The Interview - Jerry Haworth, 36 South: "Risk-averse investors will be driven toward volatility funds that offer uncorrelated returns"

Jerry Haworth, co-founder and director of 36 South Investment Managers, which moved its main base of operations from Auckland, New Zealand, to London earlier this year, says one of the firm's distinguishing characteristics is that it treats options as an investible asset class, in contrast to other managers that view them as a pure risk management tool.

GFM: What is the background to your company and funds?

JH: 36 South Investment Managers was founded in New Zealand in March 2001 and is still run by Richard Hollington and myself, who between us have more than 40 years of experience in the financial markets. We moved our main base of operations to London in May this year.

I was instrumental in the establishment of the futures and options market in South Africa and was head of equity derivatives at Investec, one of South Africa's largest and most successful merchant banks.

In 1996, I co-founded Peregrine Holdings, a boutique brokerage and structuring house. Peregrine enjoyed phenomenal early success, culminating in a stock market listing in 1998 in which the value of the company soared over 400 per cent followings its initial public offering.

36 South specialises in managing global macro/volatility funds and deliver returns for investors by identifying misvalued assets and their respective options across a broad range of asset classes using our unique proprietary Quadrivium process.

We have two broad categories of funds, the 'best of the best' fund (Kohinoor Series Two) and various theme funds that are opened and closed as opportunities wax and wane. At present, we have three theme funds open for subscription: Regent (gold), Dresden Green (yen) and Excelsior (inflation).

GFM: Who are your key service providers?

JH: Rothstein Kass is our audit firm and our law firms are Walkers and Ogier. HSBC Intuitional Trust Services (Asia) provides administrative and prime brokerage support.

GFM: Have there been any recent key events such as fund launches?

JH: The move of our head office to London in May was a key event for us. While we were achieving excellent returns from our Auckland base, the hurdles of distance and time zone restricted us somewhat in terms of fundraising. Post-Madoff, due diligence and regular visits have become far more important for investors - and New Zealand is a very long trip from most financial centres!

We believe the move to London will allow us to go from strength to strength because of our increased proximity to the investment community. Initial indications support this - we have had good inflows and a large number of unsolicited enquiries since the move. We are already moving to a bigger office as we have had to hire more staff to meet demand.

In June, we launched our latest single-theme fund, Excelsior, a high-risk/high-return fund that seeks to protect against the extreme event risk of a significant spike in global inflation, caused by central banks around the world implementing expansionist monetary policies such as quantitative easing and near-zero interest rates. Target returns are five times the G5 inflation rate above 5 per cent. It is intended to form only a small element of an investor's portfolio to protect an otherwise defensive portfolio from being eroded if inflation does occur.

Our last single-theme extreme event fund was the Black Swan Fund, set up in 2007 to protect investors against a significant market downturn. This now-closed fund delivered returns exceeding of 230 per cent in 2008.

GFM: How and where do you distribute the funds? What is the profile of your current and targeted client base?

JH: Our focus is on distributing funds in London and Geneva. We are targeting UK and European institutional and individual investors.

GFM: What is your investment process?

JH: We take investment decisions based upon the Quadrivium process, which means 'where four rivers meet' in Latin. It was developed to identify value opportunities in options, especially long-dated, and is used to scan the world's financial markets looking for such misvalued options. The four factors we consider in deciding whether or not to execute a trade are volatility, sentiment, technicals and fundamentals. In calculating volatility, we make use of our bespoke global implied volatility indices.

GFM: How do you generate ideas for your funds?

JH: Identifying mis-estimation of volatility is key. Our proprietary volatility scanning engine scans 3,000 individual stocks, currencies, commodities and interest rate instruments diversified on a global basis.

The volatility scan returns a list of possible trades based on a combination of the current volatility of the underlying asset and the spot price in relation to its long-term mean. We then take the top-ranked of these potential trades, and start the Quadrivium process with them. If we see or predict a consistent theme emerging, we may package this as a single-theme fund.

GFM: What is your approach to managing risk?

JH: We don't use debt - with options the leverage is already built in. The risks of our investments are always known and we stay firmly within our circle of competence.

GFM: What opportunities are you looking at right now?

JH: Our flagship Kohinoor Series Two Fund, which delivered a stellar 73 per cent in 2008, has been running for seven years. It is currently delivering annualised returns in excess of 20 per cent per annum with a downside deviation of less than 10 per cent with a low to negative correlation with most benchmarks, including the global macro index itself.

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

JH: We expect to see an increase in currency volatility. This will be very good for Kohinoor, as its strategy is tailor-made to capitalise on volatility.

GFM: Are investors' expectations shifting between capital preservation and growth? If so, how do you deal with this?

JH: Investors' expectations are moving toward capital preservation, but preserving capital has always been key for us, so nothing will change. We have also never gated any of our funds.

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

JH: We are specialists in a profitable yet under-explored niche - we believe we run a unique strategy. We treat options as an investible asset class, whereas many tend to view them as a pure risk management tool. We do not rely on debt, and we are always aware of the risks to any particular trade or fund.

GFM: How do you view the environment for fundraising in 2009? How does this affect your funds?

JH: People are increasingly risk-averse so will be driven toward volatility funds that offer uncorrelated returns. We do not anticipate problems raising mandates in 2009, and we have already had a very healthy first six months.



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