The Hedgeweek Interview: Developing bespoke solutions for the Middle East: Eric N. Swats, CFA, Chief Investment Officer, Rasmala Investments
Eric Swats outlines the strategy underlying the FoHF launched by Rasmala Investments earlier this year, focusing on managers in well-defined niches.<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
HW: What is the background to the company?
RI: Rasmala was founded in 1999, with the establishment of the Rasmala Fund LP, a private equity fund dedicated to investing in the Middle Eastern financial services sector. In late 2002, Rasmala developed into 'Rasmala Investments' an independent asset management and investment advisory company focused on delivering best-in-class global investment products and services to Middle Eastern clients. In addition to our asset management offering, we also source and structure innovative and high quality direct investment opportunities in GCC and Arab markets for our clients.
Rasmala shareholders include a top German Bank, one of the largest Saudi banks, and several prominent Saudi & UAE investors.
We have USD 350 million in terms of assets under management.
HW: What are your products?
RI: At Rasmala Investments, we structure bespoke solutions for our clients depending upon their particular investment objective. We have found that clients tent to gravitate to either LIBOR Plus or Globally Diversified investment strategies.
Our flagship products are as follows:
- a LIBOR Plus Portfolio. This is aimed at conservative investors and bank treasuries who are looking to achieve returns of 2% to 3% above money market rates with a minimal amount of incremental risk. The strategy entails allocations to money market, fixed income, floating rate notes in addition to certain types of low volatility and diversified hedge funds.
- a Global Diversified Portfolio. This is aimed at more investors who are seeking returns in the high single digits to low double digits and are willing to deal with higher volatilities. This strategy entails allocations to global equities, emerging equities, high yield and emerging debt, real estate strategies and medium risk hedge fund strategies. The strategy may entail the use of leverage.
- Rasmala Hedge Fund Strategies, Ltd. This is aimed at uhnwi's and institutions that are looking to invest in a relatively focused portfolio of hedge funds. The strategy entails investing in 15 to 20 underlying hedge fund managers who are of institutional quality and who have terms that are not geared towards the more retail market. The strategy targets absolute returns in the region of USD LIBOR +4% to 6% with a risk target of 4% to 7%.
HW: Have you had any recent launches?
RI: We have recently launched the Rasmala Hedge Fund Strategies, Ltd.
HW: What is your investment process?
RI: Our Investment approach combines a top-down review of the expected future conditions for each of the hedge fund strategies, and a bottom-up appraisal of the managers in those strategies. There are 5 key stages to the process:
- The top down strategy view is a fundamental appraisal of the likely returns for a hedge fund strategy given the current market conditions and competition (crowding) that managers face in the strategy.
- An ongoing assessment of the funds within each individual hedge fund strategy is made, and managers are rated and selected according to various criteria such as the investment process, the quality of the team, risk management, expected alpha, etc.
- An initial proposed selection of funds is made given the criteria chosen (capacity, liquidity, etc.) from the funds (as outlined in 2 above) in the strategies deemed to be attractive (as outlined in 1 above).
- Having selected the initial proposed portfolio, a multi-factor forecast risk model is run with two main purposes - to check the compliance of the portfolio with the objectives and benchmarks set at the portfolio level, and to ensure that each fund selected is positioned correctly within the portfolio to assist in meeting those objectives.
- Where necessary, amendments are made to the portfolio, and 3 and 4 above are re-run to ensure that the portfolio is :
- comprised of strategies that are expected to perform,
- contains managers of high quality,
- constructed in accordance with the chosen criteria; and that
- the portfolio objectives have been addressed.
HW: How frequently do you reallocate the portfolio?
RI: In general, portfolio allocations are designed to be strategic in nature and encompass forward-looking assessments of market conditions. Backward-looking correlation and regression studies are used as a reference and a forward-looking overlay is what determines the strategic portfolio allocations. These allocations are generally revisited on a quarterly basis. Unforeseen events may lead to more frequent adjustments but the intention is not to make frequent changes to the portfolio.
HW: What are your key reasons for hiring/firing managers?
RI: At Rasmala Investments, we place a large emphasis on the business risk inherent in investing with managers. As such, personnel changes (particularly with respect to "key men"), developments in assets under management, assessments of operational infrastructure and issues related to the good standing of the managers we invest in are key factors in our decisions to retain or terminate managers.
HW: How many managers do you have on the substitutes' bench?
RI: We aim to have around 10 managers on the substitutes' bench, and there are close to 100 managers whom we monitor closely.
HW: What trends do you foresee this year?
RI: Markets are in the midst of an interest rate tightening cycle and we would expect that the shake out from this will persist over the next few months. Further out, we see opportunities in the European and Asian markets and this has been reflected in our current portfolio positioning.
HW: Is there evidence that some managers are now switching strategies to take advantage of related opportunities? What are your thought s on this?
RI: In the search for higher returns in a generally slow market, there is some evidence of this.
We retain managers based on a proven track record and process in a certain strategy/market. As such, we would generally view this negatively and would flag it as potential style drift. For example, a proven <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />US equity manager is not necessarily a quality European equity manager and any drifts into a different space would be a red flag. Certain funds are characterised as multi-strategy and actively allocate their risk budgets to where they see the best opportunity set. Such managers would be expected to have several teams of specialists managing the various exposures within the portfolio and can be expected to be more opportunistic within their general strategy. With such managers, we need to be very comfortable that they have teams with the requisite skill sets and that the portfolio construction is overseen by a senior portfolio manager who makes the ultimate decisions as to where capital is invested. This is important as such managers would have several portfolio managers competing for capital.
HW: Some funds of funds have complained that managers are not taking enough risks in the current environment - what are your views on this and on risk in general?
RI: Risk management is a key part of any investment process. A key measure of a manager's skill is in gauging the environment and increasing/decreasing risk accordingly. We look at risk on both a manager level and on a portfolio level. Some strategies are inherently more risky than others and the portfolio allocation process is all about blending the various risks within the portfolio to achieve the risk and return targets.
HW: What makes a hedge fund manager special enough for you to select him?
RI: Besides impeccable professional and personal profile/s, we look for managers that are in strategies and spaces that are less crowded and who operate in well-defined niches.
HW: Are investors' expectations moving upwards and how do you deal with this?
RI: Returns in global markets, with very few exceptions, have been on a downward trajectory for the best part of a year now. Low bond yields and flat equity markets have made it a frustrating environment for investors. So the answer is, coming from a low base, investor expectations are for higher returns going forward. Within our hedge fund portfolio, we are attempting to address this by offering clients a more focused and less overly diversified portfolio than many of our competitors. We are also cutting out as many layers of fees as possible.
HW: How do you distribute your product/s?
RI: With offices in Dubai, Amman and London we are able to reach out to our core client base of uhnwi's and institutions effectively. The partners of the firm are actively involved in the marketing process and our shareholders serve as effective referral agents. We find this formula to be ideal for the markets we are active in.
For the more retail market, it is our view that forging alliances with local banks in the various markets are the most effective way to distribute investment products. Such a configuration would combine our operational platform and investment process with a recognisable brand name in the respective local markets.
HW: Are you planning any further launches this year?
RI: We are looking for ways to cater to the growing demand for Islamic products and are planning to extend our globally diversified investment approach to Islamic products.
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