rate policy and negative interest-rate policy environments that we find ourselves in, the hunt for yield is paramount and GCRP provides a unique source of yield that is uncorrelated to the major asset classes and other forms of alternative risk premia.
What are the main differences between your strategy and a standard CTA?
The GCRP strategy capitalises on how commodities are stored, transacted and valued. Momentum is the premier market anomaly and most CTAs have a heavy reliance on trend following. GCRP not only looks at price signals such as momentum and mean-reversion but also at a range of commodity factors as diverse as carry/roll, seasonality and relative value. This results in return drivers that are more diversified than a typical CTA. In addition, GCRP focuses exclusively on commodity markets whereas most CTAs also have large exposure to bonds, equity indices and FX. GCRP is also unleveraged compared with CTAs that generally employ leverage and often carry greater volatility in their return profile. When we performed the analysis and looked at the correlation between GCRP and the SG CTA Index since January 2000, we found that there was effectively no correlation at all. Even over rolling three-year periods the correlation remained consistently low and oscillated around zero.
What’s the thinking behind running the investment strategy in a systematic fashion with a discretionary overlay?
The commodity factors that we have identified have been the basis of many years of research. Since they are readily quantifiable it makes sense to have them combined in a quantitative model to capture the return in a systematic fashion. The discretionary overlay only applies when we move into tail events that the model has not seen before. In these situations there are benefits to having a portfolio manager taking the system off of autopilot and managing risk appropriately. The outlier events are also quantifiable and we want to avoid situations where the model would be generalising too far beyond the range of the data seen during model development.
Some commodities markets have started to pick up this year – is it still a good time to invest in a long/short commodities strategy?
Commodities are certainly on the move in recent times and we have seen natural gas up over 50% in Q2 2016, with the entire energy sector rebounding strongly from the lows set in February. Soybeans, cotton and sugar have also put in very impressive rallies. Brexit and increasing global uncertainty has seen safe haven demand for precious metals increase with silver soaring in recent times as it also has industrial uses. The beauty of the commodities complex is that the return drivers are very diverse and there are generally always opportunities. Now is the time for an investor to be seriously looking at commodities as bonds and equities are in overvalued territory, especially in relative terms as commodities have been pushed lower over the last five years while other asset classes have been trending higher. Just recently former U.S. Federal Reserve chair, Ben Bernanke, the architect of U.S. quantitative easing and the subsequent “tapering”, held meetings in Tokyo with both Prime Minister Shinzo Abe and Bank of Japan governor Haruhiko Kuroda. It is likely talks were about the logical extension of current monetary policy, the adoption of so-called helicopter money. The next huge fiscal stimulus in Japan and then in other parts of the world will most likely be an expansionary move focused on infrastructure, which will bode well for commodity prices. With the adoption of helicopter money comes an increased risk of unexpected inflation at some point and it makes sense for an investor to look towards commodities to help protect against such risk. This is part of the case for commodity beta, however, the advantage of the GCRP strategy, which uses a long/short approach, is that it is agnostic to the economic cycle and it exploits cross-sectional opportunities rather than relying on directional market timing. So while there is stratification in the yield of each constituent in a given basket of commodities, there are always cross-sectional opportunities that the GCRP strategy can benefit from. It just depends on what the investor’s needs are. GCRP is really about providing a consistent source of yield that is uncorrelated to other styles or asset classes.
How do you divide up the work between you, as PM and head of research, and the firm’s founder, Greg Smith?
Since we have built the strategy to be largely systematic, it is a case of looking at the various metrics each day and ensuring the portfolio is tracking as expected. Greg and I have worked together for a long time and have a good understanding of how each other thinks and manages risk. When decisions do need to be made, we have a standard process for how that is determined. However, for most of the time the strategy is automated. As PM, I sign off on orders on a daily basis. In addition to both of us reviewing the portfolio daily, I spend a substantial amount of time in research to ensure that we remain at the forefront of latest developments and have incremental improvements in our technology and strategy, while Greg spends a large portion of his time in market analysis, client relations and marketing.
You have been with Global Commodities Limited since 2010. What did you do before that?
After completing a PhD in engineering, I undertook a postdoctoral fellowship at Harvard University. My work there involved utilising NASA’s remotely sensed satellite data and developing models based on artificial intelligence algorithms to forecast environmental variables, such as droughts. After completing my work at Harvard, I moved into the fund management industry where I worked in research and strategy development for two CTA hedge funds. It was a natural fit as I was able to keep developing the statistical and numerical modelling skills I had gained from my years working as an engineer, but in these roles I was able to apply those skills to the markets, which has been both challenging and fun and has suited my analytical mind.
You’re based in Adelaide, Australia. What do you get up to when you’re not running money?
I have a young family with two boys aged three and five and I love spending my free time with them. We are blessed in Adelaide with a great climate and we like to get outdoors as much as possible on the weekends. We have a family beach house down the coast where we often get away to enjoy some time fishing and surfing. I also enjoy cycling and love going for long bike rides through the Adelaide Hills or along the many scenic coastal routes that we have in South Australia. Each year I participate in the Tour Down Under cycling event where recreational riders are able to ride an actual stage of the UCI World Tour event before the professional riders complete the stage. I am also passionate about Australian Rules football and I’m a keen supporter of the local AFL team, the Adelaide Crows, so I like to attend their games with my family and cheer them on whenever possible.
If you hadn’t been a fund manager, what would you have been doing?
As I mentioned, my background is in engineering where I predominantly focused on artificial intelligence and machine learning. I think if I wasn’t a fund manager I would most likely be working in this area and would be applying the latest robotic and AI technologies to solve environmental problems or perhaps in medical research applications. I think that would also be rewarding and would satisfy my desire to keep learning while solving interesting problems and technical challenges.
Clare Flynn Levy, during her stint at Beauchamp/Linedata, was one of the very early sponsors of the Hedge Funds Club. A decade later she is the talk of the town with her new fintech venture Essentia Analytics. London-based Clare Flynn Levy is a former fund manager and current financial software entrepreneur who uses behavioural data analytics to help fund managers do a better job of investing. Stefan Nilsson decided to have a chat with Flynn Levy about who she is and what she’s up to.
You’ve got an interesting career path so far – from asset management to fintech, back to asset management and, again, back to fintech. Tell us about your journey so far.
I started my career as a tech stock picker in the late 1990s, and was a long-only fund manager during the internet bubble. In 2001, I launched a long/short tech fund and I slogged away at that for a good four years, running very hard to stay in one place, and continuously aware that I probably wasn’t using my energy as efficiently as I could. I was always an early adopter of technology for fund management and while there was a lot going on in the electronic trading space at that time, what I really wanted was a data-driven feedback loop that could tell me exactly what I was good at, so I could do more of it, and exactly where I was repeatedly destroying value, so I could do less of that. No one could give me that, and without it, running money felt increasingly futile. When I joined Beauchamp Financial Technology, my hypothesis was that a tech company serving fund managers that was actually run by a fund manager would have a competitive advantage – and I was right. We sold Beauchamp to Linedata, and once we’d finished our earn-out, I joined Tisbury, a large European event-driven fund, this time on the business management side. The founder of Tisbury could see the need to diversify his investor base, and therefore his product offering, and he hired me to make that happen. My business plan got the green light in July 2007 – just in time for the first major rumblings of the financial crisis. By necessity, my business strategy focus switched from offence to defence, as we tried to stem investor redemptions. When I left Tisbury it was the end of 2009, I was pregnant with my first child and keen to get some distance, to figure out where the intersection of my skills, my passion, and my network lay. Essentia is the result of that soul-searching.
Your current firm, Essentia Analytics, is focused on using behavioural data analytics to help fund managers. How can you best describe what this means and how fund managers can benefit?
As a fund manager, you’re continually under pressure to perform, but there is very little assistance available when it comes to telling you how to do that. It’s like being a runner who can see his final times, and maybe even his lap times, but has no insight into what he could be doing differently in order to win more consistently. You’re focusing on the result, not on the process. And in fund management, so much of the result is outside your control, that the only way to really develop skill is to focus on getting the process right – yet you can’t do that without in-depth, ongoing data analysis. Professional athletes figured this out decades ago – now you have no chance of competing if you’re not using a data-driven feedback loop to continuously raise your game. Essentia is a data-driven feedback loop for investors. It uses data about your past trading behaviour and its context, along with data about the current state of affairs, to tell you exactly where you’re adding value and exactly what is repeatedly tripping you up. Then it alerts you when it notices one of those patterns re-emerging in your behaviour. Unlike most performance analysis software, it is designed primarily to help the fund manager make better decisions, not just to report on him. It’s proven to help fund managers make significantly more alpha, effectively by holding up a mirror and giving them precise feedback on how to play to their strengths and avoid their weaknesses.
How did you come up with the idea for this business?
It was really born of my own frustration as a fund manager. When you’re making money, no one asks too many questions, but when you’re not, the pressure to turn it around is intense. Yet no one has any advice for you on exactly what, if anything, you should be doing differently. It’s up to the organisation to offer that support, and yet most organisations don’t have a platform that makes analysis easy, repeatable, and user-friendly for the portfolio manager to reflect on his own behavior.
You have gone down the cloud-based route. Was that the obvious way to offer access to your service?
Yes, the cloud simply is the most effective way to deliver software in this day and age. And the infrastructure available from the likes of AWS is far more secure than most companies can ever hope to be with their on-premises technology. A big part of why buy-side technology is so antiquated is the fact that it is mostly local-install and can only be upgraded once every few years, at great expense.
What have been your biggest challenges with setting up this business?
The biggest challenge has probably been the status quo. To the new generation of fund managers, what we do at Essentia is a must-have – they understand that our technology can empower them to make more money. But the old generation has been doing things the same way for 20 or more years – to them, what we’re doing sounds scary. They are used to technology being forced upon them, normally for the sake of compliance or reporting. It takes some patience on our part to help them realise that Essentia is a competitive advantage, not a threat or an admin burden.
What kind of fund managers have you mainly won as customers so far? Is it a service that can work both for major asset managers and smaller start-up funds?
Today, our customers are almost all equity managers, but they range from $200m AUM hedge funds who are keen to prove their skill to investors, to $300bn long-only managers who are trying to stem the flow of assets from active to passive funds. The patterns that our software identifies are unique to the portfolio manager, and the automated nudges we send them are based on those patterns, as well as on their personal workflow. In each case, our goal is to make the PM’s life easier, while helping him make measurably more alpha.
How do you anticipate Essentia’s business developing over the coming years?
I expect what we do at Essentia to become as standard in the fund management industry as “Moneyball” has become in professional sport. It’s common sense, really, but I expect the adoption of it to be driven by both the generational shift that is currently taking place in the industry and the growing threat of cheaper, passive investment strategies. Survival of the fittest is the name of the game if you’re a fund manager – more so than ever before – and Essentia is the key to investment fitness.
If you hadn’t worked in fund management and fintech, what would you have been doing for a living?
When I was a kid, I wanted to be a newsreader. I still think I would probably be good at that – I enjoy communicating. But I think I would miss the satisfaction that comes from building something and watching it grow.
Masaki Gotoh, Misaki Capital
Misaki Capital is one of the bright new fund manager stars in Japan. HFC’s Stefan Nilsson decided to catch up with Masaki Gotoh, who is a partner and chief investment officer at Misaki Capital in Tokyo.
Masaki is a Partner and Chief Investment Officer/Portfolio Manager of Misaki Capital Inc. Prior to co-founding Misaki, he was Portfolio Manager of the Asuka Value Up Fund, responsible for managing the Fund and the investment team. Prior to this, he worked at SPC Japan (Standard Pacific Capital LLC’s Japan Advisory) jointly responsible for long-short investments in Japan, Korea and Taiwan, as well as Morgan Stanley Japan in International Proprietary Trading and Goldman Sachs Japan heading Asia-Pacific Derivatives and Trading Research and brings 15+ years of experience in Finance. Masaki received his B.Eng in Computer Science from Cornell University and MBA from Northwestern University.
Tell us the story about how this experienced team set up on its own.
The genesis of Misaki started over 15 years ago when Yasunori Nakagami, our CEO, was a partner of a domestic management consulting firm. He found that successful engagement via value-enhancing projects with management led to an increase in the value of the business and thus its stock price. Hence, rather than charging high consulting fees to only those large companies that could afford it, he decided that it would be more mutually beneficial to invest in businesses and management teams that he likes, provide the same services for free and generate the returns from the market as the market realized this value. This led to the launch of the previous fund in 2005, and, after having built and managed the strategy for over eight years, the senior members of that team spun out to form Misaki Capital in late 2013.
You manage a sort of a friendly activist or engagement strategy. How would you describe your investment strategy?
We prefer to use the word “constructive” vs “friendly” to describe our strategy. “Friendly” implies constant support of the business regardless of the strategies undertaken by senior management. We consider ourselves “constructive” as our sourcing is based on strong business models that have H-O-P – hungry, open and public – management teams who are willing to listen to minority shareholders. When we consider an investment in a business, we think to ourselves “what would we do if we were to inherit this company in its entirety today?” The answer to this question tends to lead to value enhancement through long term growth of cash flows rather than excessively focusing on efficient balance sheet use. We believe management teams appreciate this mentality and become more open to our proposals. While balance sheet efficiency is critical, the solution tends to be one-off projects whereas cash flow expansion requires constant improvement (kaizen) and leads to long term growth of the business and a healthy long-term relationship with management. Therefore, we believe that having both investment – financial – professionals and management – consulting – professionals is crucial to our investment strategy. We take seriously our three Misaki values, Value for Investors, Value for Businesses, and Value for Society. What this means, of course, is that our engagement should add value for the businesses but, of course, must add value to our investors. As such, there have been and will be times when we must be less “friendly”. However, that is not the preferred tool and would be used as a last measure to uphold our fiduciary duty to the fund’s investors which, ultimately, should be value enhancing for the business as well. Ultimately, whatever the methodology undertaken to persuade management, we do so for business value enhancement. We have simply found that collaborative, constructive dialogue is generally more productive.
What’s different about your strategy compared to other fund managers out there?
The Japan “activist” universe is still very small and growing and, thus, allows for many varieties of activism. Our peers have their own biases on with whom and how they invest. As we are a pure long-only strategy with no hedging overlay, we very much consider ourselves a value investor and base our valuations on the margin of safety vs intrinsic value and the potential engagement upside, or the “double discount”. We look for companies that have a sustainable competitive advantage, focusing on the moat of Buffett-speak, in order to assess the sustainability of the cash flow generation and to compute, in greater confidence, this intrinsic value. But equally important is whether management is “engage-able”, i.e. we will not simply wait for the gap to shrink. Engagement is inherently a very human, high-touch, high-context strategy. As such, local, cultural connectivity is crucial to successful engagement. The fact that our entire team is Japanese, physically based in Japan leads to positive interaction with our companies. Finally, the content of engagement is a very customised, management consulting based approach in addition to the financial toolbox that traditional activists focus on.
We’ve now seen about 3.5 years of the Abe administration and Abenomics. How has the economy and investment landscape changed?
Although it might seem from outside of Japan that the pace of change occurring in Japan is slow, being on the ground and having been doing this strategy well before the Abenomics tailwind, we can definitely feel the landscape progress, much faster than it ever has in my investing career. The multiplying effect of the JPX-Nikkei 400 Index, the corporate governance code, the stewardship code, implementation of external board directors, and other factors have all had an enormous impact to wake up corporate Japan. This snowball effect has made it much easier to engage with companies compared to pre-Abenomics and have allowed us to build a portfolio very quickly with active engagement with a majority of our companies, both in and out of the present portfolio. We are still in the very early stages of corporate governance reform. It took the UK 20 years for the investment landscape to fully embrace the stewardship code. Large, structural shifts take time and it is unrealistic, if not outright naïve, to think that such massive shifts can happen in a year or two. The government has kickstarted the movement. It is now up to corporate Japan to embrace and we hope that we may be assisting that change in some small way.
Is your investment strategy sustainable in the long term or is it a theme you run for a few years during a period of change in the economy?
Regardless of Abenomics, our strategy was and would be the same if the environment were different. We only invest in 10-15 companies and, at any given time, we believe there are enough good businesses with strong, open management teams that are valued at a discount. This was true before and continues now. The universe has simply expanded. We don’t invest based on a top down theme, and are bottom up driven from this selection criteria. Furthermore, unlike the private equity market, which our strategy is often compared with, the universe of potential investments is very large and valuations have fallen through the decades to rational levels. Finally, there is no “completion” to business management enhancement, and particularly so in Japan where the starting point is so far behind the “managerial skill” curve. Contribution to this enhancement from shareholders is even more new compared to Western markets.
Foreign investors are less bullish on Japan than many domestic investors are. Do you think this is because of better access to information, home bias or something else?
With regards to corporate governance change, I would argue that there is scepticism on both sides. But I have noticed that long-time foreign Japan-watchers have most noticed the change. Those less bullish have, in my view, yet to notice the subtle changes that are occurring in Japan. Domestic investors, on the other hand, are no more bullish with regards to corporate governance and continue to focus on the short term. Again, I would note that we are not talking months or quarters but years. Long-term investors will be able to capture the most upside, domestic or foreign, and we believe the opportunity set is tremendous.
If you hadn’t been a fund manager, what would you have been doing?
I would probably be running my own business. After starting as an engineer in a large Japanese firm, I moved to finance, focused on derivatives, given my quantitative background. I then moved to proprietary trading based on a quantitative model, then fundamental long-short investing and now in what is almost a private equity approach to public markets. My career has become less quantitative and more qualitative over time, understanding businesses better and focused less on the minutia of the numbers. As such, running a company like one of our portfolio companies would be the ultimate transition. In that sense, I not only am fulfilling my dream by co-managing a venture called Misaki Capital, but also have the luxury to assist many other great businesses in the process.
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?
Sally Crane, Linedata
HFC’s Stefan Nilsson decided to have a chat with Linedata’s Asian Managing Director Sally Crane about her work in the complex and fast-changing financial markets and why Asia is not for the faint-hearted.
What is your background and what brought you to Asia and the hedge fund industry?
After graduating with a degree in Financial Services from Sheffield Hallam University I moved to London to begin my first job in the city – working in the market data and software space. Within two years I had an opportunity to join FactSet to open up their Hong Kong office. I jumped at the chance and moved to Hong Kong for two years – 18 years later I am still here. My first 14 years In Hong Kong at Factset served me well in understanding Asia and the institutional and alternative markets – then four years ago I chose to specialise in hedge funds by moving across to Linedata.
Can you tell us about what Linedata is offering Asian hedge funds?
Linedata is a company that had grown by acquisition and it has many different products servicing the asset management segments of front, middle and back office. The hedge fund product is called Linedata Global Hedge and it offers an integrated and flexible platform including trading and order management, portfolio management and middle office, investor accounting, pre and post compliance, and risk and reporting. The system is modular meaning you can add functionality as your business requires. We also offer the service elements of hosting, managed services, consulting and support. We recognise that the financial markets are growing in complexity and changing faster than ever so our response is to be experts in the areas we cover. Those Linedata experts act as an extension of our clients’ internal teams and we pride ourselves on our exceptional client service. We also continually invest in our suite of systems and services enabling us to support our clients’ growth.
What do you see as the biggest challenges for fund managers operating in Asia today?
Asia is large and diverse representing many countries, both developed and emerging. So for those trading across these multiple markets, that represents a challenge in itself. Each market has its own set of regulations as well as the fact hedge funds need to adhere to regulations from their investors’ domicile. So the regulation burden is immense. There is also a different approach to trading and the use of derivatives in each market as well as the fact that the markets in Asia are much more volatile and change rapidly. You could say that Asia is not for the faint-hearted…
One of the issues in the Asian hedge fund industry is the relatively small size of assets managed by a typical Asian fund manager. Are you able to serve smaller start-ups as well as multi-billion dollar managers?
Linedata Global Hedge can serve small startups with under US$50m and offers them the operational efficiency to allow them to grow into billion dollar funds, of which we have many. Each year we sign both small startups and those who have either outgrown their current system or wish to move off an internal system, so they can refocus on generating alpha by leaving the technology piece to us. Linedata Global Hedge is a very robust platform that is customisable and flexible and offers the choices of either being hosted by Linedata or deployed to the client’s infrastructure.
We have seen a number of asset management-related frauds in Asia in recent years. Subsequently many investors are now spending more time on operational due diligence and scrutinising funds and their service providers. Has this had any impact on Linedata’s business in Asia? Do you check potential clients more thoroughly now than you used to?
Many of our new clients are referrals from either existing clients, prime brokers, fund admins or even existing users moving on. When we start working with a new client, we spend a lot of time helping them answer many questions that their investors are asking. So we are very much involved in helping them design processes, creating audit trails etc. to help them give investors the right amount of transparency.
What do you think the future looks like for the hedge fund industry in Asia?
There is definitely demand from investors for Asian strategies and Asian based managers. We have seen a healthy flow of startups which doesn’t look to be diminishing. Historically most of the money has come from Europe, now we are seeing more US money. As the market in China matures and becomes more accessible it will be source of future opportunity for hedge fund managers in the region.
If you hadn’t been working in financial services, what would you have been doing for a living?
I never really had a back-up plan, I knew I wanted to work in financial services, so I studied for it, saw an opportunity in Asia and jumped straight in….
Richard Waddington, Sherpa Funds Technology
Disruptive technologies can be fun, especially when they shake up the investment management industry. HFC’s Stefan Nilsson decided to have a chat with Richard Waddington in Singapore who recently launched the disruptive technology service Optimal Risk Sizing.
What is your background and what brought you to Asia and the hedge fund industry?
I studied physics and engineering at Cambridge and was then swept into the world of derivatives trading along with many of my peers. It was very fashionable in the early 1990s. After the usual London and New York spells trading various complex option books at Bankers Trust, I moved to Tokyo in 1999, having enjoyed my few business trips to Japan and wanting to do something different. There, I set up a derivatives modelling business, primarily interest rate options. I didn’t really know much about programming, in fact my first business expense was the book “Programming for Dummies”! However, after my studies and time at Bankers Trust, I was very much at the forefront of the mathematics and really understood the business logic. To my mind that’s a much rarer skill-set than programming. The business was good but very hard to grow as I couldn’t hire foreigners, and there was little expertise available at that time in Japan. Strangely, when I returned to London a few years later, I met a guy in a bar who, once he knew my name, immediately asked if I was the Waddington who came up with the pricing software he used in Tokyo. That was reaffirming! After Japan, I returned to London to work for my old boss from Bankers Trust who was then running FICC at Barclays. By 2006 I had a global trading role and was back in Asia, and have been in Singapore ever since.
How did Sherpa evolve from being a fund manager to also being a tech provider to other funds?
When we set up Sherpa Funds, first as a G7 FX trading fund, my primary interest was in the mathematics and process rather than the markets. So whilst my business partners at Sherpa did the asset selections, I was always looking at improving the process – most importantly how to convert the asset selection decisions of a PM into the best possible portfolio for the client. My experience told me that this was the step that many people struggle with. And after about a year of research and much pondering and experimentation, I came up with a solution that has now grown into ORS. I initially presented this, in a very rudimentary package (back to my non-programming skills!) to a large long-only fund manager, who bought into the concept and went on to use it as the corner-stone for a pitch for a large government pension mandate. They won the pitch, and so I had my first client. The ORS product had proved itself as a differentiator in the managers’ hunt for AUM.
Can you tell us about what your Optimal Risk Sizing solution can offer fund managers?
The first client that I just mentioned used ORS to raise AUM. They were able to show that the fund would be managed according to the investors’ best interest, using ex-ante active sizing methodology to manage both market risk and trading style, rather than the usual VAR or other ex-post reactive risk measure. This is a big differentiator. More importantly ORS’ main benefit lies in improving returns. By optimally sizing the assets in a portfolio, over time you improve returns. Indeed, when we test ORS on real trading data, the performances are always improved, some quite radically. This is not to say that PMs are doing a bad job, but that their asset selection skills are not being optimally expressed in the portfolios that they build. So a PM has to be a good asset selector, otherwise the portfolio will do badly. But once the assets are selected, it is a very difficult task to create a correctly balanced portfolio: one that is consistent with the goals set out, either by the investor or in the PPM, and one that, over the long term, maximizes the value of those asset selection decisions. The PM’s calls are central to everything, the ORS tool allows those calls to generate the best returns, given the portfolio’s stated goals.
What do you see as the biggest challenges for fund managers operating in Asia today?
Clearly the industry is reacting to increased regulatory and cost pressures by consolidating. That’s nothing new of course. If you look at any established industry, you can see that same pattern. But fund managers who wish to remain independent have to do something different. There is always room for boutique producers in even the most developed markets, but they have to be offering something truly different.
One of the issues in the Asian hedge fund industry is the relatively small size of assets managed by a typical Asian fund manager. Do you have cost-effective solutions for both small and big funds?
ORS is a subscription service, delivered over the web with zero IT overhead straight into the PM’s working environment. In other words, you pay for what you need, and subscription fees can be tailored to AUM. The full suite of functions, such as optimizing a portfolio with factor constraints, or pre-emptive reporting of variance-to-benchmark at an asset level, are only suitable for the larger funds. Even in their case, the monthly fee is much less than what they would typically pay for research.
Partly due to a number of asset management-related frauds in Asia in recent years, many investors are now spending more time on operational due diligence and scrutinising funds and their service providers. Has this had any impact on your business?
Sherpa Funds Technology is all about improving the returns of our client funds’ trading rather than the infrastructure of the fund. In that sense we help fund managers demonstrate good process when executing investment strategies. While this does not directly relate to the normal definition of “criminal” fraud, ORS does help prevent mandate creep and over-zealous risk taking, which are just as harmful to the investor.
What do you think the future looks like for the hedge fund industry in Asia?
The Industry is very segmented, so I’m not sure that I have any general observation that fits all the funds out there. I would say that in order to survive the ongoing consolidation, funds are going to have to embrace methods of working that challenge their established procedures, and where help is available, be open to assessing the cost-benefits of using that help. Now there’s is nothing very earth shattering about those statements, they are as applicable to healthcare as to hedge funds, and to the 1980s as today, and as a service provider with an innovative product, I am very much interested in seeing clients challenge the status quo. But none of that changes the fact that it is the truth.
If you hadn’t been working in financial services, what would you have been doing for a living?
At Sherpa Funds Technology, I am returning to my roots as a scientist and engineer: experimenting, developing ideas and building solutions. I am sure I would have always been involved in science in one way or another. Failing that I would have been a mountain guide or skier, but that’s one for the fantasy double-life!
Steve Bernstein and Neil Logan, Henley Business School
Founded in 1945, Henley was the first business school in the UK. It stands among an elite group of business schools, ranking within the top 1% worldwide. Henley is truly international, delivering EMBA programs in 10 locations globally. It has now teamed up with hedge fund industry veteran Steve Bernstein to launch a first of its kind executive hedge fund program in Hong Kong. HFC’s Stefan Nilsson, who will be one of the lecturers on this new course, decided to have a chat with Henley’s Neil Logan and Steve Bernstein about this new initiative.
What’s the thinking behind the launch of an executive hedge fund program in Asia?
“If you think of hedge funds, the expertise is in the USA and Europe. Asia is growing but is still far behind. Part of that is the level of expertise in the region. There are a lot of seminars, executive courses and programs that are more general in nature. The Henley program is laser focused on all aspects of hedge funds, from setup to management,” explains Steve Bernstein, an industry veteran who currently is CEO SinoPac Solutions and Services and previously served as CEO of Oppenheimer Investments Asia. Henley’s Asian director Neil Logan continues: “It was also an opportunity to invite some of the industry’s top executives, to shape a program and allow them to influence the training they feel the industry needs.”
Who is the course aimed at? What will participants gain from this course?
“The course is aimed at finance professionals that want to make a move from the sell side to the buy side, that want to set up their own hedge fund, that work at hedge funds or service hedge funds. Those who complete the course will have a good understanding of all aspects of setting up and managing a hedge fund which will be invaluable for all professionals in the hedge fund space,” states Bernstein. “It also offers unprecedented access and networking opportunities for participants. It is an industry built on networking and this program will be a fast track to linking with some of the biggest organisations and individuals in the business,” says Logan.
The program’s curriculum has been developed with participation of industry professionals. All teachers are currently active in the hedge fund space. “The industry experts provide the content and Henley will provide the learning platform and overall instructional design to ensure the program is delivering the key messages created by the professionals,” explains Logan.
The hedge fund program’s modules include Business Set Up & Fund Administration, Markets & Trading, Legal, Regulatory & Compliance, Tax & Audit, Ethics & Corporate Governance, Prime Services, Portfolio Management, Capital Introduction and Risk Management.
The program’s line-up of industry speakers were chosen based on their specific expertise, their level of hedge fund experience and their ability to teach and share their knowledge. The first program will run from September and the plan is to offer this course two times a year in Hong Kong and then expand to other cities such as Beijing, Shanghai, Singapore and Tokyo. “We have also received interest from South Africa, Henley’s largest international campus and a major centre for Africa’s rapidly growing hedge fund industry,” says Logan.
You seem to have received great backing from many industry players. Do you think that the hedge fund industry itself sees a need for better equipped professionals in the Asian hedge fund industry?
“This program has been very well received and is the first of its kind. It will definitely help the hedge fund industry in Asia. The level of support from the industry has been great and they are critical to the success of the program,” says Bernstein proudly.
You have won some support from established financial organisations such as CAIA and the CFA Institute. How did you win them over as supporters rather than sort of competitors?
Bernstein explains: “We all have the same goal, to provide expertise and educate the financial community. CAIA, AIMA and the CFA are fantastic programs and the Henley program is a great first step to these other great programs and associations.” Logan adds: “They have all been very supportive of the initiative and have agreed to be involved in teaching, mentoring, judging and supplying materials. As Steve says we share a common goal which is to ensure a better educated and bigger hedge fund community. We hope to finalise the formal agreements shortly.”
Was Hong Kong an obvious choice as the location for the course?
“Not obvious but because the finance industry is concentrated and Hong Kong is the finance capital of the region it is a great place to launch the program,” says Bernstein. “Henley has also been in Hong Kong for 30 years so we have the support and infrastructure to manage the logistics here,” adds Logan.
With the help of the world-renowned Henley Business School, the future for the Asian hedge fund industry is looking bright. Hedge Funds Club members and friends benefit from an exclusive 10% discount on the Executive Hedge Fund Program fee. Please contact Dennis Chan email@example.com for more information or visit http://henley.asia/executive-education/executive-hedge-fund-program/
Kate Hodson, Ogier
Regulatory issues are frequently mentioned as a major issue for many of Asia’s hegde fund managers. HFC’s Stefan Nilsson wanted to find out more about the legal side of the Asian hedge fund industry and decided to have a chat with Ogier’s Kate Hodson. Hodson has been working in Ogier’s Hong Kong office since 2010 and has been promoted to partner in the firm from August. Kate advises a large number of sponsors and fund managers as well as their onshore counsel on the establishment and structuring of hedge funds, private equity funds and other closed ended and opened ended fund structures. She also advises managers, trustees, family offices, HNMWIs, administrators and other service providers on fund related issues and other corporate matters. Kate has particular experience in partnership and unit trust structures and advises an extensive number of Japanese clients, including some of the largest investment houses and prominent fund managers in Japan. She has an international client base with a particular focus on clients in Asia, including Hong Kong, Tokyo, China and Singapore.
What is your background and what brought you to Asia and the hedge fund industry?
Well Asia, in particular Hong Kong, is home. My English parents moved to Hong Kong in the late 70s. I was born and have lived in Hong Kong for over 20 years, and spent just under two years in Singapore. Whilst I trained as a lawyer in the UK, I always knew I’d be back to Asia. I started my career as a banking and finance lawyer in London with Allen & Overy, and it was the move to Hong Kong nearly six years ago and joining Ogier that got me into the hedge fund industry. I’ve not looked back since.
What do you see as the biggest legal challenges and issues for offshore fund managers operating in Asia today?
Fund managers around the globe have been thrown a few regulatory hurdles of late, with new requirements imposed on their businesses such as under FATCA and AIFMD. This has had major cost implications and for smaller and even larger managers looking to access capital in Europe, this can pose a significant barrier. Fund managers have had to deal with a surge of compliance requirements – requiring new people, processes and at times, technology. This will have impacted profit margins and restricted some managers from being able to build their infrastructure and grow – and there are also serious implications if they get it wrong.
Corporate governance is high up on the agenda in Asia, including the role of independent fund directors. In your opinion, what are the main issues?
I think the focus here has to be on identifying truly independent fund directors with the right skills, who will offer the checks and balances that this role demands. However, particularly as independent directors are under pressure to keep down their number of directorships, the costs of these appointments can be an issue for funds with small AUMs. To access bigger ticket investors, funds are going to need to be able to show that they have strong corporate governance in place. Appointing appropriately skilled and independent directors to the board is just one step towards achieving this.
Cayman Islands and other offshore financial centres have in recent years been more criticised and questioned than perhaps ever before. What impact does this have on the alternative investment industry and how it operates?
These offshore jurisdictions are often in the firing line for negative PR. However, this is not always deserved and has at times been allocated in a blanket manner. I think the majority of investors in Asia generally appreciate this or at least won’t let it scare them from investing into jurisdictions that they are familiar and comfortable with, and with managers that they trust. However, at the same time, it remains a cause for concern and ultimately it is down to the relevant jurisdictions to respond appropriately. Looking at the Cayman Islands in particular, it has done its fair share of co-operating with international regulators. It was one of the first offshore jurisdictions to sign up to an IGA with the US for FATCA and it has taken a number of proactive steps to adopt best practice international standards as well as strengthening its anti-money laundering regime. Whilst offshore jurisdictions have had to defend themselves against the criticisms, international pressure has most likely had a positive impact on the alternative investment industry, as jurisdictions such as the Cayman Islands, BVI, Guernsey, Jersey and others have updated their legislation and addressed transparency while looking to maintain their competitive edge. Some of these changes have added to the compliance burden on the industry, but looking at the Cayman Islands for instance, this doesn’t appear to have dented its attractiveness to Asian investors, and it remains one of the most popular and widely used jurisdictions for offshore transactions.
One of the issues in the Asian hedge fund industry is the relatively small size of assets managed by a typical Asian fund manager. A small AUM also means lower revenues and less likelihood of running a profitable business. Some managers cut corners by using second-tier, cheaper service providers. Is this a problem that investors should worry about?
There is a lot of comfort that comes with appointing a large financial institution as a service provider. However, in Asia there is also an appetite for accepting smaller boutique firms to do the job, especially given that a number of banks have started to withdraw from this area due to regulatory changes such as the Volcker Rule. In Hong Kong, this is such a competitive space that administrators have had to stay ahead of the game, and many have proven that going with a “tier 2” firm by no means leads to a drop in service. One outcome of the financial crisis has been renewed attention and a growing awareness of custodial risk. Yet, the larger financial institutions offering prime brokerage have been paring back their services to the smaller hedge funds and it is becoming harder for these managers to secure the support, technologies and services they require. The space is now more competitive with a new wave of players having entered the market and while these smaller sized firms will fall short of the levels of capitalisation of the big primes, they are at least driven to provide additional tools, functions and solutions to their client. The overall result is that there are now more options in the market for fund managers to choose from. Ultimately, the details of a fund’s service providers will be disclosed in the fund’s offering memorandum so that investors can make an informed choice about whom they are “getting into bed with,” so to speak.
We have seen a number of asset management-related frauds in Asia in recent years. Subsequently many investors are now spending more time on operational due diligence and scrutinising funds and their service providers. Has this had any impact on Ogier’s business in Asia? Do you check potential clients more thoroughly now?
Compliance is clearly a big area of focus for us as a leading offshore law firm. We can’t afford to get it wrong. It means we are constantly growing and reviewing our KYC processes – every client has to be analysed from a take on perspective and kept under review during the life of the relationship. We have a dedicated team working on this. Of course, clients do get frustrated with the amount of evidence and documentation they have to provide when all they want to do is get the deal done. But we have observed that they are getting used to these processes now, having come up against similar requests when opening bank accounts and appointing other service providers, so generally speaking we find the gathering of information a little smoother these days. The importance put on these procedures has undoubtedly strengthened of late and all lawyers in the firm are required to undergo training and to stay up to date on Ogier’s policies and procedures.
What do you think the future looks like for the hedge fund industry in Asia?
With regulatory improvements across the region, the ability to manage risk has developed and the industry has become more sophisticated. Added to this, a competitive environment and global regulatory pressures has meant that fund managers have had to adapt and to bring about product diversification and a broadening of investment strategies. The overall picture is that Asia is well set for growth, despite the ongoing challenges. But the industry certainly hasn’t gotten easier – it has actually become harder to navigate, but perhaps more professional as a result.
If you hadn’t been a lawyer, what would you have been doing for a living?
A complete pipe dream, but if I could have made a career out of sailing then I would have done it! As it is, I’m content for it to remain a weekend activity with an offshore race to the Philippines each year – a good way to unwind.
Kenichi Ura, Creation Japan Revaluation Fund
Kenichi Ura made himself a name while doing research and managing money at the asset management arms of Prudential and Baring. In 2007 he set up his own research shop, KU and Associates and in 2014 Creation Capital launched a new value-focused small/mid-cap Japan fund advised by Kenichi Ura. HFC’s Stefan Nilsson decided to find out more in a brief interview with Ura-san.
Can you tell us about your investment strategy?
The fund invests in Japanese companies with a low Return on Equity (ROE) that I believe have the potential to improve their ROE. Actually, in Japan low ROE stocks have historically shown better performance, along with improvement of ROE, than high ROE stocks. In addition, the fund takes short positions in companies with a high ROE that may not, in my view, be able to maintain those returns. For the long-side names, we expect a target return of each holding of more than double based on the earnings growth and the improvement of the capital structure. Companies with low ROE tend to also have low Price to Book ratios (PBR). On average I choose stocks with a PBR of less than 1.0. Accordingly, the fund’s long investments are expected to have low downside risk. In this regard, I think that there are certain opportunities for high Sharpe ratio-type of investment in Japan. For the short-side names, we decide on the investment timing based on technical analysis as well as fundamental analysis.
How is your investment strategy different from most other Japanese hedge funds?
It is long biased, contrarian and we have lower turnover. We don’t necessarily aim for a small but constant return. We rather aim for a large return with smaller risk as we invest in low PBR stocks.
As you are focused on small- and mid-cap stocks, is your research of this space mainly based on company visits?
Yes. We identify candidates for both long and short positions mainly by onsite visits with listed companies on an individual basis.
Has Abenomics had any impact on how you invest in the Japanese equities market?
Yes, it has. Abenomics requires listed companies to take the responsibilities of being listed. In other words, the listed companies with excess capital are under pressure to pay out more in dividends or make share buybacks in order to optimise the capital structure. This leaves plenty of room for share prices to go up. On the other hand, if they choose to delist from the stock exchange through an MBO or LBO due to the expectations created by Abenomics, it will also offer us opportunities to buy shares with lots of premium because the share price at an MBO or LBO historically tends to be fixed at 1.0 times PBR.
Do you see more attractive opportunities in any specific sectors in Japan?
Yes. At the moment we see attractive opportunities in areas such as electric power plants, capital expenditure and R&D.
How do you manage risk in your portfolio?
Because the long investments consist of low PBR stocks, the downside risk is somewhat limited. In addition, we apply a maximum individual stock weighting of 10%, initially 5%, and 5% for each long and short position respectively, as well as a 15% stop-loss rule for short positions. Our rules allow for 40 to 60 names on the long side and up to 30 names on the short side.
Can you tell us a bit about who you are and what you have done prior to launching your current Creation Japan Revaluation strategy?
I established my firm KU and Associates in 2007. Prior to that I spent eight years at PPM, Prudential’s asset management arm, now known as Eastspring Investments, as a fund manager. During my time there I was twice, in 2000 and 2004, ranked number one fund manager in the Japanese small stock universe by Micropal. Earlier I was at Baring Asset Management where I worked as an analyst and fund manager. I graduated from Yokohama National University’s Department of Technology, Architecture. My first job was with Wako Securities, now part of Mizuho, where I initially worked in sales and later transferred to an analyst role in the research division.
If you had not been working in fund management, what would you have been doing?
I would have been an owner of a contemporary art gallery.