Fri, 09/11/2007 - 05:58
Chief investment officer Chris Jones outlines Key Asset Management's investment thinking and range of funds of hedge fund investment strategies.
HW: What is the background to your funds?
CJ: Key has been managing funds of hedge funds for more than 17 years, with our inaugural product, Key Hedge, never having had a losing year. We currently manage USD3bn, over 80 per cent of which are institutional assets. I have been investing professionally in hedge funds for more than 13 years, and have a PhD in quantitative trading strategies from the University of Cambridge, where I still lecture on hedge funds.
Our funds of funds range from the multi-strategy Key Hedge to single strategy and niche funds of funds such as Key Global (a 14-year track record) Key Asia (12 years), Key Europe (eight years) and Key Recovery (5 five years). We also manage bespoke portfolios for well-known institutions. Key has more than 30 people with a full-time investment team of 10 with offices in London, New York, Oslo, Stockholm and Geneva.
HW: What is your investment process?
CJ: The investment process consists of strategy allocation and manager selection, run in parallel with risk appraisal. At a strategy analysis level we construct proprietary reports running to 35 pages per month to analyse the drivers of risk and return, asset inflows and opportunity sets for every strategy in which we invest. This allows us to take a forward-looking view on each strategy.
The manger selection process is very deep. We meet with more than 500 managers a year and this, in combination with Key's 17-year store of previous manager analysis, results in an extensive coverage of the investible hedge fund universe. Any fund that passes first-stage analysis is subjected to in-depth and on-site analysis as members of our team build an investment report that is often well in excess of 50 pages and which is not just factual but also contains much interpretation and critical analysis.
We look hard for weak points, potential worst-case scenarios, personal issues as well as a rationale for returns to exist and perpetuate. It is our job to find and evaluate a clearly definable edge. Also, just because some risks are difficult to measure, it doesn't mean they can be ignored, and we spend much time on areas such as operational risk, liquidity risk, valuation risk and financing risk.
The report is then combined with the risk appraisal and combination analysis (with our portfolios) using our in-house risk management systems before any decision is made to approve the fund for investment. Investment decisions are made at our monthly investment decision meetings where the case is pitched by the appropriate portfolio manager and may be challenged by the other portfolio managers and the chief investment officer, who has the right of veto.
HW: How have your funds performed?
CJ: So far in 2007, Key Funds' performance has performed well compared with the relevant indices. Most of our funds attained double-digit returns for 2006 and many of our funds are once again on course for this in 2007.
HW: How many funds are in your portfolio?
CJ: We typically invest with around 20-30 underlying funds in our multi-strategy portfolios, and 15-20 funds in niche portfolios.
HW: What makes a manager special enough for you to select him?
CJ: For us to select a manager, not only must he be able to prove he has an appropriate infrastructure, operational risk control and infrastructure, but he must also have an edge that we can identify, define and understand.
HW: What are your criteria for removing managers from the fund?
CJ: This could be for a range of reasons based on style drift, depletion of edge, assets, infrastructure, turnover or strategy.
HW: How many managers do you have on the substitute's bench?
CJ: For every manager there is a pre-selected alternative.
HW: What events do you expect to see in your sector in the year ahead?
CJ: We expect to see equity long/short to be less of a one-way street, with more return generation on the short side. Similarly, good returns should be made from true long/short credit funds. Finally, we expect to see more returns from the distressed space, although we still believe that equity event-driven has more return to yield.
HW: How will these developments impact upon your own portfolios?
CJ: We are lucky enough to have already a full stable of niche single strategy funds in some cases dating back to 1992. We have a formal strategy allocation process that looks at future drivers or risk, return and opportunity set for each hedge fund strategy. We will prudently rebalance strategy exposure on an ongoing basis in line with our expectations.
HW: What differentiates you from other managers in your sector?
CJ: We have a skilled, extremely risk-literate investment team combined with excellent capacity with the best hedge fund managers; optimal asset size-nimble portfolios but solid infrastructure; leading edge in risk management and downside control; and a long track record that shows evidence of our ability to generate solid upside with a well-controlled downside.
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?
CJ: There is an abundance of funds out there that take higher levels of risk, but these funds are typically closed to new investors or kept deliberately small in terms of asset size. Key's 17 years of hedge fund investing means we have often been long-term investors with otherwise closed funds and so we have access to them. Also, our asset size of USD3bn means we are small enough to give our investors meaningful exposure to funds that have been kept deliberately small.
HW: Are investors' expectations moving upwards, and how do you deal with this?
CJ: Each of our investors is different, but it's fair to say that their expectations are well managed and there is no significant upward trend in their demands - they are cognisant that extra return is a trade-off with increased risk.
HW: Are you planning any further launches this year?
CJ: Key manages hedge funds of funds, but we are very solutions-minded and so we will always work both proactively and reactively to ensure that our investors get the best solution for their needs. There will always be new solutions and, when required, new products.
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