Thu, 26/01/2006 - 06:17
Fred Siegrist provides a compelling insight into the thinking that underpins the investment processes at RMF, the asset management division of Man Group plc.
RMF is a leading provider of alternative investment solutions in Europe, specialising in hedge funds, leveraged finance and convertible bonds. RMF is headquartered in Pfäffikon/SZ, Switzerland, and also has offices in London, New York and the Bahamas. RMF currently manages over USD 19.4 billion (as at 30 September 2005) of assets, with approximately USD 16.7 billion (as at 30 September 2005) invested in fund of hedge fund products.
RMF began as a hedge fund manager in 1992 with a mandate from one of the world's most prestigious market neutral hedge funds. Since then it has focused on servicing investors by providing a range of comprehensive products and solutions. RMF is part of Man Investments, the asset management division of Man Group plc, a FTSE 100 company.
This detailed interview with Fred Siegrist was conducted shortly after RMF announced (in December 2005) that it had made a significant investment in a US-focused equity long short fund managed by Thomas Wynn of New York-based AM Investment Partners.
HW: What is the background to RMF's partnership with AM Investment Partners?
FS: RMF is invested in AM and has a long relationship with its key players. We know the principals, Adam Stern and Mark Friedman, very well.
HW: What makes a manager special enough for RMF to select him?
FS: RMF conducts a very thorough due diligence of all managers in which we consider investing, looking at whether:
-the investment manager has the necessary skill set and infrastructure to successfully manage the investment strategy;
-the investment strategy is fundamentally sound and is suitable to provide the desired risk/return characteristics; and
-the investment product fulfils all our economic, legal, and structural requirements.
When seeding a fund, we also consider whether the manager has the ability to attract other investors and develop their business into a commercially sound enterprise for the longer term.
In the case of AM Investment Partners, we were dealing with a known player in the market which is demonstrably capable of attracting other investors. Their investment strategy is promising especially when one considers the pool of skills and knowledge in the partnership. All of this is supported by state-of-the-art infrastructure, affording us a high degree of confidence in the operational management of the partnership and its ability to deliver on its investment strategy.
HW: What is Thomas Wynn's track record?
FS: Thomas Wynn has 20 years of industry experience. He was a portfolio manager at MacKay Shields from 1995 - 2004, with responsibility for USD 2.1 billion in institutional equity assets. Prior to that he spent a decade at Fiduciary Trust where he managed over USD 500 million in convertible bonds.
This combination of convertible bond and equity investments leaves him well qualified to manage the AM platform as AM is in the convertible arbitrage space.
HW: Why invest in a US-focused fund at this time?
FS: RMF tends to seed funds on an opportunistic basis, rather than with a view to building capability in a given markets as market tend to go through short-term trends while we are looking to secure superior risk-adjusted performance over the medium- to longer-term. Managers with the potential of AM Investment Partners are rare and we are fortunate to have secured this early capacity. That being said, we believe that the sell-off in convertible bond markets has created a lot of upside potential for the strategy while lacklustre gains by US equities in 2005 have also created value opportunities for skill-based managers.
HW: How has the AM Investment W Fund performed?
FS: The fund has performed in line with its sector and peer group.
HW: How many funds are in the RMF portfolio?
FS: About 280, though this figure include double counting of approximately 40 MACs
HW: How have RMF's portfolios performed this year?
FS: RMF has a wide range of products/portfolios with different risk/return patterns.
Our highly diversified portfolios (over 40 managers) have clearly outperformed the investable indices and are in the top quartile relative to their peers. Our latest estimates show that RMF Absolute Return Strategies 1 returned 6.6 per cent in 2005 while RMF Four Season Strategies returned 6.75 per cent.
HW: What are your criteria for removing managers from your portfolio?
FS: As mentioned previously, RMF implements a stringent and continuous due-diligence process. We consider quantitative criteria such as returns, levels of risk and correlation to other investments in the portfolio and qualitative criteria such as sustainability of returns, risk management process, operational capabilities and other issues. We also pay close attention for any signs of style drift, which would suggest that the manager is deviating from their strategy and are concerned when we see an increasing correlation between funds within a portfolio.
These factors are all given a score and that score is regularly re-evaluated. If a manager's score falls too low in any given area, we would place them on a watch list and liaise closely with them to resolve the issue or, if necessary, redeem if the issue proves to be irresolvable.
If, however, we found evidence of fraud or malfeasance at a manager we would, in almost all circumstances, redeem automatically.
HW: How many managers do you have on the substitutes bench?
FS: If you mean managers on our watch-list then it's fewer than 5 per cent. Being on a watch list does not necessarily imply that we are planning to redeem, but that some event has triggered closer supervision, in which case we will hold a continuous dialogue with the manager in question, including on-site visits, until the situation has been resolved and we can return them to a normal rating.
HW: What sectors/strategies do you expect to perform well in 2006?
FS: Disequilibrium in global markets has kept many investors on the side lines in the last couple of years, stifling financial markets. As a result, we have seen limited volatility in equity markets and limited opportunities in most strategies over the past two years.
While it is impossible to predict exactly when this will turn around, we can see a number of signs that, despite the synchronised growth of the world economy, risks are increasing over time as liquidity tightens, creating market imbalances which must eventually correct. This will increase volatility and provide a much wider range of investment opportunities to hedge fund managers.
That would directly benefit global macro managers, who are traditionally the first to benefit from emerging trends, followed by managed futures, which also generate their best returns when markets have a clear direction. Relative value strategies will also profit from increasing volatility, though returns will remain flat until markets pick up.
HW: How will these changes/future events impact on your own portfolios at RMF?
FS: Portfolios will be reallocated into this direction.
HW: What differentiates you from other FoHF managers?
FS: RMF is a highly experienced alternative investment provider with over USD 19 billion in assets under management, mainly in hedge funds. The strength of our business model can be summarised as:
- Concentration on institutional business: Institutional clients are the fastest growing segment of the hedge fund universe and RMF has the experience, product base and expertise to respond to these emerging customers.
- Disciplined investment process: RMF has succeeded in developing a structured investment model that can be systematically scaled to manage increasing investment volumes. This robust process is ISO-certified.
- Diverse product range: RMF has a history of product innovation and development which stretches back to the launch of the first fund of fund product in 1993 and continues to match investor needs.
- Extensive quantitative and risk management capabilities
- First class reporting and client services
- Strong research & development: This helps us to identify new strategies, products, quantitative tools and methodologies to keep us at the forefront of the industry.
- Investment solutions: RMF has extensive experience in providing investors with solution oriented products making use of the expertise of Man Investments.
- Global footprint: Having investment professionals and hedge fund analysts in four key financial centres provides RMF with unique insights into local markets.
- The support of the Man Group plc, a FTSE 100-listed company, gives RMF the financial strength to invest in research and development disciplines in order to maintain their position at the forefront of the industry.
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?
FS: Volatility in the hedge fund industry has dropped slightly in recent years. For example, the HFRI Fund of Fund Index had an annualised volatility of 4.4 per cent between 1 January 2000 and 30 November 2005, down from 6.0 per cent for the decade ended 1 January 2000. That reflects the increasing institutional participation in hedge funds, as this category of investor tends to be more conservative than wealthy private clients. As a result, funds of hedge funds are frequently reintroducing risk in their portfolio, usually at the asset allocation level, by applying leverage.
HW: In the current low volatility environment, are you prepared to invest in some of the more exotic strategies being launched in search of alpha? If so, please detail.
FS: Innovation is a cornerstone of RMF's business strategy. Continuous education and industry research is a major component of our success in staying ahead of the innovation curve to solve client needs. Our presence in a broad spectrum of complimentary areas of alternatives investments (hedge funds, leveraged finance, convertible bonds, and new alternatives) provides information sharing, synergies and exposure to new trends.
This is reflected in some of the products launched in the past three years, such as RMF Commodity Strategies, RMF Asian Opportunities, RMF Alternative Risk Transfer and RMF Healthcare Opportunities. It can also be seen in our active incubation programme, which has seen us secure capacity in a diverse array of new funds and strategies. For example, we recently invested in an emissions fund, CCC Carbon Fund.
We will continue to access these opportunities when and if they become available, as long as the managers and strategies meet our due diligence and portfolio criteria.
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