Tue, 03/10/2006 - 06:59
Kevin Shames highlights the investment process and thinking that differentiates the Alpha Opportunistic Fund, which provides investors with a full currency hedged entry into South African hedge funds.
HW: What is the background to Alpha Asset Management?
KS: Alpha Asset Management was established in 1997. We started investing in HF in 2001 and are one of South Africa's leading FOHF managers. The Alpha Opportunistic Fund commenced trading in South African Rand in April 2005 and is launching in a USD franchise on 1 August 2006.
HW: Who are your key service providers?
KS: Fund Administrator: FinSource (BVI); Fund Auditor: Deloitte and Touche, Cayman Islands; Custodian: HSBC
HW: Have there been any recent events such as launches or changes/additions to the management team?
KS: The fund is launching a USD class on 1 August 2006
HW: What is your investment process?
KS: We have an extremely thorough due diligence process. Our objective is to differentiate between luck and skill and our entire process is geared towards this objective. We require full position level transparency from the underlying managers. We are able to effectively combine qualitative skill evaluation with quantitative performance evaluation to provide us with a fund that performs like a single strategy hedge fund but has the diversification of a fund of funds.
HW: How has your fund of hedge fund/s performed?
KS: The performance over the last 12 months to end May 2005 has been 19.1% at a standard deviation of 6.0% in USD. This results in a Sharpe Ratio of 2.41.
HW: How many funds/strategies are in your portfolio?
KS: The fund is focused and has only 11 underlying managers. Approximately 70% of the fund is long/short with 30% market neutral.
HW: What makes a manager/strategy special enough for you to select him?
KS: We need to be convinced that the manager has skill. This is difficult to determine in the current environment as we have had a strong bull market for the last 3 years. We therefore focus heavily on the qualitative factors of understanding the people, process and philosophy of the fund and, only once we are satisfied that the skill required is present, do we focus on performance. A fund needs to reduce the risk and increase the return at a fund of funds level in order to be included.
HW: What are your criteria for removing managers from the fund?
KS: Given the full transparency of the underlying funds, we have a competitive advantage due to the data that we receive. We analyse the data to identify areas of style drift and actively monitor the funds. Should a fund drift, we will actively engage with them to determine the reasons. If we are unhappy, we will redeem. We also monitor their weekly risk adjusted returns for early warning signs of fund stress. In addition, we will make minor adjustments within the underlying managers depending on our view of the market at the time. All our managers are on one calendar month's notice.
HW: How many managers do you have on the substitutes bench?
KS: We currently have 3 funds and constantly due diligence more every month.
HW: What events do you expect to see in your sector in the year ahead?
KS: The South African market has traditionally been the domain of local investors. International investors are suddenly becoming aware of the very high levels of alpha generated in South Africa as well as the exciting investment potential the country has leading up to World Cup 2010 (to be hosted in SA). The most significant event we expect will be a substantial increase in international investment interest in South African hedge funds.
HW: How will these changes/future events impact on your own portfolios?
KS: We have geared our portfolios to be able to provide investors with a full currency hedged entry into South African hedge funds. We therefore expect to attract much of this interest into our fund.
HW: What differentiates you from other managers in your sector?
KS: Our robust and unusual due diligence process is our major competitive advantage. We are the only South African fund of hedge funds with a manager that has previously run hedge funds in South Africa. In addition, our full transaction level transparency and detailed risk reporting process gives investors an insight that they are unlikely to have seen before into the funds that they invest in.
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?
KS: The South African market is different to other markets. The investment opportunities here, with massive infrastructural investment as well as huge foreign domestic investment and strong commodity markets, means that our underlying funds do not need to take excessive risks to generate attractive returns. In identifying manager skill, part of that process is the identification of the risk appetite of the manager and each manager is selected to deliver a certain alpha to the fund. As a result, we are not concerned about this at all.
HW: Are investors' expectations moving upwards and how do you deal with this?
KS: Our business has managed to deliver consistently attractive returns over the last 5 years. Our clients' expectations are therefore reasonable and are being met. We expect this to continue in the future.
HW: How do you distribute your products?
KS: Alpha has entered into an exclusive agreement with Emergent Asset Management UK to handle our international distribution.
HW: Are you planning any further launches this year?
KS: This will depend on the demand from investors. Alpha manages 3 different funds of hedge funds in South Africa, and we are launching the Opportunistic fund in USD at this stage. Should there be demand for either currency class (USD or Rand) with regard to any of our other funds in USD, we will open a USD franchise at the appropriate time.
(Kevin Shames was interviewed in August 2006)
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