The Hedgeweek Interview: Tushar Patel, Director of Alternative Investments and Investment Manager for FoHF businesses at GAIM Advisors Ltd, London.
Tushar Patel outlines the strategic thinking that is driving the development of GAIM Advisors' growing range of index-based funds of hedge funds.
HW: What is the background to GAIM Advisors?
TP: GAIM Advisors was established in 1991 as an investment manager and started advising on hedge funds in 1994. Since 2000, GAIM Advisors has been owned by Integrated Asset Management plc, an AIM listed company on the London Stock Exchange, and is regulated by FSA. GAIM Advisors manages both index-based and active fund of hedge funds
I was hired in 2000 specifically to develop and set up GAIM Advisors' fund of hedge funds offering. Our range of index-based funds of hedge funds now includes GAIM Hedge Fund, which is a multi-strategy hedge fund; GAIM Market Neutral; and GAIM Long Short Equity.
HW: What was the thinking behind the development of these index based funds of hedge funds?
TP: I started formulating my ideas on the index based approach way back in 1997 and they arose from the question: "How does one allocate to hedge funds given that a key problem with funds of hedge funds is the lack of transparency in both the investment process and the underlying factors that impact on performance?"
We wanted to offer something different at GAIM Advisors, from the other fund of hedge funds available at the time - something meeting the following requirements: firstly, we wanted to offer a fund of hedge funds providing a core multi strategy exposure to hedge funds as an asset / skill class and to capture the return and risk characteristics of the leading hedge funds and hedge fund strategies; secondly, to offer an investment process that was both systematic and transparent in its approach to investment allocation; and thirdly, to invest in funds selected from a predefined investment universe, ie a published hedge fund index, which investors could access independently of the investment manager. The approach that fitted these requirements was an index based approach.
So you see that we addressed this question at the time in a unique and innovative way by creating an index-based approach and it also coincided with the launch and development of indices and databases such as HFR, MAR Hedge, Van Hedge and Tass tracking hedge funds performance in the 1990s
Our choice of hedge fund index allows investors to log on to the index provider's website and check any underlying component of the index and therefore the investment universe is transparent. In addition, the hedge fund index itself has a number of filtering processes before underlying funds are selected.
HW: On which specific strategies did you first focus?
TP: The obvious natural choice was to start by offering broad exposure to the hedge funds asset / skill class using largely equity-based strategies: global macro, market neutral, long/short and event driven.
These were obviously the four largest equity-based strategies (although some trade futures too) among hedge funds. They were also among the best performing hedge fund strategies between 1994-2004 over a number of market cycles.
HW: Why did you limit yourself to these four strategies?
TP: We would say launching with these equity-based strategies was a logical choice as we initially wanted to offer investors the opportunity to diversify from holding long only equities or long only products into hedge funds. Hence we initially chose not to invest in managed futures, fixed income or convertible arbitrage but instead focused on the leading equity-based strategies.
HW: How did you develop the first product?
TP: Developing a multi-strategy product giving investors exposure to those four equity-based strategies was not as easy to do as it might sound. We had to develop a systematic and robust investment process that identified the strategies and then perform simulations to get to an allocation model that would meet investors' return and risk requirements for hedge funds whilst also achieving the original objectives we had set ourselves of simplicity and transparency. What we found was that a fairly equally weighted allocation to each strategy produced the results we wanted.
HW: What are the complexities of selecting the underlying funds?
TP: There are many complexities in hedge fund investing and our products succeed in simplifying through the development of investment guidelines that address all the various challenges including redemptions, liquidity, and accessibility to the underlying funds.
HW: What happens when a selected fund is already at capacity?
TP: It is true that funds in which we wish to allocate may have capacity constraints and some of the managers will not accept further allocations, even from existing investors in the fund. We have a set of rules in our investment guidelines that deal with such situations. If a manager is closed, we will go to the second largest and third largest and so on. The idea is to capture the core return and risk characteristics and create diversified exposure to these strategies with at least some of the leading managers, if not all of them.
HW: When did you launch the first product?
TP: The GAIM Hedge Fund was launched in July 2001 as an index-based fund of hedge funds. It has performed in line with the index as a whole and it now has USD 150 million in assets under management.
Almost 50% of the underlying funds in this product's portfolio are technically closed to new money.
HW: What was your next launch?
TP: Last year we launched the GAIM Market Neutral Fund, a fund of hedge fund that provides exposure to equity market neutral and convertible arbitrage strategies. This was in line with our business plan to launch strategy specific fund of hedge funds, which adopt the same investment methodology as our multi-strategy fund of hedge fund.
HW: What is thinking behind these rules?
TP: The rules set out in our investment guidelines ensure a consistency of approach to investment allocation across all our index based funds.
HW: What other launches are you planning?
TP: We are in the process of launching a third fund of hedge funds, GAIM Long Short, which gives investors exposure to a number of leading global long short managers.
It will have similar investing rules to our other products, i.e. investing in up to 40 larger managers with a track record of at least two years.
In the future we plan to launch an event driven fund of hedge funds, giving investors access to both risk arbitrage and distressed securities strategies.
All these funds are built in a very similar manner. They give investors exposure to some of the leading and largest funds in the world, are well diversified and are clearly defined in their return and risk characteristics, allowing investors, particularly institutions, much greater transparency and ease of access into the hedge funds asset class.
This latter point is reflected by the profile of our investor base, which is 90% institutional. In 2003/2004, it is estimated that some 30% of new institutional money has gone into index-based funds and we intend to develop products in line with this growing demand.
HW: What are the advantages of this approach to you as a manager?
TP: In essence, with their diversified risk profiles, the index-based funds provide a favourable foundation to write structured products, like capital protected notes and leveraged notes, linked to the performance of our fund of hedge funds.
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