The Interview - Stephen Greene, ACP Partners: "Many of the world's financial institutions are still facing issues of capital adequacy"

Stephen Greene, partner and chief investment officer of the multi-manager business at ACP Partners, says that having undergone an unprecedented shock resulting in severe price dislocations, the financial sector offers ideal conditions for sector specialist hedge fund managers to add value.

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

SG: ACP Partners, a private wealth firm founded by the former heads of Goldman Sachs' Asian and internal private client businesses, has recently merged with TriAlpha Investment Advisors, the dedicated asset management arm of international wealth management company the Stonehage Group.

With combined funds under management of approximately USD2.5bn billion, the merged firm will provide a full service asset management offering comprising asset allocation, internal investment products, best of breed third-party products, portfolio management and a proprietary dealing platform.

The ACP Financial Opportunities Fund invests predominantly in financial services-focused long/short equity managers and was launched as a result of client requests for risk-managed exposure to the opportunities that presented themselves within the financial sector.

Financials account for around 20 per cent of global equity market capitalisation and, despite benefiting from significant diversification, the financial sector as a whole exhibits a high degree of complexity and is sometimes neglected by investors. Having undergone an unprecedented shock resulting in severe price dislocations, the sector offers conditions ideal for sector specialist hedge fund managers to add value.

The key to achieving positive returns has been portfolio construction. The portfolio was specifically structured to benefit from the expected market volatility as we placed significant emphasis on sourcing managers with trading-orientated approaches, 'macro-aware' processes and short-term catalysts for value realisation.

HW: What is your investment process?

SG: Our investment process starts with a top-down macro view of the investment landscape. To formulate this outlook, our team draws upon direct market-related input from our in-house equity and fixed-income trading teams, as well as our own primary research and input from the managers in which we invest.

We then scour the investment universe to source the best managers to express our macro views, taking a forward-looking approach by relying more on forward-looking qualitative assessment as opposed to backward-looking quantitative data-mining. Rather than being biased by past performance, we constantly reassess current positioning to determine whether this provides the best risk/reward profile for likely future scenarios.

Our portfolio construction process aims to provide an asymmetric return profile. The core of our portfolio is invested in low-directional stable managers that are able to generate consistent returns. This is combined with satellite thematic exposures that create an option-like pay-off profile to the portfolio. Additionally, we have a preference for managers with significant trading expertise who are 'macro aware', as we feel this helps limit the realised volatility of our portfolio, especially during times of market dislocation.

We utilise sophisticated state-of-the-art proprietary risk management systems and techniques, of equal quality to those found within single manager hedge funds, which seek to identify hidden risks within the portfolio. In addition, we have a zero-tolerance approach to operational risk management.

HW: How has your fund of hedge funds performed?

SG: The ACP Financial Opportunities Fund returned 2.7 per cent between its launch last September and the end of March. Over the same period, the S&P 1200 Global Financials and HFRI Equity Hedge Indices declined by 54.8 per cent and 19.9 per cent respectively.

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

SG: The fund currently has 10 underlying managers. We intend to keep the portfolio fairly concentrated with between 10 and 15 managers.

HW: What makes a manager or strategy special enough for you to select them?

SG: Our approach has always been to invest only in managers where we have strong conviction in both the manager's ability to generate returns and a favourable macroeconomic environment for their strategy. Even the best managers in the world struggle when facing macro headwinds, as evidenced by the events of 2008. In addition, we look at our portfolios on a look-through basis to constantly assess and reassess whether the managers and strategies are additive to the portfolios as a whole.

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

SG: Our reliance on qualitative assessment of both the macro environment for the strategies and the underlying manager's trading style, portfolio and psychology can prompt a removal. We look beyond the typical approach of basing decisions solely on performance.

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

SG: The co-ordinated efforts of governments and central banks globally have resulted in a dramatic reduction in systemic risk. As a result it is probably safe to assume that there will not be another Lehman Brothers-type bankruptcy.

However, the problems facing financial institutions have thus far been largely confined to the residential mortgage market, with many of the remaining loans on the books of financial institutions still being carried on the balance sheets at or near par. As the recession deepens, these non-residential loans (such as business, commercial real estate and consumer loans) are going to be negatively impacted as a result of unemployment and bankruptcies.

Many of the world's financial institutions are still facing issues of capital adequacy and will inevitably need to raise more capital. Existing shareholders face the risk of dilution and at some point bondholders may also be negatively impacted. A period of consolidation will occur at a later stage, where stronger institutions will likely swallow up weaker ones with residual franchise value, while others will be left to fail, or be nationalised.

HW: How will these developments affect your own portfolio?

SG: Our portfolio was specifically designed to take advantage of the volatility and turmoil within the financial sector, as we believe specialist managers have the expertise to analyse better the very financial institutions that led us into the current crisis.

Though the portfolio is focused on a specific sector, we were able to source quality managers to build a sufficiently diversified portfolio, with sub-sector exposures including banks, operational companies, asset managers, brokers, insurance, home builders, development companies, real estate, investment companies, exchanges, consumer finance, commercial finance, speciality finance and financial technology.

Specifically, through a combination of stable market-neutral, opportunistic trading-oriented and fundamental long-biased managers, diversified across sub-sectors and regions, we feel we have the optimal portfolio to take advantage of any situation that may arise within the financial services sector.

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

SG: We believe there are several factors that differentiate us from our competitors. This begins with our focus on macro considerations in portfolio construction, and our ability to draw on direct market-related input from our in-house trading teams. We have a preference for mid-sized managers, who generally have higher expected returns and are more liquid, transparent and nimble.

The team aims to undertake a prolific number of manager meetings every year, believing direct interaction to be the best way to assess talent and investment opportunities. Our unique approach to portfolio construction provides further edge.

HW: What is your attitude toward risk in the current environment?

SG: Volatility in the financial markets will undoubtedly stay elevated for some time. While many investors associate volatility with risk, we view this as possibly one of the best opportunities for the right managers, as the elevated volatility levels create distortions in the markets that can be exploited. Though we may not be constructive on the global economy, we are optimistic that we will be able to continue to generate strong risk-adjusted returns for our investors.

HW: What is the profile of your current and targeted client base?

SG: From a business perspective we have never been more optimistic about our prospects. Our current investor base ranges from ultra high net worth individuals to institutional pension funds and insurance companies, and we aim to develop these client bases further over the coming year and beyond.

Over the period from December 2008 to April this year, the period of most stress for our competitors in the fund of funds space, we experienced net inflows into our fund of funds products, which we feel speaks to the strength of both our client base and the business as a whole. Our goal is to capitalise on our strong positioning within the industry and the exodus of both institutional and private clients from large investment houses.



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