The Hedgeweek Interview: Ari Bergmann, Penso Capital Markets: "Managers are taking too much risk"
Ari Bergmann, managing principal at Penso Capital Markets, says the firm gains access to best of breed managers by bartering its expertise in risk management services for capacity in their funds.
HW: What is the background to your company?
AB: Penso has been in business since 1997. Its heritage comes from my career at Bankers Trust in the 1990s, where I ran the derivatives desk and the risk merchant bank and created the transaction development group.
HW: What are Penso's key businesses?
AB: Penso has a risk management business through which we service other hedge funds and large asset managers with systemic risk and derivatives overlays, mainly through the implementation of custom hedging strategies in managed accounts.
The firm also has an asset management business with total assets of more than USD400m in two fund of funds products with a six-year track record, two hybrid products with a 22-month record made up 75 per cent of funds of funds and 25 per cent special situations and strategic hedging as well as the Global Crisis Fund, a single-manager product launched on February 1.
HW: Who are your key service providers?
AB: The firm's accounting is carried out by Rothstein Kass and Ernst & Young. Our legal council is Kleinberg, Kaplan, Wolff, & Cohen in New York and Priestleys, Attorneys-at-Law in the Cayman Islands. Our fund administrator is SS&C.
HW: Have there been any recent launches?
AB: We launched our Global Crisis Fund, based on our global crisis strategy, on February 1. The strategy focuses on trades with high expected payouts in volatile markets and is designed to have a significant negative correlation to the market and most hedge fund strategies while still producing a respectable positive return in stable market environments.
We use our expertise in derivatives and risk management to structure trades around asymmetric opportunities in mispriced systemic risks across global capital markets and asset classes.
HW: What is your investment process?
AB: For our fund of funds and hybrid products we have the ability to access best of breed managers by bartering our expertise for capacity in their funds. Many of these top managers know us very well, have participated together with Penso in various investment opportunities and use our risk management services. In return, we get capacity in these very difficult to access funds, some of which have been hard-closed for some time.
Our manager selection process follows a few basic principles. We only invest in managers with a long proven track record, whose strategies involve the trading of only liquid vehicles, are easy to evaluate, mark their positions to market, and who are proven to produce real alpha through different market environments.
The special opportunities and strategic hedging portion of the hybrid strategy focuses on high conviction investments with a high risk/reward profile as well as systemic risk hedging across asset classes.
HW: How many funds and strategies are in your portfolio?
AB: We have 28 underlying funds following six strategies
HW: What makes a manager or strategy special enough for selection?
AB: We focus on high quality, risk-adjusted return streams. All returns are not created equal. We believe that a risk-adjusted return on capital approach preserves capital and should produce consistent returns over the long term. Further, we believe that the best way to manage risk is not to take unnecessary risks in the first place. We invest in people, not historical track records.
We focus on investing in the people that we believe are capable of finding opportunities, managing risks and generating strong returns in the future. We allocate to alpha strategies, not enhanced beta. We look for strategies where the manager's skill is the key component of the returns, not market dynamics.
HW: What are your criteria for removing managers from the funds?
AB: Strategy drift has been the main reason historically. We will also redeem managers if we feel that the market environment has altered the risk/reward balance of their strategy.
HW: How many managers do you have on the substitutes bench?
AB: Ten or so.
HW: What events do you expect to see in your sector in the year ahead?
AB: We expect the environment to remain difficult, and we are increasing allocations to trading-oriented managers who are able to benefit from volatile markets. We have also introduced short funds for the first time.
HW: How will these developments impact on your own portfolios?
AB: We expect our portfolios to be even less correlated to global equity markets.
HW: What differentiates you from other managers in your sector?
AB: Our risk-adjusted return approach to evaluating strategies, and that we only invest in strategies that we ourselves have experience managing.
HW: What are your views on risk?
AB: We think managers are taking too much risk! We are concerned that poor risk management has led to larger than expected losses in many strategies.
HW: How do you deal with investors' expectations?
AB: Our goal is to produce consistent absolute returns over time. We believe that most professional hedge funds investors have reasonable expectations.
HW: How do you distribute your products?
AB: We have a small in-house sales and marketing team. We also have distribution agreements with some private banks, family offices and other hedge fund distribution firms.
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