Fri, 11/08/2006 - 07:00
Mehraj Mattoo discusses the investor-focused approach that is shaping the evolution of Commerzbank's funds of hedge funds.
Mehraj Mattoo is the Global Head of Alternative Investment Strategies (AIS) group at Commerzbank. He joined Commerzbank in March 2006 from Dresdner Kleinwort Wasserstein (DrKW) where he was Managing Director and Global Head of the Alternative Investments Group since April 2001. Prior to DrKW, he was the Global co-head of Fund Derivatives Group at BNP Paribas where he pioneered the use of structured products on alternative investments especially hedge funds. Mehraj has also worked for CIBC Financial Products as an Executive Director and NatWest Markets as a Director and Head of Structured Products. Mehraj holds an MBA and PhD (Financial Economics) from the University of London and is also a recipient of Diploma of Imperial College (DIC). He is the author of Structured Derivatives published by Financial Times, London.
HW: What is the background to Commerzbank's FoHFs?
MM: Comas Strategy Fund Limited was incorporated under the laws of the Cayman Islands on August 21, 2002 and commenced operations in early 2004. The company issued its Class B shares (Gateway) on 10/1/2004. The fund acts a feeder fund in a master feeder structure. The current AUM are USD 522,000,000. The assets are distributed between Class A USD 500,000,000 and Class B (Gateway) USD 22,000,000. The Head of Portfolio Management is Bill Bonde and Michael Kane is a portfolio manager. The Head of Operations and Due Diligence is Michael Mangravite, and I am the Global Head of Alternative Investment Strategies (AIS).
Comas Strategy Fund I Limited was incorporated under the laws of the Cayman Islands on August 21, 2002, and issued Class A shares on December 1, 2002. The company issued its Class B shares (Elinas) on 6/1/2005. The fund is a feeder fund in a master-feeder structure. The current AUM are USD 175,000,000. The assets are distributed between Class A USD 152,000,000 and Class B (Elinas) USD 23,000,000.The Head of Portfolio Management is Bill Bonde and Michael Kane is a portfolio manager.
Finally, Commerzbank Global Alternatives Limited (CGAL) was incorporated September 1, 1999, and commenced operations on January 5, 2000. The Head of Portfolio Management is Bill Bonde and Michael Kane is a portfolio manager who has been managing our products for over 4 years. The fund is set up as a master fund, and the current AUM are USD 38,000,000.
HW: Who are your service providers?
MM: The Auditor for CSF Ltd, CSFI, and CGAL is PricewaterhouseCoopers. The U.S. legal counsel for CSFI and CSF Ltd is Fried Frank, Harris, Shriver & Jacobson LLP. The European Legal adviser for CSFI and CSF Ltd is Linklaters. Cayman Island legal counsel for CSF Ltd and CSFI is Maples and Calder. The Legal counsel for CGAL is Ogier& Le Masurier. The Fund Administrator for CSF I and CSF Ltd is HSBC, the administrator for CGAL is R&H Fund Services (Jersey) Limited.
HW: How and where do you distribute the funds? What is your current and targeted client base?
MM: Historically, the focus of the group has been Germany especially the retail fund-linked certificates market. However, the group has done business in Europe, Asia and the Middle East. Late last year, Commerzbank Corporates and Markets (CBCM), the investment banking division of Commerzbank, decided to make alternative investment strategies a strategic business of the bank. I was brought in to run the AIS group globally. The group focus is now primarily institutional with strong track record in retail and global. The key target clients are pension funds, insurance companies, foundations, family offices, regional banks and private banks in Europe, Asia and the Middle East.
HW: What is your investment process?
MM: The portfolio is constructed using an allocation of capital to a number of primarily market neutral investment strategies. It is a 'top down' investment approach that seeks enhanced returns from an active, tactical weighting to arbitrage and relative value investment strategies. Allocations are altered in accordance with the macroeconomic environment. In addition, allocations to systematic futures and global macro style strategies will be used to further diversify the portfolio. It is recognized that investors in our Funds are likely to already have portfolio allocations to traditional asset classes such as equities and bonds. Thus, investors desire returns that are non-correlated to these assets. One of the prime investment objectives of our Funds is to maintain minimal correlation to traditional asset classes.
HW: How do you generate ideas for your funds?
MM: The allocation strategy is focused upon using a macro-economic driven approach to determine where the most attractive risk-adjusted investment returns are expected to be available over the next 6 to 18 months. Macro-economic data, the current and forward interest rate environment, currency markets and political developments, particularly in the G8 countries are closely monitored so as to assess which strategies may most benefit in the months ahead. The senior bank lending/credit cycle is closely monitored as changes in credit conditions have a material impact on many of the arbitrage and event-driven strategies.
Once the top-down investment strategy allocation has been decided, cash is allocated to specialist managers. The objective of the individual manager selection is to identify hedge fund managers who are leaders in their respective disciplines. Criteria such as diverse portfolio construction, historical performance, risk management, organizational structure and operations, investment discipline, capital base and management depth are all important factors that are examined before a manager can be considered for possible investment allocation. In addition, an individual manager's performance is also statistically reviewed for sensitivity to overall portfolio correlation and specific strategy correlation, and to determine whether addition or deletion of this manager will alter the Fund's overall correlation to traditional asset classes
HW: What is your approach to managing risk?
MM: The group manages risk on a constant basis. We monitor our underlying hedge fund managers' performance on a stand alone basis, versus their peers and versus the markets. We also generate a number of quantitative reports that addresses performance attribution and correlation with in the fund/s and to the markets. These reports are then reviewed by dedicated risk analyst and portfolio managers on a weekly basis. Our close communication with our managers allow us to understand their thinking in the current markets and how they have constructed their portfolio to express their view and capture alpha. When a manager has performed better or worse than anticipated, we immediately focus on their portfolio construction through analytics and meetings to determine if further action is warrant. This can include a reduction in the fund's allocation of capital or, in certain cases, full redemption.
HW: How/against what do you benchmark the performance of your funds?
MM: We benchmark against global major market indices, bond indices and hedge fund indices including Tremont and HFR.
HW: Has your performance been as per budget and expectations? Do you expect your performance or style to change going forward?
MM: All of our products have delivered consistent risk adjusted returns in line with target investor expectations.
HW: What opportunities are you looking at right now?
MM: We are in the middle of launching sector focused products in global macro, fixed income and Asia. We will continue to develop and market products that we believe will deliver value in the context of broad macro economic environment to our target investors.
HW: What events do you expect to see in your sector in the year ahead?
MM: The classical fund of funds model is falling out of favour with investors especially institutional investors. The net inflow into the fund of funds industry has been dropping significantly over the past five years. We believe this provides us with an opportunity to move in and deliver the products and services that the traditional fund of funds industry has generally failed to do. Our model gives investors everything that a traditional fund of funds does plus a lot more. These include, a flexible and open architecture platform giving investors access to wide variety of alternative asset classes including managed accounts, hedge funds and private equity, an institutional due diligence and risk management platform and a culture of innovation through an appropriate mix of skills and technology - both IT and analytics.
AIS will market several niche FoFs products, both existing funds and new funds, that will become our core offerings to institutions that require specific solutions for their portfolio needs. AIS product offerings will move from a 'one size fits all', single product to a dynamic solution provider that can craft specialized products for its clients' needs.
HW: How will these changes/future events impact on your own portfolio?
MM: Our product offering will become more solutions driven. What that will mean is our portfolios will better reflect investor expectations and investment parameters. Our products will increasingly become more innovative as we better combine human skills with technology.
HW: What differentiates you from other managers in your sector?
MM: We are a platform that aims to give investors access to a variety of underlying alternative investment opportunities including hedge funds. Unlike many fund of hedge funds we are not a mono product offering even though we have a number of flagship funds that have long and excellent track record. Ours will be a total solutions platform giving investors access to quality hedge funds through managed accounts, fund of hedge funds, tailored portfolios and structured products. We pay more than lip service to the use of technology. We use cutting edge technology in portfolio construction and risk management/due diligence. We work closely with leading centres of academic excellence to fund research and gain access to new ideas. We are going to have a dedicated portfolio analytics team that will work closely with due diligence and portfolio management teams to ensure the robustness of our portfolios.
HW: Do you have any plans for similar/other product launches in the near future?
We are in the middle of launching three new products focussed on global opportunities - especially opportunities in the commodities sector, fixed income and emerging Asia.
(Mehraj Mattoo was interviewed on 9 June 2006)
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