Gravelle Pierre, Iron Harbor Capital Management: “The key to our process is being patient, waiting for the market to make a mistake”
Iron Harbor Capital Management president Gravelle Pierre says the global macro specialist, which he founded in 2008, attempts to identify misalignments between market expectations and what the fundamentals suggest, using economic analysis to identify situations where the market has made lapses in judgement.
GFM: What is the history and background of your company, principals and fund?
GP: Iron Harbor is a global macro investment advisor founded in late 2008. Our strategy is based on rigorous, fundamental economic analysis. Investments decisions are research-driven. We look for opportunities in which there is a misalignment between what the market expects and what the fundamentals justify.
Prior to founding Iron Harbor, I traded currencies and interest rates at Goldman Sachs for 10 years, most recently co-managing the G-10 currency forwards book. Jacquie Hayot, our chief operating officer at Iron Harbor, was previously global head of marketing for Morgan Stanley’s prime brokerage group. Additionally, the firm has recently brought on a chief risk officer and chief financial officer.
GFM: What is the structure of your fund?
GP: Our fund is a Delaware limited partnership, which limits us to US investors at this time. The investment adviser is structured as a Delaware limited liability corporation that is registered as a commodity pool operator with the Commodity Futures Trading Commission. We anticipate modifying our structure to accommodate non-US investors within the next few quarters.
GFM: What is your distribution strategy and targeted client base?
GP: First and foremost, we are looking for investors that seek a long-term, collaborative partnership with their investment manager. While we do not limit ourselves to a narrow pool of investors, we are initially concentrating our efforts on high net worth individuals in the US, either through direct investments or via family offices. Our secondary focus is on institutional investors who want exposure to smaller, more agile emerging managers.
GFM: What impact has the recent global financial crisis and economic downturn had on your business?
GP: The crisis has heightened investors’ awareness of the risks of investing in hedge funds. During the bull market of 2003-07, investors grew complacent in analysing the organisational and investment risks of financial institutions like hedge funds. This all changed after Lehman and Madoff. Now investors are doing their homework before making decisions, and regulators are enforcing more stringent guidelines.
Many managers and financial institutions have resisted the demands of the new regulatory environment, citing additional reporting costs. We, however, have embraced the new environment and been aggressive in designing reporting structures that meet investors’ expectations.
Financial firms, including hedge funds, have a fiduciary responsibility and should do everything necessary to protect the interests of their investors. At most, new reporting requirements should only formalise what firms are already doing, and the costs should be marginal.
The new regulatory parameters improve the way we think about risk internally and help to make us a better company. As an emerging manager, we have little margin for error. So risk management, both on the operational and investment side, are at the forefront of our daily internal discussions. To compete with the multi-billion-dollar money managers who control the industry, we must embrace regulation.
GFM: Please describe your investment process.
GP: Our investment process is a four-step process that attempts to identify misalignments between market expectations and what the fundamentals suggest. We are looking for situations where we believe the market has made some bad assumptions, and we rely on economic analysis, primarily cyclical analysis, to inform us when that lapse in judgement occurs.
We use both qualitative and quantitative techniques to gauge market expectations, which we compare to our own internally-developed expectations. The key to our process is being patient, waiting for the market to make a mistake.
GFM: How do you generate ideas for your fund?
GP: Most of our ideas are generated by comments from international monetary authorities. The central banks have enormous influence on medium-term financial conditions, so we spend the majority of our time analysing central bank policy and guidance. Beyond our focus on monetary policy, a large amount of our energy is directed at analysing global macroeconomic trends and geopolitical issues. This approach helps us to consolidate our investment ideas.
GFM: What is your approach to managing risk?
GP: We approach risk from an enterprise risk management perspective. On the trading side, we have a robust reporting structure whereby we measure, manage and monitor trading risk. On the organisational side, our service providers add multiple layers of risk control. The idea is to protect both the firm and our investors.
GFM: Are you looking at any particularly attractive opportunities right now?
GP: We remain modestly bullish on the evolution of the US recovery, believing that valuations are modest, rates will remain low, and the dollar will continue to weaken.
We are also bullish on the commodity producers, Canada and Australia. The commodity story remains popular and might be subject to significant risk reduction from time to time. However, over the next three to five years, we expect the commodity story to continue to dominate.
Finally, we are bearish on the US dollar in the medium term. As long as the US Federal Reserve maintains an extremely accommodative monetary policy, while every other region in the world is tightening, we think the dollar will remain under pressure. On occasion, there may be dollar buying as a fear trade goes in and out. However, barring a significant event, such as a disorderly resolution of the European crisis, we expect the dollar to trend lower.
GFM: What developments do you expect to see in your investment sector or industry field in the coming year?
GP: Due to the lack of direction in the markets and what appears to be unprecedented uncertainty, global macro as a strategy is not receiving a lot of love from investors now. Yet we think that to capture the big opportunities over time, a manager must have a consolidated view of the various asset classes and some intuition of how global economic and geopolitical trends are likely to affect their relative attractiveness.
GFM: What differentiates you from other managers in your sector?
GP: We hold positions for longer periods of time than many managers. Our investment horizon is typically six to 12 months. Because we rely on rigorous fundamental macro analysis, we do not trade frequently and are not influenced by the most recent data release. Unlike many market participants, we do not make asset allocation decisions based on any single data point.
We are convinced that the best opportunities exist beyond the end of any given day, week, or month. For us, and our investors, it is important that we look through daily volatility to themes that exist further on the horizon.
GFM: How do you view the environment for fundraising over the coming 12 months?
GP: The ease of fundraising depends on whom you ask. Fundraising for large, multi-billion-dollar firms is great. In 2010, 80 per cent of inflows went to the largest 20 per cent of funds. They control the industry and investors continue to trip over themselves to give them more money.
We are finding, however, that an increasing number of discriminating investors want something that the large firms cannot deliver. Smaller investment managers are typically more agile, and approach the asset allocation process with more creativity and certainly greater diversity. Moreover, smaller managers can target opportunities that might be too small for larger managers. For these reasons, we expect that fundraising will get easier for some smaller managers.
GFM: Do you have any firm plans for further product launches?
GP: In line with our global approach to asset allocation over different asset classes, we are adding an emerging/frontier market strategy in 2012. Over the next five to 10 years, investors have no choice but to increase their allocations to these markets. We intend to have a strong platform as this occurs.
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