Fri, 10/03/2006 - 07:00
Virginia Reynolds Parker outlines the strategy and thinking that drives Parker Global Strategies in its search for investment opportunities around the world.
Virginia Reynolds Parker, CFA founded Parker Global Strategies in 1995 to specialize in providing customized solutions for hedge fund of fund investments for institutional clients. Previously, she was Managing Director and Director of Research for Ferrell Capital Management. Virginia graduated from Duke University in 1980 with an AB in Economics and Political Science and from the OPM Program at Harvard Business School in 2003.
HW: What is the background to Parker Global Strategies?
VRP: I founded Parker Global Strategies 10 years ago to specialize in custom designing and managing funds of hedge funds for institutional clients. Over the past decade, we have designed and managed 23 funds of hedge funds totaling over USD 1.7 billion in assets. Our customized funds of hedge funds have included global multi-strategy, global hedged equity, Japanese Equity Long/Short, FX, CTA, US focused, to name a few. We launched our first FX fund in 1997. We launched our first global multi-strategy fund in May 1998.
HW: Have there been any recent events such as launches or changes/additions to the management team?
VRP: We launched our Japanese Equity Long/Short Fund in May 2005... We have added John Maxwell to our team to help spearhead future product development.
HW: What is your investment process?
VRP: PGS has an Investment Committee which is responsible for the portfolio management our funds of hedge funds. This team is responsible for developing our top down view on where we believe the best opportunities will be for the year ahead for hedge fund strategies. For those strategies we deem very attractive, we will overweight. For those strategies we deem neutral, we have an average weighting. For those strategies we deem less attractive, we underweight or remove from the portfolios entirely. For example, we removed convertible arbitrage from our funds of hedge funds starting in early 2004, and we were out completely by the end of 2004.
We have a bottom up process for manager selection. PGS's Research team sources and reviews managers. Strong managers are proposed for our 'Short List,' which are managers approved for investment. At any given time we may have between 95 and 120 managers on our Short List. The Investment Committee selects the managers for our funds of hedge funds. The Investment Committee is also responsible for rebalancing and for terminating managers.
We also have a Portfolio Committee composed of the Investment Committee and our portfolio analysts who are responsible for reporting on what each hedge fund manager to whom we allocate is doing in their portfolio. PGS receives position level information from approximately 50% of our managers. Almost all of the rest provide detailed risk reports summarizing exposures. The Portfolio Committee looks for materials changes in risk exposures and for style drift in addition to discussing performance. The analysts have been a valuable resource for our Investment Committee.
Finally, PGS has a Risk Management team which helps us monitor risk at the individual hedge fund level and also at the aggregate portfolio level. In addition to proprietary analytics that we have developed, we have recently started using RiskData which we believe is well suited for Fund of Funds to monitor various market risk exposures in portfolios.
HW: How have your funds performed?
VRP: We have had strong performance over the years and have performed particularly well across our various fund of funds during 2005. We attribute our strong performance to getting our important themes right and having some very strong managers in our portfolios. Our themes this year have included energy and natural resources, Japanese equity long short, India, and emerging markets. We decided early in the year to decrease allocations to spread and credit related strategies. We have had strong managers in each of themes and also several of our US and European equity long/short managers have had an outstanding year. Our global multi-strategy fund was up 13.2% for 2005, our global hedged equity is up 18.7% for 2005, and our Japanese equity long/short, launched in May 2005, is up over 23% for the year.
HW: How many funds are in your portfolios?
VRP: Our fund of funds range from 35+ hedge funds to 12 hedge funds, depending upon the focus.
HW: What makes a manager special enough for you to select him?
VRP: The manager has to have performed well in the past, or we have no reason to believe the manager will perform well in the future. We must understand the strategy and the manager's edge. We must have confidence in the strategy. The manager must be open with us and willing to discuss where the manager has made and lost money. The manager's story must be consistent with our due diligence work. We must feel comfortable that if things go wrong, the manager will be there. This on is one of the most important points, because for every hedge fund manager who is in business for more than a few years, something will go wrong. We have a preference for talented managers with smaller AUMs in niche strategies. Our analysis shows that this category can provide some of the best performance over time.
HW: What are your criteria for removing managers from your funds?
VRP: Circumstances which cause us to review a manager include: underperformance, underperformance against their peer group, structural changes in the strategy where we question the viability going forward, style drift, departure of personnel key to the investment process, complacency of the hedge fund manager, to name a few. We try to minimize portfolio turnover, but markets, opportunities, and managers do change over time. It is important to be constantly considering how to improve performance, and also looking for the next great undiscovered talent. Over the past several decades we have seen many examples of fading stars.
HW: How many managers do you have on the substitute's bench?
VRP: It varies according to strategy. Anywhere from 3 to 5.
HW: What events do you expect to see in your sector in the year ahead?
VRP: The risks we see are that the US Fed may over tighten, which could cause a sell off in global equity markets. But we would deem such a sell off as a short term correction. We believe the global economy looks healthy. We are concerned about the markets should the bird flu become a pandemic, and especially if it mutates and begins spreading among people. Terrorism is always a risk. But one must be tactical if there is a major event, rather than positioning for something which may not happen. The key to all successful investing is diversification across risk factors. There is always downside risk, and downside performance. But seeking value after sell offs usually delivers strong returns over time.
HW: How will these changes/future events impact on your own portfolios?
VRP: It is hard for us to gauge the risk of bird flu. If it happens, we would likely increase allocations to macro strategies and US sovereign debt.
HW: What differentiates you from other managers in your sector?
VRP: We are nimble and our team has many years of experience allocating to hedge funds. We avoid 'check the box' due diligence, which has allowed us to identify and allocate to some star hedge funds early in their careers. We really search the globe for the best talent, which has helped us outperform many US centric fund of funds. The best opportunities today are outside the US. We have seen many market cycles and lived through many events. Our experience has strengthened our judgment of what to do when.
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?
VRP: Risk taking varies depending upon the manager. Many of us have been taking risk this year and delivering returns. We have a few managers that have been light on risk, but they are in some challenging areas. We'd rather have them take less risk when they are less confident, but as fund of fund managers we must make sure we have managers in our portfolios that are taking risk and delivering returns.
HW: Are investors' expectations moving upwards and how do you deal with this?
VRP: We believe many investors' expectations have been too high for hedge funds. Targeting Libor+5% seems reasonable. Some years will be better; others worse. Hedge funds should been seen as a method of consistent returns over time with less downside than long only strategies. We try to be upfront with clients. High returns require taking sector or regional bets and getting the manager selection right, or taking a well diversified fund of funds and applying leverage. Even with a low expected volatility fund of funds, we do not believe that leverage should exceed 2-2.5 5imw, depending upon the investor's risk appetite.
HW: Are you planning any further launches this year?
VRP: Other funds of funds that we have been preparing this year include an energy and natural resources fund, a green fund of hedge funds, and a green private equity fund of funds. 'Green' funds are focused on environmentally sound investing. We believe that green investing will become an important theme over the next decade. We have found some exciting managers and strategies and are pleased to be early in this space.
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