Fri, 24/10/2008 - 06:59
Shaun Port, chiefinvestment officer at fund of hedge funds manager BDO Stoy Hayward
Investment Management, says the firm selects managers with a unique,
often contrarian perspective, and usually with depth rather than
breadth of focus, but only if they are supported by an organisation
robust enough to survive and prosper.
HW: What is the background to your funds of hedge funds?
SP: BDO Stoy Hayward Investment
Management began offering funds of hedge funds with the launch of our
Fitzwilliam Balanced fund in September 2003 and the Fitzwilliam Growth
fund the following month. The Fitzwilliam Commodity Plus fund was
launched in February 2006. Current assets under management are around
USD300m, spread nearly evenly across the three funds of funds.
The principals comprise myself as chief investment officer, senior
hedge fund analyst John Smutniak and portfolio manager Kristian Cassar.
HW: Who are your key service providers?
SP: Our accountants are PKF, our law firm is Carey Olsen and our administrator is IAG, all in Guernsey.
HW: Have there been any recent changes to the management team?
SP: We've been strengthening
our team aggressively this year. We recruited John Smutniak from
LyonRoss Capital Management in New York, where he was a portfolio
manager for balanced and aggressive portfolios, and we hired analyst
Dev Jadeja from Old Mutual Asset Management in the UK. More recently,
Rahul Saito joined us as an analyst from RMF in New York and, before
On the due diligence side, which operates on a completely separate
reporting line to preserve its full independence, we added a new
analyst in March. With a staff of 10 the team is more than double today
what it was just a year ago.
HW: What is your investment process?
SP: Top-down macro views play a
bigger role than at most of our fund of hedge fund competitors. We do
not feel we need to have an allocation in every hedge fund strategy.
Too often, it seems that bigger fund of funds firms tend to have an
allocation across all strategies without an ability to tilt this
according to the macro environment.
All investments start with our view of the macro climate, backed up by
a team with strong macro experience. I am an economist with a long
background of developing portfolio strategies for central banks, public
pension schemes and sovereign wealth funds, and am supported by our
global macro economist, Catherine Macleod. John Smutniak was an
economics and financial journalist at The Economist for several years,
and brings his own unique perspective to global markets.
Starting with that robust top-down approach, we are always asking
ourselves where the macroeconomic winds are likely to blow the various
hedge fund strategies over the coming year.
For example, we like to think that we were ahead of many peers in our
understanding of the current commodity super-cycle. We understood the
likely depth of the current global banking crisis before many others,
and that has had a significant impact on how we run money. We have long
been proponents of emerging markets and, despite the current sell-off,
feel that the macro fundamentals of these markets will make them
attractive in many specific ways for several years to come.
Manager selection is a rigorous process, backed by a robust due
diligence approach. While we never bend on our strict requirements, we
are probably more nimble and willing to act expeditiously when we see
opportunities in managers.
HW: How many funds and strategies are in your portfolio?
SP: At any given time, our
managers may fit into any of the dozens of hedge fund strategies. But
we tend not to think in terms of what are often vague definitions used
in the hedge fund world, but rather how individual managers in a
strategy area or a geographic region contribute to the portfolio in
Having said that, we have tended in recent years to shy away from most
convertible arbitrage and quantitative equity market neutral
strategies, as well as from most forms of quantitative macro managers.
We much prefer discretionary macro managers, and have had good results
especially with those in the past year. Typically, we have between 20
and 35 managers in each portfolio, depending on the fund profile.
HW: Are you linked to any hedge fund indices?
SP: No, all of our products are
designed as absolute return vehicles. While we may benchmark ourselves
internally against hedge fund indices, such as the HFRI Conservative
Fund of Funds Index for our balanced offering, we do not directly link
ourselves to index performance, believing that superior fund of hedge
funds performance involves going off the beaten path to find unique
strategies allied to the highest standards of risk management and
HW: What makes a manager or strategy special enough to select it?
SP: The first criterion is a
manager's unique perspective, often contrarian, in their space, an
ability to articulate why they believe their strategy will prosper, and
to back this up with a track record.
Next we look for an organisation that can deliver results over time,
one that is robust enough to survive and prosper. Our due diligence
team has independent authority to reject a manager if internal
processes are not adequate.
We tend more toward including niche and truly uncorrelated strategies,
such as electric power trading and certain areas of direct lending, to
name two examples. We want managers who are experts in their space,
rather than merely having been, for instance, a good equity manager at
a long-only shop.
In general, we prefer deep and extensive expertise in specific markets
and asset classes, rather than big multistrategy programmes, no matter
what the pedigree of the manager. There are exceptions of course, but
we prefer depth to breadth in a manager, and feel we can create
portfolios that offer diversification on our own.
HW: What are your criteria for removing managers from the funds?
SP: We monitor our portfolios
rigorously for the basic and essential criteria for hedge fund
investing, such as appropriate size of assets, commitment of the
manager, risk management process and continuity of staff. There are
hard rules about what a manager can and cannot do. Style drift is
certainly one reason for removing a manager.
Most of the time, however, the decision is more subtle. Often the
trigger for removing a manager will be our sense that his or her
process of idea generation and ability to take advantage of global
macro conditions and trends has diminished. There are many solid and
well-run hedge fund strategies and managers, but few are able to
produce superior risk-adjusted returns in all macro conditions.
The challenge is to understand the currents in which various strategies
operate, and then to choose the managers which are best suited to
thriving in that climate. We do not like to trade in and out of
managers, but at the same time we will not hesitate to redeem a manager
if it is warranted. We put the interests of our investors ahead of any
relationship with a hedge fund.
HW: How many managers do you have on the substitutes bench?
SP: For any strategy, we may be
looking at anywhere from a half-dozen to many more than that. The key
is not the number on the bench, but our ability to understand the
processes that make a manager suitable to come into the portfolio at a
particular time. We see hundreds of managers over the course of a year,
but only a few will make it into our portfolios.
HW: What events do you expect to see in your sector in the year ahead?
SP: In the commodity space, we
are still long-term bullish on the fundamentals in supply and demand
terms, not only in energy but in agricultural commodities and many
metals. We would not be surprised if the current deleveraging process
in commodity prices continues for some months, but at the same time we
have assembled a portfolio with managers who are nimble enough to take
directional bets that can profit in down and up markets. Longer term,
we think inflationary forces will push the commodity super-cycle along
for several more years.
We think the coming year will be a good one for macro managers. The
return of volatility to currencies, to emerging market debt and
equities and to other asset classes bodes well for a flexible,
discretionary macro approach.
We think that the global credit contraction will provide a good climate
for well-managed direct lending and asset-based lending programmes.
Whatever the impact of the global bailout plans, credit will likely
remain restricted to many borrowers despite promising fundamentals, and
we are looking to take advantage of these opportunities.
HW: How will these developments events impact on your own portfolios?
SP: We are likely to lean ever
more into the global macro space. We are continuing to build out our
commodity fund of hedge funds with managers who can profit from current
volatility. We are also looking to pursue lower volatility and more
liquid programmes in our balanced portfolio.
Unlike many in our space, we think the current global equity market
dislocations may prove an excellent opportunity for emerging market
investing, both directional as well as arbitrage strategies.
HW: What are your views on the SEC and FSA restrictions on short selling?
SP: One financial commentator recently referred to short selling as the "free speech of financial markets", and we tend to agree.
We think that history has shown that short selling is rarely the cause
of a company's problems, it is more likely just a symptom. Regulators
obviously need to do what they feel is in the best interest of the
overall functioning of the financial markets, but banning short selling
seems to us a temporary solution rather than any lasting way to keep
poorly-run companies from going bust. (Of course, we are speaking here
of covered shorting, not the 'naked' sort which is a whole different
Looking at recent experience, it is hard to see that banning short
selling has done anything more than delay falls in poorly-run
companies' share prices for a few weeks. Banning short selling does not
create any fundamental improvement in a company's position.
HW: What differentiates you from other managers in your sector?
SP: Our whole team is
macro-orientated, with strong market views and a willingness to run a
hedge fund portfolio according to these views, with strong tilts
according to our internal outlook.
We are dynamic, willing to invest in emerging/young managers where
processes are robust and world class. We believe there is a sweet spot
of fund assets between USD200m and USD1bn, and that investing early in
these managers yields the best risk-adjusted results.
The team are generalists, and therefore willing to explore all asset
classes and strategies that may be appropriate for our fund of hedge
funds investors. We are not constrained by geography or
specialisations, and able to spot early trends in alternative assets.
We have a robust operational due diligence process that is independent
from the investment team and ensures that the interests of our
investors are protected with the most stringent standards of
HW: What are your views on risk?
SP: For us, it is never a
question of managers taking on a particular level of risk, but of
taking on the right type of risks. We simply don't target a level of
volatility or VaR for an individual manager, and believe that such
measures, if applied too seriously, can lead a manager to take on the
wrong risks or a higher level of risk than is appropriate. Instead, we
assess a manager's view of the market conditions and, if we are
comfortable, leave it to the manager to take particular positions at
HW: How do you deal with investors' expectations?
SP: Investors should always
expect performance that is in line with the mandate of a portfolio. We
believe many of the complaints among fund managers about investor
expectations stem from a failure of the manager to explain better how
and when their strategy is likely to perform well. It is the duty of a
manager, whether of long-only funds, hedge funds or funds of hedge
funds, to ensure that expectations are both reasonable and reachable.
HW: How do you distribute your products?
SP: Traditionally the mainstay
of our distribution has been the internal private client platform in
the UK. BDO has been a leader in catering to the needs of high net
worth entrepreneurs and business leaders. It has been a natural
extension of our asset management business to offer multi-manager
absolute return vehicles to such clients.
Second, we are increasingly relying on BDO's global network to offer
our products. BDO has 620 offices in more than 100 countries, and the
UK asset management business is the only one to offer funds of hedge
funds. Third, our dedicated marketing team is making great strides in
pursuing pension and other institutional mandates. Finally, we are
involved in a number of white labelling discussions at the moment, and
interest is strong.
HW: Are you planning any further launches?
SP: Given our history of
product innovation, as most recently demonstrated by our commodity fund
of hedge funds, we are always mindful of investors' needs for
high-quality absolute return funds addressing the most relevant themes
in the global economy.
We are finding some interesting opportunities in the area of distressed
funds, both mortgage-related and corporate-related. Credit conditions
make asset-backed and direct lending a good area for issuing new loans
in areas of the economy that will still thrive amid the current
downturn. Electric power trading is an area in which we have developed
considerable expertise, and we believe this asset class is likely to
see huge growth in the coming years.
There are significant opportunities in these areas, but whether we'd
look to launch separate funds to take advantage will depend on our
ongoing discussions with our clients.
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