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The Hedgeweek Interview: Stuart G. MacDonald, Director of Hedge Fund Development, Henderson Global Investors, London

Henderson, which now has over USD 1 billion in hedge fund assets under management, will launch its seventh hedge fund in November this year. Stuart MacDonald charts Henderson's progress in this exclusive interview with Hedgeweek.

HW: When was the hedge funds business set up at Henderson and how has it progressed?

SM: The first fund (a Global Technology long short equity fund) was established in 1999, with two other long short equity funds launched in 2000. I took on this role in 2001, at which time we had about USD 50 million in the three funds.

At that time, the common opinion in the market was that large, traditionally based asset management companies like Henderson Global
Investors could not develop successful and sustainable hedge fund businesses.

In fact, we already had a substantial presence in other alternative investment areas such as property, private equity and socially responsible (or ethical) investment, this meant that there was less novelty to the proposition than an outsider might have thought.

We recently passed USD 1 billion of hedge funds assets under management, with a large development pipeline of new offerings that are planned for 2004-5.

We are often asked about the well publicised plans for the de-merger of Henderson Global Investors from its parent, the AMP Group. This seems to be going ahead and it is hoped that there will soon be a successful completion to this process. Henderson currently manages c.USD 150 billion and we will remain a substantial asset management company after the de-merger.

HW: What are the hedge funds you have launched so far and how much does each fund have under management?

SM: Our offerings include three funds that are "capped" (the Japan, Asia Pacific and European Absolute Return Funds, which have just over USD 100m, USD 200m and USD 200m in each, respectively). We also have a UK Equity Market Neutral Fund, launched at the end of 2001, which is near to a "soft close", with assets of over USD 350m. This year, we have launched Global Fixed Income (with assets of c. USD 50m.) and UK Long Short Equity funds (with assets rapidly approaching USD 100m.).

HW: How and where are you distributing your funds?

SM:  Distribution has been travel intensive and has made us all too familiar with airports! It has been largely, but not entirely, focused on the global hedge funds "circuit".

We are fortunate to have additional institutional and intermediary distribution channels that have been able to attract investors who are not traditionally active in this area, which has given our investor base a welcome diversity.

The capital introduction teams at our prime brokers (currently Goldman Sachs, Morgan Stanley and Citigroup) have also been tremendously helpful as reference points.

We have achieved good penetration of the fund of funds segment of the market, although until the launch of our recent more scaleable offerings, some of the largest players have unable to gain access to our funds, since we try to avoid an excessively concentrated investor base.

Equally, we have ensured that a substantial part of the investor base of each fund is drawn form other types of investor, whether institutional or private.

HW: You now have over USD 1 billion under management. What are you targets for this business and how do you propose to achieve them?

SM: The emphasis has been on franchise building and a "slow burn" approach to asset growth. This will not prevent us building a large business over time. In the meantime, we have been capping funds at comparatively low levels.

The rationale for our approach is based partly on a truism, that excessive size can diminish a strategy's performance. Some hedge fund players seem, nonetheless, to give priority to asset accretion. Our time horizons are quite long and so the focus has, instead, been on establishing a reputation for consistently high quality offerings in which performance rather than size is paramount.

As Henderson's hedge fund business develops, some of the new funds that we are bringing to the market are increasingly scaleable. With our next launch we will have added over USD 1.5 billion of capacity to our range of funds in 2003.

What makes this feasible is one of Henderson's greatest strengths, its diversity of activities even in traditional areas of its business. There is tremendous breadth to the pool of internal talent that we can unlock in the form of hedge funds. It will be a long time before we exhaust this pool.

Consequently, we have some confidence that the progressive addition of new funds and capacity over the next couple of years will place us in the position of having a fairly large but well diversified and sustainable business. The key to this approach being a success is, of course, that we ensure that the quality of our products does remain high.

In parallel to these considerations, we have done our best to create an environment in which managers are happy to remain with the firm. This is not simply a matter of economic incentives (such as receiving a substantial portion of a fund's incentive fee income).

It is also a combination of providing strong operational and commercial platforms, as well as leveraging to their benefit the tremendous depth of knowledge and ideas flow that they can enjoy within Henderson's notably collegiate atmosphere.

HW: How are you going about developing talented managers and new funds?

SM: We are acutely aware of the fact that a good traditional manager will not always be able to make the philosophical and practical transition to being a successful hedge fund manager. When we identify suitable candidates, they are put through an intense iterative process which enables us to give a coherent shape to whatever strategy they might manage.

Our understanding of the continually evolving demands of the marketplace for different types of strategy is an integral consideration. If we reach the stage at which the potential manager has a sound grasp of what is required and we believe that there will be sufficient demand for the product, then we stress test both strategy and manager by conducting a protracted "dummy run" or simulation.

This provides an opportunity for the manager's approach to be refined and for us to develop a sense of whether the strategy will really work. We do not believe that this simulation is ultimately a substitute for managing "live" money, but we certainly make no attempt to fool ourselves, let alone investors about the strategy's viability. If the "dummy" fails, then there is no product.

In two cases, a "dummy" has not been necessary. Some of our best talent resides amongst "star" long only retail mutual fund managers, but we also have a strong institutional business. This has provided us with the managers and the process on which the UK Equity Market Neutral fund and also (our next launch) the European Equity Market Neutral fund are based.

In both of these cases, we are simply replicating in the form of a hedge fund an existing process that has been used to manage "live" money from within the AMP Group, of which Henderson is a part. In such instances, the iterations and the refinements still occur, but a simulation is unnecessary.

HW: What new products are you launching over the next few weeks?

SM: On 30 November we aim to launch the Henderson European Equity Market Neutral Fund. This is based on a similar multi-strategy approach, coupled with a well-developed risk control framework, to the one already used in the UK Equity Market Neutral Fund.

There will be a different balance between the trades involved (such as more emphasis on capital structure, convertibles and volatility trades, less on simple fundamentals), to reflect the different opportunity set available in Continental Europe. The strategy of the new fund has been applied successfully to "live" money since April of this year.

It is too early to have a clear idea of assets at launch, but we have already had expressions of interest from key players in the major hedge fund centres.

The fund is certainly scaleable up to several hundred millions of dollars, so some of the larger players who have found capacity an issue in the past could quite sensibly take a look at this one.

Copyright Hedgeweek 2003

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