The Hedgeweek Interview: Arne Schmidt,Managing Partner and CIO, Systematic Absolute Return AG: Focusing on the environment

Arne Schmidt outlines the thinking and investment processes that underpin Zurich-based Systematic Absolute Return's new fund of hedge funds, SAR Environmental Fund, and unveils plans to launch a leveraged version by April 2008.

HW: What is the background to your fund/company?

AS: Systematic Absolute Return was founded by Michael Ahrndt and myself in 2001 to manage a single manager hedge fund. In 2003, the company entered the fund of funds space and has been managing Asset Finance investments. We have had a healthy growth, expanding to 8 team members and managing USD150 million.

HW: Who are your key service providers?

AS: We have an in-house lawyer to council on legal matters for the firm, as well as coordinate our legal due diligence processes. KPMG has audited our funds annually with Citco acting as Custodian. Our fund administrator is IFCE Fund Services.

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

AS: Yes, we have launched four single strategy FoF's, the strategies being: Asset Based Lending, Asset Based Investing, Structured Finance and PIPEs.

HW: What is your investment process?

AS: We take a top-down bottom-up approach to our investment process, and have a strong focus on operational due diligence, which is crucial for successfully managing investments in these universes. We spend between 70 and 200 hours on each fund in order to bring it to the approved stage. All investment decisions are taken by the investment committee.

HW: How has your fund of hedge funds performed?

AS: Pro Forma, the fund has an unleveraged annualized performance of 24.91% since November 2006. As 70% of the funds in our 70 fund-universe have a track record less than 12 months, it is impossible to build performance based on those figures. We target an achievable 15% net return to investors with limited correlation to traditional markets.

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

AS: The fund is set to launch with 10 underlying funds, however we expect this number to grow to around 15 by Q2.

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?

AS: No, there is no Environmental Hedge Fund Index available. Our targeted return is 15% net for investors with and annualized standard deviation of less than 7.5%.

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

AS: The manager needs to offer:
a) A solid infrastructure
b) Experienced team with relevant expertise
c) A well articulated strategy that is sustainable and provides uncorrelated return drivers
d) Good research skills and deal sourcing
e) Active risk management with strict guidelines
f) Top and independent service providers, good legal structure and terms
g) Transparency and due diligence support

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

AS: Underperformance, overcapitalized, not transparent and supportive with our ongoing due diligence, key person leaving, big redemptions, lack of focus, insufficient risk management, change in service providers, liquidity concerns, delays in finalizing account statements.

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

AS: Our investment universe is rather small with about 70 hedge funds in the environmental space, but we are seeing new managers every week. Our portfolio will start with about 10 funds and we have another 10 in the final stages of our due diligence process.

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

AS: Significantly more environmental hedge funds will enter the field and the return will become less correlated to the general market. Investor demand will grow beyond supply.

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

AS: We will have to be fast in identifying new managers, conducting and finalizing our requisite due
diligence and reserving capacity with them.

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

AS: We are one of the first in the industry to offer an environmental fund of hedge funds to investors. Our product differentiates itself in that each of our investments is truly green or environmental and is actively hedged, unlike many of the socially responsible investment (SRI) products that are out there.

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?

AS: Most of our managers are most of the time net long on the environment, meaning that their appetite for risk is quite healthy. Our return target of 15% net of fees reflects this. The sector is booming currently and we are aware of the risk appetite of our managers. We are actively applying a risk overlay on our portfolio to allow some protection in case of increased downside volatility.

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

AS: Not only investors' expectations are moving upwards, but ours as well. We have set ourselves very ambitions goals as well and are continuously trying to improve our investment and due diligence processes, along with our product offerings, our investor communications and reporting standards.

HW: How do you distribute your products?

AS: First of all, we have a strong network of existing and potential investors along with a few distribution agreements with third parties. We have joined forces with a great team in Hong Kong which is distributing our products in the region. Our investor base is very diversified and international. It is however our goal to raise more assets via structured products that provide investors with an additional benefit i.e. tax advantage or capital guarantee.

HW: Are you planning any further launches this year?

AS: It is our intention to launch a 1:1 leveraged product of the SAR Environmental Fund by 1 April 2008.



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