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.


Penjing Asset Management

Ronnie Wu, Partner and CIO, Penjing Asset Management


Can you tell us a bit about Penjing Asset Management?
Founded in March 2005, Penjing is an independent asset management firm specialised in Asian hedge fund investments. I previously worked for JP Morgan Chase, UBS and Vision FoF and I am now the CIO of Penjing. I am backed by a team of 9 investment professionals which the key investment professional have average 11 years of FoFs management experience. There are another 13 staff in the operations area performing legal and compliance, operations due diligence (ODD), investor relations, general administration and accounting functions. We manage around US$600 million of clients’ assets. A majority of our investors are institutions based outside of Asia.

 

Describe your investment strategy and why it differs from what other fund managers are doing.
We are absolute return oriented which means we aim at preserving capital while maximising “risk-adjusted” returns across the mandates and funds we manage. Our investment process is primarily bottom-up driven, i.e. doing intensive research on individual funds and managers to best understand their investment skills, edges and styles to determine if they are fit to be placed on our approved list of “investable universe”. Aside from ensuring the selection of the best-of-breed managers, we consciously add-value through allocation decisions in terms of strategy, asset classes, sectors, markets as well as position sizing. We are not afraid of investing in a hedge fund at its early stage if the manager can demonstrate its investment and business capability. Disciplined rotation to new talents enables Penjing to participate in managers’ start-up and growth phase of their business life cycles. We pride ourselves on the ODD capabilities through our hand-holding approach that benefited many new managers in their early stages.

 

What investment themes in Asia do you see as the most attractive at the moment?
The Penjing Asia Fund (“PAF”), our flagship Asian FoF program, invests across a diversified portfolio of hedge fund strategies, asset classes and geographies. For PAF, we intend to maintain abalance between market independent and equity long short strategies. At the same time, there are other funds with specific guidelines to cater for the diverse interests of our investors who may be seeking manager alpha and/or market beta in various proportion based on a targeted risk budget. At present, we favor managers excelling in Asian macro, volatility trading and stock pickers among others. The former two should benefit from the opportunities arisen from the sharp spikes in
volatility level and resultant dislocation across asset classes. After the broad equity market sell-off, the fundamental stock pickers would be able to go long on winners (good companies) at decent value and go short on losers ( companies with poor management and fundamentals) for alpha generation.

 

How has your approach to risk management changed in recent times?
Risk management is an integral part of our investment process. We are vigilant against any risk that would result in capital loss. After the global financial crisis of 2008, we have tightened our requirement on transparency and liquidity of underlying managers. Around 70% of our managers can be exited on a monthly basis and we do not normally invest in funds with hard lock-ups over 1 year. Our quantitative investment team responsible for tracking and monitoring manager and portfolio risk control parameters provides risk analysis and alerts for the portfolio team to consider appropriate actions.

 

Do you see changes in regulation as a threat or an opportunity?
We welcome regulation to enhance professional integrity, improvement in portfolio transparency and leveling of playing field etc. Nonetheless, regulating to the extent of adding complexity to operate an asset management business and hinder market clearing (through banning of short-selling) would not be a positive development for the financial industry as a whole not to mention hedge funds particularly.

 

Fundraising in Asia: as Asian investors increase their hedge fund allocations, do you think Asian managers will start to benefit more or will big global fund managers get most of the assets?
So far we have received more inquiries from investors based outside of Asia when compared to Asian based investors. Having said that, we are aware of increased interests in hedge fund allocations from sovereign wealth funds, family offices and insurance funds in the region. The key concern for these Asian super-investors is the current shortage of capacity to satisfy their appetite. From recent examples, managers with proven skill-sets can easily raise capital in Asia.

 

What would you have done if you hadn’t been running a fund management firm?
We have not given this topic a lot of thought since we all have been in the industry for a while. I think it is likely that we will run our own money and the only difference then is we only answer to ourselves.

 

(Aug 2011)

 

 

Firebrick Capital Management

Toru Ueda, CEO and CIO, Firebrick Capital Management

Can you tell us a bit about Firebrick Capital Management?
The company was established earlier this year in Singapore, and we focus on Pan-Asia Mid-Cap Equity Long/Short strategy. Apart from me, the senior team consists of Simon Peladeau, Jae Kim and Emiliano Ragnini, all having previously worked as fund managers and analysts of global or Asia focused hedge funds before.

 

Describe your investment strategy and why it differs from what other fund managers are doing.
For a start, there are not that many mid-cap managers around, we also work with a relatively small investment universe consisting mainly of undiversified, cyclical, and growth cyclical companies. We
think that in a world where there is a great deal of noise, focusing on companies with share price drivers, which are for us clear and predictable, enables us to apply our research edge.

 

What investment themes in Asia do you see as the most attractive at the moment?
Currently we appear be in a battle between cheap valuation and in headwind for economic momentum and policy for most parts in Asia Pacific, within a backdrop of sub-par economic growth in the US, Europe and Japan, which are coping with various incarnations of over leverage. This is the third year into an economic recovery and countries and regions are becoming desynchronised for a change, which at times can be quite confusing but at the same time, strangely result in relative stability at the global level, and that should allow more semi-macro or micro-based themes to come through. It may well be less interesting for macro investors, while I suppose the flip side can be said for bottom-up investors. Other than to say that we too believe the secular growth story of our region but are aware that given certain conditions, growth recessions are perfectly possible and can be quite painful at times, even if rates of growth are high compared with other parts of the world. Just look what happened to Japan in the 1950-60s, which enjoyed long periods of very high economic growth, which were periodically punctuated by very sharp, and deep set-backs. Overdependence on fixed capital formation as an engine of growth as in China has its drawbacks, because of its opportunistic nature. Consumption and services are therefore secular themes for us, while some leading growth themes up to now are worth questioning as possibly completed from a stock market perspective, e.g. the China steel story. It consumes ½ tonne of steel per capita and is
now above the per capita consumption in OECD. Per capita production is around 1 tonne in some countries but they are all big exporters of autos, machinery or shipbuilding and China is not likely to become one of them soon so steel production growth from here will lag economic growth. Steel demand in other emerging economies will continue to be strong, but it is hard to replace China who saw its steel production rise six fold during the past decade. Else we see electronics industries as maturing as well because innovations enabled markets to effectively to leapfrog legacy infrastructure impediments, such that diffusion rates in Asia are now much higher than say for autos, which still lagging well behind. For now we are focusing on the larger markets in Asia Pacific except India, but that has more to do with focus of internal resources rather than preference from an investment point of view.

 

How has your approach to risk management changed in recent times?
Risk management is evolving. In my previous incarnation of Hachiman, our risk management improved over time, such that we avoided a drawdown in 2008, a year which recorded the greatest levels of systematic stress. The risk management we now have in place here at Firebrick, are based on the previous experiences but have also been enhanced further. Generally speaking rules are useful and shall be applied but in order to genuinely protect the interest of investors, the key decisions in my experience are actually made in the phases prior to say such two or three standard deviation events, which risk management try to contain from turning into three, four or five standard
deviation events. However hard and at the same time not depriving oneself of a rebound, the focus is therefore increasingly on how not to hit such risk limits, because once risk limits are being hit, by definition subsequent actions becomes automatic, and by then most of the damage has already been incurred and recovery can take time.

 

Do you see changes in regulation as a threat or an opportunity?
Relatively speaking, regulations tend to favour larger, established incumbents and as such the likes of us are likely to regard regulations as an hurdle, which gets raised. As an example, increasing
regulation require more reporting and will lead to cost increase as companies are ensuring compliance.

 

Fundraising in Asia: as Asian investors increase their hedge fund allocations, do you think Asian managers will start to benefit more or will big global fund managers get most of the assets?
I certainly hope for the former but the latter with better recognition and reach among fund investors will certainly continue to be a force.

 

Why have you chosen to operate from Singapore?
As a Pan-Asia manager, Singapore is an optimal location from and investment and business perspective. The other obvious location is Hong Kong but I prefer Singapore because of legacy but I also as a family friendly location.

 

What would you have done if you hadn’t been a fund manager?
No real clue except that the idea of figuring out what will happen in the future I think is fascinating so I would certainly be involved with that. Also, most likely I would have been involved in nvestment
decisions of some sort, either in some other related professional capacity or personally.

 

(July 2011)

 

 

Rimrock Capital Management

Paul Westhead, CEO, Rimrock Capital Management

Can you tell us a bit about Rimrock Capital Management and its history?
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 Fund 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 Fund, which is designed to generate most of the return that we target in our flagship fund, but with lesser volatility. Then, starting in 2008, we launched a series of closed-end distressed
mortgage funds, which had a five year legal life that included a two year investment period followed by liquidation. The first two funds have already been liquidated and all capital returned, with the 2008 fund returning 14% net IRR and 1.4x cash multiple, while the 2009 fund generated a 44% net IRR and a 1.9x cash multiple. The third fund, High Quality ABS Opportunities Fund III, 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 the Fund’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 Funds 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.

 

(May 2011)

 

 

WERU Asset Management

Hidemichi Watanabe, CEO, WERU Asset Management

 

Hidemichi Watanabe is an executive partner and CEO of WERU Asset Management. He was
previously head of fixed income in Tokyo at UBS Global Asset Management, Credit Suisse Asset Management and Fuji Investment Management.

 

Can you tell us a bit about WERU Asset Management and its history?
WERU Asset Management is a Japan credit investment advisor. Our Chief Investment Officer, Ms Tomone Kawachi, is one of only a few top credit managers in the industry. WERU Asset Management was established in March 2007 as a 100% owned subsidiary to WERU Investment which was established in June 1998. WERU Asset Management has been strongly supported by its parent company’s management and resources. The name of “WERU” means “Waseda
University Entrepreneurial Research Unit”. The top shareholder of WERU Investment is Waseda University. Half of the board members of WERU Investment are professors at the graduate school of Waseda University.

 

Briefly describe your investment strategy and why it differs from what other fund managers are doing.
WERU Asset Management manages a Japan credit strategy. WERU’s strength is its unique and sophisticated risk management. As a result, it brings one of the important considerations for diversification to investors.

 

What investment themes do you see as the most attractive at the moment?
It is always anomaly.

 

How has your approach to risk management changed in recent times?
The approach is same. Fundamental analysis is the key for our risk management. However, we consider that the keys for the fundamentals are varied.

 

Do you see changes in regulation as a threat or an opportunity?
The changes in regulation sometimes provide us with more opportunities as we think that investors are looking for better solutions.

 

What would you have done if you hadn’t been running a hedge fund?
I probably would have been sailing on a boat on the ocean. But this may pose higher risks…

 

(May 2011)