Interview with Effie Datson – For CTA managers on Deutsche Bank’s dbSelect platform, 2012 has very much been a year of contrasting fortunes. According to Effie Datson, director, product head for dbSelect, 1H12 was a challenge for these trading strategies, but managers generally posted good returns in July, August and September. And, though October has been a difficult month, the long-term case for adding such strategies to a portfolio remains robust.
Which is no doubt a relief for dbSelect, having chosen to ramp up its CTA manager offering to investors over the past two years. “We recently added Man AHL, Crabel, and RG Niederhoffer to an already outstanding collection of more than 70+ trading strategies in this area,” confirms Datson. “Most of this has been in response to a number of large investor mandates. We have also been adding pure commodities managers over the past 12 months, including such flagship programs as the Hermes Commodities Absolute Return program, Coeli, Abraham, Global Advisors and JE Moody.”
The dbSelect platform focuses on liquid hedge fund trading strategies. Typically, these include FX, CTAs, global macro, commodity and, to a lesser extent, fixed income and volatility arbitrage strategies. Together with Deutsche Bank’s other MAP, dbalternatives, the bank has more than USD11.6billion in AUM, making it the leading industry provider of managed account platform solutions.
Investors are looking for liquid strategies in today’s uneasy market environment, and this has very much played to dbSelect’s advantage. Inflows have largely followed the pattern of manager performance – slow at the start of the year, picking up in Q3.
One interesting trend in 2012 has been a shift in the source of investor inflows. Says Datson: “From the close of business 2011 until now I would say the largest shift in allocation from our underlying clients has been a proportional decrease in assets from pension funds – including those in Japan – and a quite considerable increase from US asset management companies. We’ve also seen a relative increase in FoHF money as well as inflows from US endowments and foundations.”
The nature of managed account investors has always been largely institutional. Indeed, the amount of technology and infrastructure spending undertaken by Deutsche Bank has, over time, enabled it to create a truly institutional-class platform. But within that institutional investor mix, things do change.
Japanese institutions have not suddenly turned their back on hedge fund managed accounts. Rather, the reduction in exposure may be linked to increased regulatory scrutiny of the alternative investment industry and trading practices in Japan. Since the start of the year, dbSelect has seen net outflows from the Japanese market, though Deutsche Bank is optimistic that interest will resume in the not too distant future.
“The fallout of several specific incidents in Japan has been that hedge funds have basically fallen off the front burner for these institutional investors. We still see interest – they still want exposure to the asset class – and my view is that the managed account solution is the ideal solution to the issues in that market,” says Datson. “However, it will take time for those investors to come back to the market with confidence.”
Conversely, when asked why US real-money asset inflows into managed accounts have risen this year, Datson credits it to the fact that access to hedge fund strategies has evolved markedly this year. The market seems to more fully understand exactly what it is dbSelect can offer and the rise of US 40-Act funds linked to alternative strategies has fuelled much of that growth.
“Having built a presence in the US for several years, educating the market and showing how dbSelect can benefit investors, all of that effort is now bearing fruit,” says Remy Marino, Head of Alternative Investment Solutions in Deutsche Bank’s New York office.
Perhaps another reason for increased interest ties in to the earlier point regarding the platform having expanded its range of CTA managers. In 2012, the platform added more than 50 new trading strategies in response to investor demand.
This last figure may not sound significant, but in the context of portfolio construction – something the largest institutions are beginning to favour in a managed account format – it is.
Says Datson: “Once you get to a certain size, a certain critical mass, and you have enough managers to be able to create portfolios it becomes easier to close the investment. Whereas if you’re missing quite a lot of managers that investors are interested in, then it’s harder to make the case that they should invest via your platform.”
Currently, dbSelect has more than 170 managers on the platform. These include a variety of stellar names such as Hong Kong-based Ortus Capital, one of the region’s leading currency hedge funds managed by Dr. Joe Zhou. Like CTAs, FX strategies have had a bit of a mixed bag performance-wise this year, with some performing well and others less so.
“The markets have seen range-bound trading without too many clear trends. Many of these ranges were occurring right at the point where people were expecting a break out, entering trades, and then prices were reversing causing losses so it was very hard to generate performance. Managers have been adapting their strategies recently though, so performance has been better in recent months,” observes Datson.
In terms of how investors are allocating to dbSelect, the fact that it has such a wide representation of leading managers means that more institutions are choosing to invest with the managers that are currently available. There have been some large institutions with significant tickets to allocate, and who come to Deutsche Bank with their own manager preference to invest with privately, but as Datson explains:
“Increasingly we are building a very good representation of high quality managers on the platform. We are now seeing investors coming to us and selecting specifically from the universe of managers we have, even for those with sizeable allocations. So it’s working both ways.
“We’re always happy to put new managers on the platform where an investor has interest provided they’re willing to allocate above a minimum size. In that sense, dedicated single mandates are an important part of our business. However, what we’re seeing is that very often investors want to invest in a manager’s flagship strategy and it’s more the exception rather than the rule that someone asks for a bespoke mandate.”
Unlike other MAPs, investors who allocate to dbSelect receive a bespoke product. Each investor can choose how to receive the return stream from a chosen manager or portfolio of managers: for example, as a swap, certificate, or a note, to name a few options.
“The note can be principal protected or not. It can be denominated in any currency. There are a wide variety of options available to suit the end investors’ needs; it’s not a one-size-fits-all approach,” says Hans Feder, Global Head of dbSelect.
This avoidance of using underlying funds has its advantages: it means managers can be more quickly onboarded; the risks can be better controlled on a real-time basis; and it also eliminates unnecessary costs.
Everything on dbSelect is geared towards delivering exactly what the investor needs.
Concludes Datson: “We understand who the investors are, who the managers are, and I’m very optimistic on the prospects of the platform growing even more next year: watch this space.”