The Interview – Michael Reveley, SEAL Capital: “Capital preservation and growth are not mutually exclusive”
SEAL Capital founders and managing partners R Michael Reveley (pictured) and Toby Chandler believe that in the wake of the Madoff, Galleon and K1 scandals, investors are demanding transparency, liquidity and a highly ethical infrastructure, which their firm delivers through the HFR managed account platform.
GFM: What is the background to your company and fund?
MR: SEAL Capital is an alternative asset management company headquartered in the Cayman Islands with an affiliate office in Los Angeles, specialising in global macro strategies designed to provide risk-adjusted absolute returns in all market conditions while offering investors maximum liquidity and transparency.
I founded SEAL Capital with Toby Chandler and am managing partner, chief executive and co-portfolio manager of SEAL Capital Global Strategy. Previously I was a founding partner and deputy chief investment officer at Seagate Global Advisors in Los Angeles, having earlier been director of the syndicate and derivatives group at SBC Warburg in London and New York, vice-president of global derivatives for Swiss Bank Corporation and vice-president of the global derivatives group at First Interstate Bank, where I co-managed a USD20bn derivatives portfolio.
Toby, who is also a managing partner, chief investment officer and co-portfolio manager of SEAL Capital Global Strategy, was previously a portfolio manager at Seagate. Earlier he was a managing director with Morgan Stanley, where he ran the global specialist macro desk covering key hedge funds and proprietary desks in an array of financial products covering all global markets. He began his career as assistant manager of capital markets and asset liability management with Westpac Banking Corp/Challenge Bank in Australia and subsequently worked for Citigroup in global fixed income in Australia and the US before a first spell with Morgan Stanley and a period in global fixed income with HSBC.
The HFR Macro Seagate fund was launched in March 2006 on the HFR Asset Management platform. Toby and I were the portfolio managers of the fund while at Seagate until July this year, when the partners of Seagate split the business into three independent and specialist entities and we launched SEAL Capital to focus on managing global macro strategy funds. The HFR Macro Seagate Master Trust was renamed HFR Macro SEAL Master Trust, a macro hedge fund under SEAL Capital Global Strategy.
The fund invests in an actively managed portfolio of global securities and financial instruments, with an emphasis on fixed-income securities and foreign exchange. We seek to add value through country selection, market selection, asset allocation, portfolio structure, security selection, duration management, arbitrage, hedging, and trading. As of October 26 the strategy had USD47.5m in assets under management.
GFM: Who are your key service providers?
MR: SEAL Capital Global Strategy is distributed as a managed account on the HFR Asset Management platform. Our key service providers via HFR are Butterfield Fulcrum Group (Bermuda) as administrator, JP Morgan as prime broker, Deloitte & Touche as auditor, Sidley Austin as US legal counsel to the investment manager and Appleby as Bermuda legal counsel to the umbrella trust and the trusts.
GFM: How and where do you distribute the funds? What is the profile of your current and targeted client base?
MR: SEAL Capital Global Strategy is distributed through the ManagerSelect strategy-specific investment option or through the HFRX investible indices. Our current client base is predominantly funds of funds with a handful of allocations from family offices and institutional investors. We are actively seeking prospective investors in the family office, private wealth, high net worth, and fund of funds space.
GFM: What is your investment process and how do you generate ideas for your funds?
MR: Our idea generation is driven by a top-down/bottom-up research process supported by experienced internal strategists and portfolio managers, paid consultants and an impressive network of unique relationships. Each day, new information is processed and new ideas are presented for consideration. Weekly research meetings serve as an open forum for discussion and debate about how themes are developing and how they relate to prevailing market opportunities. These meetings result in a list of potential trade ideas to be considered for an allocation of capital.
We determine position sizes upon evaluating many factors, including daily average volatility metrics, correlation with existing portfolio positions and asymmetric payout profiles. Positions are reviewed daily for P&L purposes by the portfolio management and risk management teams. Positions are added at the discretion of the portfolio managers as the asymmetric risk characteristics of the trade dictate.
Our active, disciplined, discretionary style allocates directional trades (long or short), relative value trades that pair one or more instruments and/or countries against another, and carry trade positions.
Our trading strategy focuses primarily on asymmetric pricing anomalies that develop in spot and forward interest rate curves as market expectations for changes in central bank policy rates diverge with probabilistic outcomes for the trajectory of official policy rates, analysis of macroeconomic fundamentals and the related impact to local yield curves and foreign exchange rates, and the impact that developing markets have on the global interest rate, FX, commodity and equity markets.
We focus on markets that provide a degree of liquidity in order to be able to manage the portfolio actively and control downside risk.
GFM: What is your approach to managing risk?
MR: State-of-the-art programs and technologies are applied to manage portfolio risk. Our daily true range risk metric captures the moving average of the true trading range calculated over 21 days. It calculates with precision the risk of all positions and also provides the criteria to set stop loss limits on positions and the portfolio, which we strictly adhere to. Portfolio management and risk management teams review trades daily to ensure that all trades were made within original parameters. Among the many data points, we review target/stop, volatility, and the associated risks of upcoming events.
Additionally, we have taken a number of steps to ensure the integrity of investor funds. SEAL Capital never receives customer funds, which are sent directly to custodian bank accounts controlled by HFR Asset Management. As a prime broker to the fund, JP Morgan controls custody of assets and reports directly to HFR daily. As a third-party administration vehicle, HFR prices the portfolio and Deloitte & Touche handles auditing. These steps essentially neutralise if not eliminate all major non-market related risks associated with hedge fund investing. Our decisions in this area reflect our commitment to high ethical standards.
Additionally, the HFR platform conducts daily independent pricing, daily independent risk management, segregation of assets, complete and ongoing manager due diligence. It offers monthly liquidity with no gates, lock-ups or holdbacks, as well as timely tax reporting.
We only invest in securities that can be liquidated within one trading day at or very near the quoted bid price, and the entire portfolio is marked to market at the beginning of each trading day and monitored with live pricing by portfolio management and risk management throughout the day. We use Tradar as our management information system (portfolio P&L) as well as proprietary risk management systems developed by our systems and quantitative analytics team to monitor risk by position and in aggregate.
GFM: How has your recent performance compared with track record?
MR: In 2008, while the average hedge fund lost double digits, we returned 24 per cent gross. We are continuing our winning streak this year with a 14 per cent gross return as of October 28. We are on track with our objective of a targeted per annum return of 15 per cent.
GFM: What opportunities are you looking at, what events do you expect to see in the year ahead, and how will these developments affect your portfolio?
MR: In the final quarter of 2009, our view that recognises the potential for ongoing economic weakness and a recovery that flies in the face of present risk market pricing is still valid. However, the veritable tidal wave of liquidity created by the US Federal Reserve and Treasury, and by other authorities around the globe, is having a marked impact on investors’ risk tolerance.
While broader monetary measures, M2 to M4, are not looking healthy by historical standards, mainly due because monetary velocity is still very weak and the monetary accelerator is very soft, M1 is finding its way rapidly into ‘primary liquidity channels’ – the markets directly accessed by institutions such as money managers, banks and hedge funds that have directly (unlike the broader real economy) benefited strongly from the liquidity surge. As a result, stocks, credit, high beta currencies and commodities have all had a relentless run.
Either risk markets are correct in telling us that the worst is over, or they are at dire risk of correction if the realisation of a much softer global economic profile prevails. If the former view holds, many of the world’s fixed-income markets, priced for slow growth and very low inflation, are in for a rude awakening, with the potential for sizeable losses. If the latter view holds, then there will be clear opportunities in shorting credit and exploiting high-beta cross-currency valuation inefficiencies.
For now, we support the former view, at least until year-end, notwithstanding our recognition that the present rally may have run too far, too fast, on broader, long term macro grounds. We expect central banks to recognise the need at least to discuss exit strategies and potential reversal of the massive monetary easing already provided. Some central banks have already delivered and others, such as the Bank of Canada, are potentially not far behind. If more central banks shift onto a more hawkish path, there will be some very handsome gains, with excellent asymmetry and risk/reward profiles, to be realised heading into 2010.
GFM: Are investors’ expectations shifting between capital preservation and growth?
MR: During the fourth quarter of 2008, all participants in the hedge fund industry saw a massive move toward capital preservation. Investors now prefer transparency of the investment process and liquidity in order to manage their investment decisions. Our strategy is aligned with both of these preferences. We trade only liquid assets and can take the portfolio to cash within one trading day. In our view, capital preservation and growth are not mutually exclusive.
GFM: What differentiates you from other managers in your sector?
MR: SEAL Capital’s focus on portfolio insurance provides a massive differentiation with other macro managers. Our ‘gamma book’ investment positions are highly asymmetric and are designed to appreciate in a capital preservation environment. This investment philosophy certainly paid off last year, one of the worst investment periods in history, as our fund experienced its best performance since launch.
GFM: How do you view the environment for fundraising?
MR: Industry assets under management fell by 25 per cent or so during 2009. These large outflows have now stabilised and new money appears to be flowing back into the industry. One of the surprising outcomes of last year was that some of the largest funds put up gates. The complexity and illiquidity of these portfolios during the economic downturn massively detracted from performance. These funds were unable to adapt, given their large size, to an investment landscape that was changing rapidly.
A distinct advantage to smaller funds is the ability to be nimble. Our entire fund can be brought to cash or risk can be completely repositioned if sentiment in the markets shifts. Our investment performance last year, and so far in 2009, is testimony to our team’s ability to identify and capture alpha in all market conditions, as well as to manage portfolio risk in volatile markets.
Although investment flows into the industry are clearly not as robust as in previous years, SEAL has produced an outstanding track record that has positioned the firm for growth.
GFM: Do you have any plans for other product launches in the near future?
MR: We have been contacted by institutional investors to establish separate managed accounts. Our firm is ready to accommodate these requests while preserving agility and focus in our core areas of strength.
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