Dynamic strategy decisions at play
The Gottex flagship market neutral products, which now have a track record exceeding 10 years, demonstrated excellent performance last year, outperforming all major fund of funds indices by between 5 and 8 per cent over the 2008-09 period.
Gottex and its market neutral products differentiate themselves from the firm’s competitors for various reasons, including diversification. Its products have an investment style that minimises single-strategy manager overlap with the general universe of fund of hedge funds holdings. For that reason, Gottex is an excellent diversifier of single-strategy hedge fund exposure for a fund of funds investor.
In addition, the market neutral products avoid allocations to directionally-biased long/short equity funds, futures and macro strategies, and require that each underlying hedge fund is market neutral in itself. Gottex’s approach involves the gradual re-allocation of capital over time to strategies that it believes will outperform over a six- to 12-month time horizon.
Gottex’s investment philosophy is rooted in the belief that strategies become efficient over time and consequently excess returns will erode as capital floods the opportunity set. The firm therefore takes a dynamic view to strategy decisions and is constantly on the lookout for new strategies and sources of alpha.
It expects that allocations to older, more established traditional strategies will fluctuate and be replaced by new strategies and opportunities that are not as well understood and therefore provide greater opportunity for return.
In the current market environment Gottex believes opportunities for market neutral investment strategies remain very good. Although 2009 was an exceptional year for market neutral strategies, leverage and risk associated with these strategies have been reduced dramatically during the crisis, and when combined with a much less competitive marketplace, it allows managers to take advantage of the abundant opportunities that have been created and generate attractive risk-adjusted returns for their investors.
On the operational due diligence side, the scale of Gottex’s business enables it to have an 11-strong team that reviews the legal and operational aspects of hedge fund managers the firm is considering investing with. This dedicated operational due diligence team is involved at all levels of the due diligence process.
The review includes an assessment of the operations and back office, policies and procedures, risk management controls, fund documentation and legal structure, background checks, systems and IT infrastructure, third-party relationships and counterparty risk.
Additionally, since the crisis started Gottex has focused on managed accounts, setting a target of 25 to 30 per cent of its portfolios to be invested through separate accounts. Gottex has developed its own managed account platform, mitigating to a large degree the operational risk of a hedge fund.
Last but not least, Gottex’s global reach – with investment professionals located in New York, Boston, London, Lausanne and Hong Kong – allows members to become entrenched in their local investment community and get local insights that can be quickly passed on to the rest of the team. This enables each Gottex portfolio to shift investments to regions where its investment professionals see the best opportunities.
Max Gottschalk is head of European business at Gottex Funds
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