2015 has certainly been an interesting year thus far, with macroeconomic negativity and uncertainty mixed with idiosyncratic events resulting in a sustained period of market volatility, with the traditional fear gauge or VIX Index peaking at 50.78 on 24 August, the highest level since 2009.
In theory, this increased level of volatility and dispersion amongst financial markets should allow hedge funds to distinguish themselves from traditional strategies, fighting back against the increasing criticism of the last five years that questioned their purpose. In fact, many of the larger industry names have struggled, with the asset weighted, large manager biased HFRX Global Hedge Fund Index down by 3.05 per cent YTD to 30-Sept versus a decrease of 1.53 per cent for the equally weighted HFRI Fund Weighted Composite Index.
As a result of the prolonged underperformance of these household names, many investors, including Sciens, have for some time been focusing on small to mid-sized hedge funds. We believe that managers can greatly benefit from being nimble and flexible in their investment strategies, leading to the delivery of attractive risk adjusted returns, with lower correlation and all whilst being strongly motivated to deliver performance rather than gather assets. Indeed the majority of strategies run on the Sciens Managed Account Platform (MAP) have less than USD 1.5 billion assets under management.
Investing in small to mid-sized managers via a MAP offers great comfort to the investor, knowing that an experienced and independent platform provider is responsible for all operational and fiduciary controls, thus freeing up the hedge fund manager to focus on the investment strategy.
For early stage managers who have perhaps yet to invest in sufficient middle and back office infrastructure, a MAP can be vital in securing institutional capital. A managed account platform should offer independent risk monitoring, ensuring that the hedge fund manager stays on mandate within its expected investment constraints at all times, thereby providing a valuable resource during periods of market stress.
At Sciens, we approach running a MAP very differently to many of our peers, maintaining a buy-side perspective, leveraging our institutional fund of hedge funds experience to help us select and perform extensive due diligence on good managers for our clients, while monitoring risk in a meaningful and accurate way that is appropriate for each individual investment strategy.
For example, the risk monitoring of a Managed Futures strategy requires a completely different skill set and expertise to the analysis of a Credit fund. Sciens has also moved away from simply offering the traditional MAP strategies focusing on managed futures and equities, and continues to expand its offering with the recent addition of Volatility Trading, Structured Credit, Power Trading and Distressed Debt strategies, all of which have seen good performance in 2015.
The Sciens managed account team ensures that the best possible infrastructure is in place, working with dedicated in-house legal, risk, compliance and operations teams while also employing external service providers such as administration, audit and custody.
This year, Sciens' infrastructure development has seen the addition of an EU-onshore umbrella structure. This allows hedge fund managers to offer investment solutions to European investors under the Alternative Investment Fund Managers Directive (AIFMD). Significant interest has been generated, in particular from US and Asian managers looking to continue marketing their strategies within the EU.
