Liongate Capital Management: Best Diversified Fund of Hedge Funds Manager
Liongate Capital Management, founded in 2003, manages USD2.5bn in assets on behalf of its global client base, which includes leading global pension funds, wealth managers, insurance companies and sovereign wealth funds.
The firm’s flagship fund, the Liongate Multi-Strategy Fund, has outperformed the HFRX Global Index by an annualised 7.53 per cent since launch and also fund of hedge funds peers, while also providing lower correlation to hedge fund and traditional market indices.
An active approach to hedge fund strategy selection, including a greater willingness to redeploy capital, a focus on niche strategies, effective liquidity management and insistence on detailed transparency are the key competitive drivers that differentiate Liongate from its peers.
The firm’s investment philosophy begins with a top-down approach to strategy allocation. A detailed understanding of how macroeconomic factors influence strategies is used to identify strategies and managers who are poised to outperform.
As part of this philosophy, Liongate focuses on managers exploiting niche opportunities and avoids those with the broadest mandates, which allows for improved portfolio construction, enhancing returns. It also leads to a focus on mid-sized managers, typically with between USD500m and USD2bn in assets, which stems directly from evidence that these managers deliver outperformance over time.
Last year was by no means easy for Liongate. Spikes in volatility made it difficult, says managing director Jeff Holland, because correlation between assets was exceptionally high. “Fundamental managers took a big hit last year as markets ignored fundamentals and traded on headlines,” he says. “They were not alone, however, as even systematic managers were able to preserve capital at best.”
Liongate was not immune to this volatility. “We didn’t meet our performance objectives last year,” Holland acknowledges. “Hedge funds overall faced strong headwinds as volatility persisted for an extended period. We reduced our directionality over the year, scaling down certain strategies that had been highly profitable and redeploying capital to more liquid, defensive strategies.
“Last year the preservation of capital became paramount in order to be ready to redeploy capital to emerging opportunities, but this year is more encouraging. We’ve entered 2012 with a more nimble book of managers. Opportunities are improving as correlations break down, and we are using this to reallocate capital to conviction ideas.” This positioning is working, as the flagship fund is up almost 3 per cent in the first two months of the year.
According to Holland, risk management is a balancing act between the longer-term objective of wanting to allow a manager or strategy time to work and remaining mindful of losses. “Since the fund’s inception, our monthly drawdowns have been consistently lower than the 10 largest drawdowns on the HFRX, which demonstrates our successful focus on portfolio risk management,” he says.
“Our proprietary risk system, PRiMa, allows us to slice and dice the portfolio using many different approaches. In particular, we use it to aggregate exposures of all the managers in the portfolio. Looking at these aggregated positions gives us a greater picture of where our risks lie and where we may need to increase or reduce a manager to improve risk at the portfolio level.”
Of winning the Hedgeweek award, Holland says: “We’re happy that investors recognise our performance, but it was a tough year. We’re grateful for the trust our clients place in us. We are optimistic that we are seeing a more constructive environment for hedge fund investing and remain focused on positioning ourselves appropriately to profit from these trends.”
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