The Hedgeweek Interview: Focusing on Cash Growth: Diane Mix, President and Founder, Horizon Cash Management LLC, Chicago
Horizon Cash Management saw assets under management grow by 27% in the first quarter of this year to USD 2 billion. Diane Mix explains why hedge fund managers are making increased use of Horizon's cash management services.
HW: When was Horizon launched and how much do you have under management?
DM: I launched Horizon in 1991 specifically to manage the cash in institutional funds, providing short-term fixed income management and treasury services. Our primary target market is hedge funds and a large sub-set of that are managed futures funds.
HW: How many hedge fund clients do you have?
DM: We have 125 hedge fund clients, from all over the world. About a quarter of those comprise various types of hedge funds and the rest are managed futures funds. A very small percentage are other institutional and HNW clients.
Almost all of our hedge fund clients are offshore US, and quite a few come from Europe. Individual manager allocations range from our minimum, which is USD 10 million, to around USD 200 million.
HW: What is your rate of growth?
DM: Our growth rate in the past year has been excellent. We ended 2003 with USD 1.5 billion under management and in the first quarter of this year we had 27% growth taking us to the USD 2 billion level. We have grown assets under management by 500% over the past five years.
HW: What factors are driving this rapid rate of growth?
DM: There are actually three factors driving growth. This first is that our clients are growing, and with that, allocations from these clients are growing.
Second, we are getting more new clients and new allocations because of the third reason, which is that interest rates have been so low for such a long time that managers are finally realising that they need to make more on their cash than they would in money market funds.
So the story we've been telling for over 13+ years now, that hedge fund managers should be paying more attention to their cash, is finally getting through.
HW: How much can managers earn by placing their cash with Horizon?
DM: Our net return has been very steady for the entire time we've been in business, right through some very different interest rate cycles.
We have consistently produced returns in excess of between 30 to 50 basis points net over the 90-day Treasury Bill. Right now, 90-day Treasury Bills are one per cent and money market funds are under one per cent, so we are able to deliver returns well in excess of money market fund returns.
HW: What are your benchmarks and how do you construct your portfolio?
DM: Our two benchmarks are the US 90-day Treasury Bill rate and the Institutional Money Market Funds Index published by iMoney.net - interestingly, hedge funds do not benchmark their cash!
In forming our portfolios we start with the issue of liquidity. We talk to the managers and find out what has been their worst case scenario in terms of needing cash. We then establish an amount in the portfolio that is higher than that worst case scenario, that will be the overnight liquidity portion.
Then we talk to them about what short-term instruments they will allow us to purchase. All our clients allow us to use both US Treasuries and US agencies which account for the majority of securities in a client's portfolio.
We also talk to them about maturities - most of our clients allow us to go out to two years with one security. Some of our clients allow us to use US corporate names on a very short term basis.
We then build a portfolio based on these criteria. Most of the time the portfolio looks like a barbell strategy, with some on the very short end and some on the longer end.
That barbell can move up and down in terms of the total maturity, based on what the interest rate cycle is. Right now, we expect that interest rates will rise sooner than later, so we are placed at the short end of the market to take advantage of rising interest rates.
The entire portfolio can be liquidated at any point in time. So that we are able to have a lot of liquidity for our clients, we employ a lot of short term maturities, ranging from a few days to a month, in addition to the overnight liquidity portion. The likelihood of losing any principal on something that short is very remote.
The big difference between us and a money market fund is that a money market fund is restricted by Federal regulations in going out over a year, and they are also restricted as to the amount of concentration they can have in any single security.
We have set our own internal guidelines, where we will not invest more than 5% in any one security. This appears similar to a money market fund, but unlike a money market fund, we are able to put a lot of different securities into a portfolio, enabling us to buy very small blocks of securities at a very good price for our clients
Each client has a specific portfolio, so we have 125 clients and 125 portfolios and no two portfolios are exactly alike.
It is also worth noting that we have built all our portfolio, accounting and risk control systems in-house, it would be very difficult for the big money manager complexes to replicate these bespoke systems and handle individual manager accounts.
HW: Despite these attractive returns, it would appear that most hedge funds do not use cash management services - why is this?
DM: In our conversations over the years with hedge fund managers, it is clear that they are very focused on executing their strategies for the benefit of their clients. In doing so, they may sometimes overlook the fact that their cash too can produce attractive returns for their clients.
It also produces more money for the managers themselves - the more money they make for their clients, the more money they make in management fees - this is a business issue that is often overlooked.
Our research reveals that of those hedge funds that have cash, these cash balances on average represent up to 20% of their total assets, though we have seen wide variations on this percentage
The managers often place this cash with their prime brokers to earn nominal interest - this cash could earn far more placed with us. Unlike prime brokers, we specialise exclusively in managing cash.
HW: How quickly can you return cash to managers?
DM: On the same day. The thing we are best at is liquidity management. We have been through many different catastrophic events such as 9/11 and the LTCM debacle, and we have always had cash available for our clients - we have cash available on a daily basis.
HW: What else do you offer to hedge fund managers?
DM: We offer full treasury management. For example, Horizon interacts daily with managers' clearing firms, prime brokers, custodians and other investment managers to assure that settlement and margin requirements are met promptly and accurately. Additionally, we handle all cash movements from providing escrow and continuous offering interest-bearing holding accounts, to bill payment, redemption wires and other money transfers. Our proprietary systems produce detailed daily statements and reports to help minimise client accounting and reconciliation time.
In essence, we aim to centralise managers' cash balances to maximise their investable cash; save them bank, wire and custody fees; and, reduce their accounting and reconciliation time.
HW: What does the rising interest rate environment mean for managing cash?
DM: We believe that US interest rates are going to rise, but we are a little outside the pack in believing they are not going to rise as quickly as people think. People in the various markets seem to be focusing on factors such US employment figures, but if you look more closely at what the Fed has been watching, it is not just unemployment rather, it is the core Consumer Price Index (CPI) and productivity. Given these are holding up reasonably well, interest rates may not be raised that quickly.
HW: What about rising oil prices?
DM: The Fed has been tracking this spike and what they call "inflation noise" for a long time and said two weeks ago that there is no evidence that any dramatic rise in commodity prices, including oil prices, is going to feed through to the consumer. This is because productivity and company profits in the US are robust enough for companies to absorb these increases and not pass them on to the consumer.
HW: What can we expect to see from Horizon in the next few months?
DM: We are going to continue to hit the market with our story, which will change as interest rates rise. We will try to capitalise on that by showing that our spreads will at the very least remain the same - we anticipate that our spreads will actually get wider.
Internally, we are currently a tight-knit team of 14. We are going to be hiring a few more people because although we are highly automated, we're very hands on with our client base and we are hiring a portfolio assistant, IT person and a compliance officer to better manage growth.
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