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Monthly Archives: November 2012
Hong Kong-based Senrigan Capital partner Kevin Kwong has reportedly left the company to start a new fund management firm.
Back in April Japanese regulators relaxed the rules for fund managers, including the minimum number of staff and capital requirements. Global macro manager Edgebell Capital has now become the first hedge fund manager to be granted the new license.
George Fox, President and Founder, Titan Advisors
George Fox is the President and Founder of Titan Advisors, a US$3bn FoF manager based in Rye Brook, New York, USA. George has been investing in hedge funds for 20 years. He is actively engaged in the firm’s research and portfolio management process as a member of the Investment Committee. George entered the New York financial markets in 1984 as a floor trader at the Coffee, Sugar and Cocoa Exchange and the Commodity Exchange Inc., where he traded for his own account for seven years. In 1992 he created G. Fox & Co., a hedge fund advisory firm and the predecessor to Titan Advisors. After nine years providing hedge fund advisory services, George launched a discretionary hedge fund of funds operation and renamed the firm Titan Advisors, LLC.
Recently we have seen many independent FoF managers being bought by bigger firms and several mergers of smaller FoF managers. As a still independent FoF manager, what is your view of the industry consolidation going on?
In many industries consolidation can be a good thing, because it can wash out weaker players and strengthen those who remain. In most instances where independent fund of hedge fund firms sell their business, or merge with a larger institution, the event provides the principals with some form of monetisation often leading to a reduced role for the firm’s senior leaders, which is generally bad for clients. Or it’s done for the purpose of aligning the firm with a broader distribution network in order to raise more assets, which again, is generally not good for clients. While some consolidation in our industry can be healthy, we firmly believe that sound hedge fund investing is a capacity constrained exercise, and most of these acquisitions are made under the premise that the merged entity will be able to generate significant future asset growth. We believe it will be challenging for these merged businesses to continue performing at a high level if they’re not careful about taking in too much capital.
You often talk about “winning by not losing” when it comes to FoF investments. What is Titan Advisors’ approach to protecting downside risk?
In a strong stock market tape, it’s tempting to wish that our long/short equity managers, for instance, would capture every basis point of rise. In fact, if these managers were narrowly focused on “up capture” our historical performance would likely be much less attractive. Avoiding losses and the power of “negative compounding” is far more valuable to investors in the long run than trying to capture all the upside. Titan’s strategy is to “win” by keeping ourselves far away from the left tail so we never have to count on our managers performing far better than their historic track records in order to make up previous losses, as this would probably require shouldering excessive risk. Titan believes this is best executed by focusing on smaller hedge fund managers, who can be liquid and flexible enough to rapidly adjust their risk exposures in times of stress. We also look for managers who combine an identifiable active trading skill, with strong fundamental investment analytics. We believe a diversified portfolio of hedge fund managers who share these qualities should provide stability in times of market difficulty, while capturing some upside when opportunities arise. While this may be a conservative approach, over the long-term the math has proven that downside protection first, and incremental upside participation when markets allow it,
will be a winning formula.
Some investors invest in FoF because they want a certain degree of diversification in their hedge fund portfolios to avoid single-manager risk such as blow-ups or frauds. However, it seems that some of these investors are missing out on returns by being too diversified. How can a hedge fund investor optimise diversification?
We find that funds of funds using a large number of underlying managers generally creates more return-diminishing effects than risk-reduction benefits. We think the best way to put together a hedge fund portfolio is to really know what you own, and use about 20 high-conviction managers. With this approach you don’t take too much single manager risk, and you can still achieve meaningful return results. Within a 20 manager portfolio we believe a prudent “core” allocation would be in the 8%-9% range. Two or three allocations of this size, with underlying managers who have exhibited truly exceptional risk management abilities over several market cycles, can really provide stability to a portfolio. The other 18 or so manager allocations fall into the 3%-6% range, with the more volatile managers at the bottom end of this range. With exposure across just 20 hedge fund managers, using this sizing methodology, you can create a stable, steady returning portfolio as long as you are combining managers with different investment processes, investment time frames, sector biases, geographic preferences, market cap biases, net and gross exposures, and return drivers.
Your firm is focused on investing in managers with liquid strategies. What is behind this thinking? Are you missing out on opportunities by excluding certain less liquid hedge fund strategies?
At Titan, we value risk management over all else. And in our opinion, one of the most important elements to sound risk management is the ability to dynamically adjust a portfolio. In particular, we seek managers with the ability to reduce risk in times of extreme volatility. We think this is the best way to protect against capital loss. The majority of the principals at Titan have had trading experience early in their careers, which is why we tend to favor this investment style. In order to effectively implement this approach, the strategy and the securities traded must be highly liquid. While this prevents us from utilising a certain portion of the hedge fund universe, we find that a well-constructed portfolio combining liquid global macro, long-short equity and multi-faceted event driven strategies, can work together extremely well from a diversification and correlation standpoint. In fact, wehave been able to generate a return stream using these strategies that we believe is even more steady and consistent than the most hyper-diversified funds of funds, yet without taking the liquidity risks contained in many other hedge fund strategies. Those strategies tend to work well for periods of time, but are punctuated by bouts of illiquidity in extremely volatile markets which can wipe out years of returns. In our view, if you can achieve steady, risk-managed returns while avoiding these less liquid strategies (as well as those that rely on substantial leverage use), then we are not missing out on anything by excluding these other hedge fund strategies.
Titan Advisors has a reputation for finding and securing capacity with great managers. But you also have a big focus on operational due diligence when evaluating managers for potential investments. Tell us about it.
We have a three-person dedicated operational due diligence team, which is a key element of both our pre and post investment due diligence process. The team conducts a thorough and rigorous review of all prospective and underlying managers and can prevent, with full veto rights, an investment at any time, or insist on a redemption if it’s determined a manager’s operations are inadequate. We have been running our business this way since 2005. In our initial operational due diligence, we focus on the depth of the manager’s organisation and internal “checks and balances.” We meet extensively with representatives of the fund other than the portfolio manager. Depending
on the fund’s staffing, this may include the CFO, compliance officer, trade reconciliation head, in-house counsel, head of risk management, and the IT team (if the fund is a quantitatively driven entity relying on the robustness of the technology). In our operational due diligence, we particularly focus on back office procedures with regard to order entry and trade reconciliation, security pricing, and interaction between manager, prime broker and administrator. Additionally, we pay close attention to operational policies regarding movement of capital, the number of banks used, number of prime brokers, etc. Performing background checks is another important part of Titan’s pre-investment operational due diligence process. We also review the audited financial statements and follow up on any issues raised by the notes and schedules. Our review also focuses on the manager’s personal investment in the fund and any changes to that investment, which may be disclosed in the audited financial statement. In some cases, we consult with Titan’s public accounting firm for additional explanations or support. Prior to investment we review the fund’s offering memorandum, partnership agreement and subscription documents. Additionally the ODD team will contact the prime broker, auditor, administrator and legal counsel to confirm the manager relationship with each and confirm assets. Titan will not invest with a manager if we deem the business support functions provided by third-party vendors to be inadequate.
How do you see the global FoF industry evolve from here and your firm’s role in it?
We anticipate the substantial asset flows into the hedge fund space will continue, as investors need ways to generate a consistent, risk-managed return, especially in light of where yields are on fixed income instruments and how up and down equity markets have been over the past decade. However, investors will become increasingly knowledgeable about hedge funds and will conduct ever more thorough due diligence, so firms will need both the infrastructure and performance ability to survive. There is also always going to be a hedge fund structure that is the current “flavour of the day.” At the moment it is the daily liquidity mutual fund structure, or the UCITS vehicle found in Europe. Historically, each new structure that has been marketed as a new way to access hedge funds has under-performed in a very meaningful way. None have proven to be long-term durable, and given the current lag in performance we see among the mutual fund structure, we anticipate it will be the same result this time around as well. Titan has no plans to acquire, be acquired, or launch a “hot” new product. We have built a very substantial infrastructure and our track record continues to be highly competitive relative to fund of hedge fund peers and direct allocators. We believe that by staying focused on the essentials, gradually building our business, and using flexible, highly risk-managed hedge funds, we will have a very stable platform to attractively compound our investors’ capital for years to come.
The Eurekahedge Asia ex-Japan Hedge Fund Index returned an estimated +1.21% in October which brings YTD returns to +6.40%.
The Eurekahedge Japan Hedge Fund Index returned an estimated +0.41% in October which brings YTD returns to +0.80%.
The number of Asian hedge funds has increased to 1,128 funds, collectively managing US$84.3bn, according to research by HFR.
Woori Absolute Partners in Singapore has teamed up with NewAlpha to raise a seeding fund focused on Asian hedge fund managers. They hope to raise $200m and typcial seeding tickets will be $25m.
Steve Shepherd, formerly a senior portolio manager at the Canada Pension Plan Investment Board, has joined Capital Fund Management as its new Tokyo-based head of Asia-Pacific business.