Fri, 29/02/2008 - 05:59
In this detailed interview with Hedgeweek, Miguel Abadi outlines the factors that are driving performance across Gems Advisors' USD 6 billion (AuM) family of multi-manager funds.
HW: What is the background to your company?
MA: Gems was established in 1987 and now manages nearly USD 6 billion for clients in over 40 countries around the world. Some of us, like Dr David Goldfarb and me, have been with Gems from the beginning. Our accumulated experience and expertise are probably one of Gems' greatest sources of 'edge'. For example, 2007 was one of Gems' best years yet (returns ranged from over 17% for our Low Volatility flagship to nearly 120% for Gems' 'best ideas' Perennial portfolio). We have navigated numerous episodes of market turmoil before, as well as engaging in a continuous adaptation to the sometimes dramatic changes in the fortunes of markets and different hedge fund strategies.
We started Gems with the goal of preserving investors' capital while delivering sustained long term growth and returns with low correlation to the markets. Hedge funds were simply (and for all their subsequent evolution, remain) the best means to express our investment views and to capture opportunities to achieve our objective. We were supported initially by people whom we knew personally or from whom our degrees of separation were minimal. It was therefore imperative for us to maintain an independence of view, to avoid conflicts of interest and to respect the paramountcy of clients' interests. We also wished to foster a company culture that empowers and brings the best out in our people. In this, we have been vindicated by very high staff continuity over the years.
With 55 staff (the majority of whom are concerned with investment), the Gems group now has a presence in London, Tel Aviv, the Bahamas, Geneva, Sao Paolo, Buenos Aires and Singapore. With historically less emphasis on Marketing than on Investment, most of our nearly USD 6 billion AuM is from institutional and corporate sources. We try to approach these investors in the same attentive spirit in which we dealt with our early private clientele. In fact, our original clients have stayed and grown with us and we continue to welcome investors from family offices and independent asset managers.
HW: Who are your key service providers?
MA: We have two umbrella structures in which our funds reside. One is domiciled in Luxembourg. Citco acts as the administrator, PwC does the audit and Brown Brothers Harriman acts as banker and custodian.
The other is Cayman-domiciled; Citco is the administrator for this, while HSBC act as banker and custodian and PwC are the auditors.
Our lawyers include Eversheds in London, Elvinger, Hoss & Prussen in Luxembourg and Walkers in Cayman.
HW: Have there been any recent events such as launches or changes/additions to the management team?
MA: Gems Perennial, launched in 2006 with returns of 22% and nearly 120% in 2007, is now being opened to outside investors. We are also excited by the 2007 launch of the Gems Asia Multi-Strategy fund. This is designed to provide a great deal of the upside that can be offered by this fast-growing region. At the same time, in keeping with our essentially conservative approach to investment, it is designed to avoid most of the drawdowns that have been endemic to this part of the world.
Gems is a veritable 'United Nations', with a great diversity of cultural, educational and professional backgrounds. We are continually augmenting our skill base by recruiting excellent people. In recent years, Gems' investment strengths and its reputation as a progressive employer has attracted the participation of some highly experienced people such as former Director of Hedge Funds at Henderson Global Investors, Stuart MacDonald, who joined us to work with Michel Ghatan on the Marketing side .
HW: What is your investment process?
MA: The Gems approach takes into account both top down strategic and bottom up views, but with a leavening of portfolio construction considerations in between the two. Analysis of Gems' sources of return would show that for over 20 years, we have proven our ability to pick the best managers in addition to acting successfully on our larger strategic calls.
We have very powerful quantitative tools, but are not in any sense quantitatively driven. Gems has developed a highly disciplined methodology. This is designed to enable investment decisions to be rigorously conceived and executed, while at the same time allowing scope for a certain measure of inventiveness, if not outright creativity. Our very detailed management process (comprising research, risk and investment processes) combines some quite innovative in-house research tools with a proactive approach to risk management issues, which are as important to us as the search for returns.
We have excellent industry and manager contacts and we are aware of new launches as well as news flow about existing managers. Primary manager research is followed by an operational assessment in which we look at issues ranging from managers' backgrounds and organisational integrity to the sustainability of their businesses. As work on a manager progresses, it becomes increasingly in-depth before being subjected to the ultimate scrutiny of our Investment Advisory Committee. A decision is made on more than just the virtues of the manager and the prospects for whatever strategy is represented. We need to determine the effects that adding a new manager (or augmenting an existing holding) will have upon the rest of the portfolio. Sizing and timing then come into our consideration.
It can take anything up to one year from initial contact until an initial investment is made. The process of getting to know a manager never stops and continues after the first investment has been made. Equally, at a portfolio level, we continually monitor the effects of persisting with a particular holding or focus upon a particular strategy and our conservative approach means that we pay as much attention to risks as possible returns.
HW: How have your fund strategies performed?
MA: Within the Gems range, four currently stand out. Some are available in structured or leveraged form, but the returns quoted are for the unlevered versions.
Our Low Volatility flagship strategy has steadily delivered LIBOR+4% returns with notably low volatility since 1995.
Gems Recovery was up over 35% net in US Dollars in 2007. This is also a low volatility strategy based on credit related, event driven and value strategies. It has been able to make money in markets both in recovery and decline.
Another conservative strategy, Gems Multi-Strategy, was up 21% net in 2007. Like Recovery, it was one of Gems' award winners at the 2007 European Funds of Hedge Funds Awards.
Gems Perennial, which is a concentrated 'best ideas' portfolio managed by the same people who are involved in the other Gems portfolios, was up nearly 120% net last year.
HW: How many funds/strategies are in your portfolio?
MA: This varies according to each portfolio's mandate. In Gems Low Volatility, we have nearly 60 holdings spread across 10 strategies; in Gems Recovery, we have fewer than 30 spread across 6.
HW: Have you launched products linked to hedge fund indices, or do you have plans to do so?
MA: No. None at this stage, although there are opportunities being thrown up by the emergence of new ways of gaining exposure to hedge funds in this way.
HW: What makes a manager/strategy special enough for you to select him?
MA: Ultimately, the decision to invest needs to fit the Gems view on markets, particular strategies and managers. The manager must also have passed muster at every stage of the detailed research and due diligence process that is conducted by the Gems research, risk, quantitative and operational due diligence teams.
Our longevity in the industry has provided us with a high level of access to some of the most respected managers in the industry, many of whom are closed. As an investor of choice for many managers, when an opportunity arises to access capacity in a premier league manager, one who is already well known to us as a consistent and solidly based generator of returns, this can be attractive.
Overall, our 'sweet spot' is a manager with a sustainable ability to generate alpha, whose antecedents feature a strong and relevant track record and whose organisation is well based. When this is combined with a strategic opportunity that can be exploited coherently by the manager (especially when the trade is not overcrowded), then we may move. Equally, we have often supported managers who have been sufficiently adaptable to migrate the application of skills developed in one type of strategy to another. For example, from M&A to distressed.
We will not very often (though we sometimes make an exception) support a new launch, except where the manager has a good pedigree and is well supported. Where you will see no compromise from Gems is in our distaste for excessive manager leverage or organisational flaws that may be identified by our Operational Due Diligence team, such as where fund pricing routines are controlled by the manager, a blurring of the lines exists between portfolio management and in-house compliance responsibilities, anomalous internal charging structures or anything else that might expose our investors to managers' business failure or even fraud.
HW: What are your criteria for removing managers from the funds?
MA: We take the sell side of the equation very seriously. Portfolios are formally reviewed on a variety of levels each week and rebalanced monthly. At its simplest, a redemption occurs when the original rationale for a manager's inclusion in a portfolio no longer holds. Redemptions also happen when we see underperformance that is either inexplicable (unusual outperformance can feature here, too) or which is evidently due to a secular shift of the opportunity set away from the strategy pursued by the manager.
For example, if there are few M&A deals, an M&A specialist who cannot demonstrate an ability to apply its skills to other trades may lose our support.
The process of gaining familiarity with a manager is one that continues beyond the point at which an initial investment has been made. Our continuing research and monitoring work can therefore prompt a redemption because of other factors, such as style drift or the departure of key people.
HW: How many managers do you have on the substitutes bench?
MA: We certainly take a close look at hundreds of managers each year and monitor many more. There are always good prospective managers and interesting strategies in the pipeline, so the Gems 'first line' substitutes' bench varies in size and composition.
HW: What events do you expect to see in your sector in the year ahead?
MA: Flows into hedge funds will continue apace, as their admissibility as an asset class increases in various parts of the world, such as Asian countries and Southern Europe, as well as because of their growing acceptance by different types of investor.
It seems that there will be an economic downturn. The question is whether it will be a full blown recession or just a slowdown. This is already reflected in the widening of credit spreads and in stock market declines. Much of the corporate sector will face refinancing problems and the process of deleveraging will cause a divestment in and the creation of value opportunities around otherwise good companies.
The Fed's aggressive monetary stance combined with investors' fears of a recession and increased market volatility will create some excellent opportunities for those hedge fund managers who are equipped to exploit them.
HW: How will these changes/future events impact on your own portfolios?
MA: There are tremendous opportunities emerging in the recovery/ value/ distressed space. Gems' portfolios will nevertheless continue to be managed conservatively, regardless of market conditions, in order to preserve investors' capital.
We have come through periods of economic and market uncertainty (1987, 1994, 1998 and so on) in the past and our portfolios are well positioned to achieve this once again. Equally, once the current transitional phase has worked itself through, we are confident that Gems will be able to deliver strong returns with low correlation to the markets and minimal downside risk.
HW: What differentiates you from other managers in your sector?
MA: We do not dwell excessively on this issue. Perhaps the truest distinction resides in the way in which Gems conceives of its work. We are asset managers who happen to use investment in hedge funds in order to express our views and to capture opportunities, rather than funds of hedge funds managers as such.
Similarly, we know that many of our competitors have built commercially successful enterprises around Marketing and investor connections. We have built Gems around Investment expertise and our deep contact with hedge fund managers.
It is almost certainly the case that (in the context of being able to accommodate this growth comfortably) we are the fastest growing of the fully independent funds of hedge funds players of any significant size in the industry. This suggests that our internal points of emphasis are the right ones.
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?
MA: Gems has always avoided strategies and managers where aggressive leverage is involved. If many of our managers have deemed it necessary to reduce their gross and net exposures, we can only respect their prudence. If you hate drawdowns, then taking risk off the table in turbulent times is half the battle. It is certainly one of the reasons that Gems has so often been able to weather the various storms of the last 20 years so well.
HW: Are investors' expectations moving upwards and how do you deal with this?
MA: Investors almost invariably take a dim view of losing money and give less credit to making it. Our investors generally appreciate that Gems' guiding principles are conservative. This has not changed over time.
HW: How do you distribute your products?
MA: Gems has offices and representation in various countries, through which we coordinate asset gathering from different types of investor. While we place great emphasis on the quality of our investor service and have top calibre Marketing staff, this has not been our main focus in the past. Instead, our best efforts have been devoted to building our investment strengths.
HW: Are you planning any further launches this year?
MA: We are always looking forward to determine where the best opportunities will arise. In this vein, for example, we launched the Gems Recovery strategy in the wake of 9/11, anticipating the subsequent halcyon period for distressed and other cyclical recovery plays. Interestingly, Gems Recovery has demonstrably been able to make money not only in markets that are going through a recovery phase, but also (as in the last year) in markets that are at the other end of the cycle.
In 2007, we launched the Gems Multi-Strategy Asia fund, which is designed to capture much of the region's upside potential without suffering the drawdowns that are often associated with markets there (in this, it has so far succeeded).
We are also exploring ways (some of which are already embodied in Gems Perennial, started in 2006 and up nearly 120% in 2007) in which to adapt some of our strategies to the many opportunities that have emerged to generate returns from trades that might traditionally have been employed essentially for defensive purposes.
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