The Hedgeweek Interview: Tim Gascoigne, Principal Portfolio Manager, HSBC European Absolute Limited
Tim Gascoigne has nine years experience in the hedge funds industry and joined HRIL in 1996 after spending three years as an equity researcher and member of the strategy team with Mercury Asset Management.
He is the Head of Portfolio Management and a member of HSBC Republic Investments Limited's (HRIL) investment committee. He is responsible for the management of the funds of hedge funds and discretionary mandates that are administered from the London office. He is IIMR accredited and earned the Chartered Financial Analyst (CFA) designation in 1997. Tim has an honours degree in monetary economics from the London School of Economics.
HW: What is HRIL's role?
TG: HRIL's role is to identify investment strategies within which there is a rationale for expected satisfactory absolute returns over time, combined with tolerable levels of volatility. Intelligent, professionally implemented, actively managed investment strategies are the stepping stones to accessing absolute returns. The key to success lies in the completeness of research and analysis.
HW: What is the background to your fund?
TG: HSBC European Absolute Limited (HEAL) is a Guernsey registered, closed-ended investment company. The inception date was 20 April 2001, with Euro and Sterling share classes. Following a re-classification of the company on 30 June 2005, a currency hedge was introduced as the sterling share class. The AUM as at 31 August 2005 was EUR 32.1m.
HW: Have there been any recent events such as launches or changes/additions to the management team?
TG: Paul Dunning retired from the business in June 2005 and was replaced by Barbara Rupf Bee. Prior to her appointment as CEO, Barbara was global head of sales and business development for HSBC's Alternative Investments Group. She has worked closely with the senior management team, which remains unchanged, since 2003.
Barbara joined HSBC Republic Investments Limited (HRIL) from Union Bancaire Privée, Zurich, where she had been in charge of the products and sales department since November 2002. Before that, she had spent nine years with the Julius Baer Group. In 1999, Barbara was appointed CEO of creInvest AG, a fund of hedge funds initiated by Julius Baer and listed on the Swiss Exchange. Prior to 1993, Barbara worked for Nomura Securities and J.P. Morgan.
HW: What is your investment process?
TG: HRIL believes in peer group analysis in similar strategies. This ensures that allocations are made to what are considered to be the best funds in each class or strategy. What HRIL does, therefore, is conduct specific strategy searches e.g. European equities or US convertible arbitrage. Members of the team conduct these searches periodically, even if HRIL has exposures to these strategies already, to make sure any good opportunities are not being missed.
Typically, HRIL's analysts use the material supplied by managers to filter to a short list on performance statistics (risk-adjusted returns, regression analysis amongst others) but also assets under management and investment style factors.
The more qualitative issues are covered in an on-site due diligence meeting. On the basis of both of these, HRIL selects those considered to be the strongest all-round investments.
Each manager is rated by the research committee at the completion of the primary due diligence. This does not mean that any investment will be made at this stage. Research projects are suggested by and conducted under my supervision. Strategy searches, quantitative analysis and the conclusions of due diligence visits are the basis for the suggestion of a new investment.
Multi-manager portfolios are constructed first of all with regard to the investment objectives of the portfolio, which are usually described in their simplest form by a range of Absolute Return Assumptions including target return and a range of expected volatilities. These lead to the construction of internal risk controls, for example liquidity, maximum percentage in any one manager, maximum percentage in any one strategy, leverage limits, etc. to reflect the investment objectives.
Then, in conjunction with the client/the mandate concerned, HRIL decides on a range of appropriate strategies to be included in the portfolio, which could be used to meet the targets. The strategies should both be appropriate in terms of the actual strategy employed (e.g. a technology long/ short equity fund is not appropriate for an arbitrage fund of funds) and in terms of return targets and risk tolerance. The performance characteristics and expectations of suitable holdings in combination should be in-line with these. HRIL does sometimes "bar-bell" one or more high return/high risk investments with other less risky investments to achieve the desired characteristics at the portfolio level.
Based on the long-term expected returns, volatility and correlations of the different strategies, on both historic performance and expectations going forward, HRIL comes up with a strategy allocation for the portfolio. This is overlaid with both market views where it is believed a particular strategy class is likely to outperform in the medium term, but also with pragmatism to ensure there is real style diversification within the portfolio, even though an optimisation on historic numbers may give a different result.
HW: How has your fund performed?
TG: The year-to-date performance (EUR) is 7.6%, with 11.03% for 2004.The portfolio has realised an annualised return of 5.7% since inception, and historic volatility of 3.9%. Total return is 27.4% since inception. The Sharpe ratio, with a risk free rate of 2.87%, is 0.73.
HW: How many funds are in your portfolio?
TG: There were 19 funds in the portfolio as at 31 August 2005.
HW: What makes a manager special enough for you to select him?
TG: Not all the points below show minimum requirements, but they will show the core points on which HRIL focuses when choosing a manager.
Good idea generation
Excellent risk management process evidenced
Entrepreneurial business skill present
Stable company/personnel background, including low historical staff turnover.
Suitable number of staff with strong backgrounds and experiences for the roles they fill
Understand motivations of the partners, their personal aims and ambitions to ensure they are aligned with that of investors
Strong staff compensation process - does this attract and retain the best staff and does it mean their interests are aligned with that of investors?
Clear corporate structure
Like to see ownership of management company by staff and personal investment in own fund
Joint venture, partner or seed money, under what terms are they involved and how does this affect their business and ability to manage money
Are they regulated/registered with a recognised and respected regulatory body? Are they in good standing with their regulators and is there any history of relevant litigation?
Suitable insurance cover.
Assets under Management
Focus on assets under management, how they have developed and how the company is planning to manage growth in the future
Dislike funds that are too big to be nimble in adjusting exposures or paying redemptions
Dislike funds that are too small to implement strategy effectively. Critical levels vary from strategy to strategy
Breakdown of clients is important: by number and by type of client gives a good indication of how stable the investor base is.
Clear investment objectives allow monitoring of how the fund is performing versus our expectations
Look at long-term return expectations and any benchmarks applicable (not generally applicable for alternative investment strategies)
Look at shorter-term volatility and drawdowns, which investors should tolerate, in the short term. Also understand when the strategy will do well and when badly.
Understand in detail the investment process and how it has evolved. This helps to know how it might fit into a portfolio of other managers
Is the process disciplined and does it make sense?
Suitable coverage, infrastructure, counterparties and trade allocations.
Sensible and thorough monitoring and limitations in terms of exposures at position level, portfolio level, leverage, counterparties, financing, prospectus constraints
A rigorous process that can stand up in severe market conditions.
Understand limits in terms of exposures to currency, asset, duration, geography, concentration and liquidity. This helps ensure that the fund fits the desired profile.
These need to be in line with HRIL's own portfolio investment objectives. Knowledge of this assists monitoring going forward.
Administration and Back-Office
Suitable choice of administrator, prime broker/ custodian, auditor.
Adequate personnel and systems to ensure correct and timely trade settlement and valuation.
Like to see administrators that price the portfolio. Where the manager has to price certain positions, they should have a disciplined process independent from the portfolio manager.
Suitable to manage and implement strategy and keep investors informed.
Client Servicing/ Transparency
Like principals to be available for frequent and regular telephone calls and due diligence visits frequent client reporting
Do not always think that full transparency is appropriate especially with a large fund with large illiquid holdings.
Positive references from investors and previous colleagues
Occasional use of background checking if comfort needed (new and independent firms).
Do the performance numbers reflect the manager's style?
Do the performance numbers reflect the manager's investment objectives?
How do they compare to others in the same field? Peer group analysis
Return, volatility (upside or downside), drawdown, consistency
Correlation to other assets
Correlation to indices/markets
Regression relative to other relevant data series.
HW: What are your criteria for removing managers from the fund?
TG: The circumstances in which a manager may be redeemed include:
Bad absolute performance
Returns inexplicably exceed expectations from the asset class
Returns diverge from peer group without reason
The returns diverge from targets suggesting that they are investing in other products
The asset class goes out of favour
Assets under management fall or rise markedly
New strategies inconsistent with expectations
Administration related problems - NAVs calculated too slowly etc.
Changes in prospectus.
HW: How many managers do you have on the substitutes bench?
TG: There are 6 specific substitute managers that we believe could easily be added to the portfolio, should for any reason we believe a manager or strategy allocation change be required. In addition to this, we monitor a large universe of hedge funds supported by some 33 analysts in 4 locations continuing to present new ideas.
HW: What events do you expect to see in your sector in the year ahead?
TG: Since the beginning of the year, market participants have found and acted upon reasonable valuations in European markets resulting in positive momentum. This has helped managers within the equity long/short strategy that have held a net long position in their portfolios.
At the same time, despite the supply side concerns overhanging the world economy in the form of the high price of crude the stock picking environment has remained accommodative. Equity market neutral strategies that rely primarily on valuation factors have found the momentum of recent months difficult to negotiate.
Credit related strategies have benefited from spread tightening as companies continue to generate and hold significant cash on their balance sheets. The volatility experienced in credit markets between March and May tested a number of managers in the space, however the environment has now returned to a normalised and more supportive environment.
Event driven strategies focusing in European are finding more and more opportunities as merger and acquisition activity has increased and balance sheet restructuring continues.
Going forward, given the uplift in European market valuations we see markets trading sideways until the end of the year. Good stockpickers should be able to generate performance in this environment.
Event driven managers will continue to find opportunities while the market neutral strategy should benefit from a lower prevalence of momentum in markets.
For credit related strategies HRIL holds a neutral outlook predicated on the belief that credit spreads have little room to tighten further, making return generation more difficult.
HW: How will these changes/future events impact on your own portfolios?
TG: HEAL's philosophy is predominantly bottom up therefore the above-mentioned events are not expected to markedly impact the portfolio.
HW: What differentiates you from other managers in your sector?
TG: The HSBC Private Bank and HSBC Group networks provide HRIL with great reach worldwide in sourcing interesting investment ideas. They also provide all of the benefits of a globally integrated bank with a very strong balance sheet, including the ability to offer tailored fund and product structures.
Advising on some USD 25 billion (as at 30 June 2005) of client assets invested in alternative investments, HSBC Private Bank is one of the largest investors in the hedge fund world. This ensures that HRIL is a first "port of call" for hedge funds seeking to raise capital, as well as being in a preferential position to invest in existing funds.
Also, through a leading internal hedge fund brokerage business in Geneva, HRIL has the ability to source paper from hedge funds with strong track records that may have been closed for a considerable period of team. Many portfolios include holdings of such funds. It is not unusual to find that 10% to 15% of portfolio holdings have been sourced through this free internal secondary market.
HRIL's team of analysts has vast experience in the hedge fund sector and has long and established links with the key industry players. This allows the group to stay abreast of any industry developments, including new manager launches, fund re-openings and manager changes.
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?
TG: We have had no cause to complain regarding the risk level of the underlying managers in the portfolio. HRIL monitors its underlying managers on a regular basis to ensure that risk levels are within expected levels. On occasion risk levels have fallen below and indeed risen above those expected levels, however, there have been no occasions where this has not been accompanied with an explanation from the manager. Clearly increasing risk has been a challenge for hedge fund managers in recent years however, whilst they operate within our expected levels we are able to use portfolio construction techniques to ensure that the volatility in the portfolio reaches its target level.
HW: Are investors' expectations moving upwards and how do you deal with this?
TG: In general, HRIL believes that our investors' expectations are moving in line with our own expectations.
HW: Are you planning any further launches this year?
TG: Yes, there is a further share issue planned for HEAL in November / December 2005.
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