Giles Worthington (pictured) and Tim Short, portfolio managers of the RiverCrest European Equity Alpha Fund, say their strategy – offered through a Ucits platform – should be capable of performing well in macro-dominated environments, since the investment process combines stock-picking with portfolio construction and risk management disciplines to neutralise market-associated risks and isolate alpha.
GFM: What is the history and background of your company, principals and fund?
GW/TS: RiverCrest Capital, an absolute return asset management company, launched its European equity market neutral strategy on December 2. The firm was formed last year by chief executive Rod Barker and Sir John Beckwith’s Pacific Investments. Pacific has backed various successful asset management boutiques over the years, notably Thames River Capital (including Nevsky Capital), River & Mercantile and Liontrust.
London-based RiverCrest is owned by its partners who, in addition to Barker and Pacific Investments, include Michael Spencer, chief executive of ICAP, and Jim Pettigrew, non-executive director of Hermes, Aberdeen Asset Management and RBC Europe. We were hired by RiverCrest as portfolio managers to launch its European long/short market neutral product, which was developed and incubated during our time at M&G.
The fund targets absolute returns net of fees of 12-15 per cent per annum, with a target annualised volatility of 5-8 per cent. RiverCrest believes the strategy is able to perform well in macro-dominated environments, since the investment process combines a proven stock-picking ability with portfolio construction and risk management disciplines that neutralise systematic market-associated risks, therefore isolating alpha.
GFM: What is the structure of your fund?
GW/TS: The RiverCrest European Equity Alpha Fund is a sub-fund of the Dublin-domiciled FundLogic Alternatives Platform, an open-ended Ucits investment company promoted by Morgan Stanley.
GFM: Who are your main service providers?
GW/TS:The auditors are Ernst & Young, legal counsel is Matheson Ormsby Prentice, and our administrator and custodian is Northern Trust.
GFM: What is your distribution strategy and targeted client base?
GW/TS:RiverCrest Capital provides distribution services directly. The fund has been launched with substantial commitments by the partners, friends and family and institutional investors. The client base is targeted to be UK- and European-based institutions, IFAs and high net worth investors. RiverCrest will partner selectively with regional distributors in Europe where appropriate.
GFM: What impact has the recent global financial crisis and economic downturn had on your business?
GW/TS:The financial crisis and downturn has caused much scepticism throughout the hedge fund world. Our investment process has been specifically designed to ensure full transparency in our portfolio management and investor communications. We have tailored our product to be fully transparent, highly liquid and with rigorous risk management.
The economic downturn has increased the volatility of the markets, which we feel this product can navigate through due to its low volatility and lack of systematic exposure.
GFM: What are the advantages and disadvantages of offering hedge fund strategies within a Ucits structure?
GW/TS:The advantages of a Ucits structure is that clients have the opportunity to invest in a regulated fund that generally provides more favourable liquidity terms than offshore hedge funds.
GFM: Please describe your investment process.
GW/TS:Stock selection is driven by cash flow analysis of European listed companies; cash flow is a useful predictor of profit growth or reduction in companies, and therefore the subsequent equity value creation or destruction of a stock. Candidates for inclusion in the portfolio, whether long or short, are determined through this proven methodology.
Volatility and correlation analysis is performed to construct a portfolio that is beta neutral and where systematic risks have been largely removed. This allows the alpha from the stock selection to drive returns at the portfolio level.
GFM: What is your approach to managing risk?
GW/TS:Risk management is integral to the investment process, with MSCI Barra being used to decompose risk and return factors in portfolio construction. Additionally RiverCrest Capital utilises RiskMetrics for central risk oversight and ensuring the fund remains within the internal and Ucits limits established for the fund.
GFM: How has the fund performed so far?
GW/TS:During the inaugural month of December, the fund returned 0.36 per cent, compared with a fall of 0.7 per cent across European equity markets. This was achieved with a gross exposure range of 80 to 86 per cent and steady volatility of around 3.0 per cent (predicted) over the month.
GFM: What do investors currently expect from managers?
GW/TS:Above all else we believe investors need to be really able to trust the manager, and to have a frequent, honest, open dialogue with how the fund is coping with the markets.
GFM: What differentiates you from other managers in your sector?
GW/TS:Our process is a combination of a proven stock selection based on cash flow analysis with a rigorous portfolio and risk management overlay, resulting in a pure alpha strategy where unintended risks are isolated and neutralised. In an environment dominated by headline risk, high volatility and correlation, we feel this is a particularly compelling proposition.
GFM: How do you view the environment for fundraising over the coming 12 months?
GW/TS:Investor confidence is likely to remain subdued over the coming year, with a focus on capital preservation, liquid and uncorrelated strategies.
GFM: Do you have any firm plans for further product launches?
GW/TS:In time we intend to build RiverCrest Capital to offer a range of uncorrelated absolute return funds. Most importantly, our growth will be performance-led.