The Hedgeweek Interview: Sandra Manzke, Manager, Matrix MAX Fund: Taking a longer-term view on the investment portfolio

Sandra Manzke, Chairman & CEO of MAXAM Capital Management, outlines the thinking behind the Matrix MAX Fund, aimed at the UK market.

HW: What is the background to your company?

SM: I established MAXAM Capital Management LLC in April 2005. Prior to launching MAXAM, I had founded Tremont Capital Management, Inc in 1984, where until March of 2005 I was the CEO.
Currently, MAXAM employs 18 professionals and there is a team of six senior investment staff that forms the Investment Committee. This team has worked together for over sixteen years, and has a combined 100 years of hedge fund experience. We are assisted by a team of five research analysts.

As of 30 April 2006, MAXAM had assets under management in excess of US USD 1.5 billion and is soft closed to new business.

HW: Who are your key service providers?

SM:
Our Accounting Firm is PriceWaterhouse Coopers LLP, Law Firm (As to Bermuda Law) is Appleby Spurling Hunter, (As to English Law) is Dundas & Wilson LLP, Fund Administrator is  BISYS Fund Services (Ireland) Limited, and Custodian is The Governor and Company of the Bank of Ireland.

HW: Have there been any recent events such as launches or changes/additions to the management team?

SM: In May, we hired both a Chief Financial Officer and a Director of Marketing.

HW: What is your investment process for Matrix MAX?

SM: Matrix MAX is different from most other fund of funds managers in that it not only follows hedge funds but also other investment opportunities where there is the potential to make an absolute return. 

Our investment process is based on an eight-step process for the selection and monitoring of investment managers within the Fund.

First, working with London-based Matrix Money Management, we determined the policy guidelines for the Fund. During this stage we addressed the Portfolio's objectives, the manager criteria, liquidity needs and the target rate of return.

Before deciding on an asset allocation structure, we analyze the investment and economic cycle to assess the market conditions.  At this point, we develop an economic outlook, assess any political risks and talk directly with investment managers about opportunities in the market.

We then screen all managers utilizing our own proprietary database of managers as well as several outside databases to determine a short list of managers. This is the first step in our identification process. 

The strength of MAXAM and the Matrix MAX Fund, is in our bottom-up manager identification process. MAXAM professionals have been evaluating investment managers and constructing multi-manager portfolios since the mid-1970s.  Only senior members of the team will evaluate and recommend managers.  This evaluation includes both qualitative and quantitative criteria. 
   
In addition, MAXAM has created a method of assessing the risk of each fund and applies a numerical rating. There are currently more than 40 different risk factors which include individual manager, economic and financial risk factors. This is a proprietary model developed by MAXAM to quantify the risk associated with each fund. These factors play a major role in portfolio construction.

We then apply a top-down analysis to determine the manager sector allocation which is dependent upon our economic overview, as well as a risk review of the Matrix MAX Fund.

The portfolio construction is performed combining all of the above steps. We choose the managers for the program and then run historical pro formas that determine how the managers complement each other, and whether the final mix meets Matrix MAX's objectives and policy guidelines.

On a monthly basis, MAXAM professionals monitor performance results of the Matrix MAX Fund and its underlying managers. We are continuously scrutinizing the Portfolio to ensure that we have conformed to the policy guidelines and investment manager guidelines.  These reviews include the economic and political risks of the managers and the portfolio as a whole, liquidity analysis of the portfolio, updated conversations and due diligence of the managers and ongoing reviews of the managers' reports including audits, updated documents and other manager supplied information.

HW: How has your fund of hedge fund/s performed?

SM: The Matrix MAX Fund launched on the 3rd April 2006 and in its first month of performance returned an estimated +2.45%.

The Matrix MAX Fund's hypothetical performance based on the actual returns of the underlying funds within the launch portfolio and their respective initial weightings back-tested from 30 April 2003 to 30 April 2006 was 31.43%, annualized, net of fees.

HW: How many funds/strategies are in your portfolio?

SM: The Matrix MAX Fund was launched with twelve underlying managers in six sectors: emerging markets, equity market neutral, event driven, fixed income arbitrage, long/short equity and multi-strategy. 

HW: Are you linked to any hedge fund indices or have you launched products linked to hedge fund indices or do you have plans to do so? If so, please provide details.

SM: The Matrix MAX Fund is not linked to any hedge fund index, although MAXAM does have a series of funds designed to track the Eurekahedge Hedge Fund Indices in Asia, Japan and the Emerging Markets.

HW: What makes a manager/strategy special enough for you to select him?

SM: We believe that manager selection is tantamount to a successful fund of funds.  Hedge fund managers are some of the brightest people in the investment arena today.  The important thing is to find the best of the best, and that is where our experience of over 20 years of interviewing and assessing managers really comes into play. 

When evaluating hedge funds we place a tremendous emphasis on the business, not just the manager and strategy.  We attempt to build significant relationships with exceptional talent that have surrounded themselves with strong businesses.

HW: What are your criteria for removing managers from the fund/s?

SM:
We perform intensive up front research before we hire a manager to avoid having too much turnover in our fund of funds, which can cause a drag on performance as you wait for redemptions to be paid and work through the hold back provisions and gates.  When we invest with a manager we want do so for the long term. 

That being said, we continuously monitor our portfolios to ensure that our managers are adhering to the controls they outlined to us when we hired them.  A quality manager may not perform well when his strategy is out of favour, but will come back stronger when that strategy turns around.  We want to make sure that we have not gotten out on the bottom and missed the return upswing.  However, if we find any operational risks that begin to appear or any inconsistencies on pricing that begin to surface, we will not hesitate to remove a manager.  Again, if your upfront work has been properly completed, there should not be any unpleasant surprises down the line. We believe in having patience and conviction in manager selection.

HW: How many managers do you have on the substitutes bench?

SM: Our research team is continuously finding new and extremely talented managers.  Each month, new managers are approved and then evaluated for their fit within our Matrix MAX Fund.  Typically, we have 5-10 managers who are approved and appropriate for the Fund ready to be added to the portfolio.  It is a matter of where we see the coming opportunities that determines what new managers or styles will be added in.    

HW: What events do you expect to see in your sector in the year ahead?


SM:
I believe there will be a lot of opportunities for fund of fund managers in the coming year.  There is a great deal of liquidity in the market which should continue to bode well for the markets on a worldwide basis.  At the same time, there are the growing problems of high energy prices and demand from China and India for raw commodities.  Predictions for a continued intense hurricane season in the US and other weather related catastrophes will create a lot of market dislocations.  We expect a lot of volatility in the coming months that will make for a challenging market environment.

HW: How will these changes/future events impact on your own portfolios?

SM: We have favoured energy related strategies and focused on growth opportunities in emerging markets.  We also like event driven strategies where deep value and activist activities 'unlock' value in companies.  We think these strategies will continue to do well despite any market downturn.  Activism has heated up in Europe and Japan, and we expect to capture returns in these areas, as well.  

HW: What differentiates you from other managers in your sector?

SM: MAXAM's key employees have a longer history of investing in hedge funds.  Our senior staff are responsible for all manager research and investment decisions.  We also take a longer-term view of our investment portfolio and do not change managers as much as our competitors.  We concentrate on doing a great deal of due diligence before investing with a manager.  Once a manager has our confidence we have patience and conviction with our choices.  We believe that frequent repositioning of a portfolio is indicative of a lack of understanding of the risks in the strategy and lack of confidence in choices.  Frequent changes to the manager line-up is costly and disruptive.  

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?

SM: Risk is an interesting subject for without risk there is no return.  The higher the risk over longer time periods, the greater is the return.  Since the internet crash in 2000, many equity managers have kept low equity exposures fearful of losing money.  Fund of fund providers were also asked to provide low risk products.  In a low interest rate environment, these products were then leveraged, increasing the risk.  As interest rates have increased leveraging is not only costly, but also increasingly risky. Investors have become more comfortable with hedge funds and as a result are seeking a slightly improved return without leveraging.  There are managers who are taking the proper amount of risk, but too many fund of fund providers are still fearful of risk to take a chance with these managers.

We have devised a new and innovative approach to risk.  We have determined more than 40 risk factors which are attributable to hedge fund managers and their strategies. We apply these ratings to our managers and it is a forward looking rather than a backward looking model.  We then model the overall risk in our fund of funds.  The key to success in any strategy is to understand the risk factors and control them through diversification and exposure. 

HW: Are investors' expectations moving upwards and how do you deal with this?

SM: I do not think investors expectations have either increased or decreased.  Investors are generally happy with consistent increases of a premium over a risk free rate of return, i.e., short-term government bonds.  As interest rates increase, investors will look for more return above these rates.  Managing expectations and meeting clients' goals is very important to us.  It is so easy to focus on short-term results, yet it is impossible to produce positive results every month.  We are not traders but investors and our portfolios will reflect a longer-term outlook.  Education and timely communication with the clients should improve the current knee jerk reaction that is systemic in the financial community.

HW: How do you distribute Matrix MAX?

SM: The Matrix MAX Fund is promoted and distributed by Matrix Money Management in London.

HW: Are you planning any further launches this year?

SM: Currently, we have no intention of launching another fund in the UK retail market.

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