In this interview Ian Cadby outlines how Liberty Ermitage doubled its assets under management in funds of hedge funds to over US$1 billion over the past year, and is now expanding into the North American market.
HW: How did you manage to double your assets under management over the past year?
Cadby: Targeting the mainstream institutional investor audience has really been an evolutionary process, the seeds of which go back several years, when we decided to be more vocal about Liberty Ermitage's positioning as a serious player in the European hedge funds arena.
We focused on building a distribution team in London and Jersey (Channel Islands) targeting institutions including pension funds, initially across Europe, the Gulf States and more recently in North America in addition to South Africa where we naturally have excellent distribution.
We recognised that our track record needed to be both robust and show meaningful longevity, and that once the important three year hurdle was achieved pension funds and other similar investors would place us firmly on their radar screen.
We built the investment platform by hiring a number of ex-hedge fund traders so that we could speak the same language as the fund managers in whom we were investing. Many of our core investment team are ex-convertible bond, equity and option traders, this aspect means we gain respect from the manager we are evaluating, helping us to not only gain more information flow from those managers, but as importantly be technically competent to analyse that data efficiently.
HW: What difficulties did you face in dealing with pension funds?
Cadby: Pension funds are not sceptical at the generic level when it comes to hedge funds, however they are sceptical at the micro level. This means that they need to be satisfied on a myriad of factors, ranging from the balance sheet of the Group and the efficiency of our administration systems to the details of the funds themselves.
On average, a pension fund will make three/ four visits to our offices and number of follow-up telephone and video conference calls before it makes an investment decision. Typically a pension fund will allocate circa US$20m initially and build that investment out significantly.
HW: Do you take early stakes in emerging managers?
Cadby: This is one of the core strengths of our business. We have a strong emerging manager programme and we also launched the Strategic Partners Fund, where, along with other partners in the fund, the Fund takes real or synthetic equity stakes in emerging managers by seeding them.
The initial partners in the fund included several large US and European institutional investors including Bear Stearns, and hedge fund managers who are seeded by SPF have the opportunity to also convince these underlying SPF investors to make direct investments in the managers' strategies.
This aspect alone makes SPF a unique product within the fund of fund space, normally fund of funds do not encourage their investors to invest with managers outside of their fund of funds. We also often sit on the boards of these funds, so we get to see both detailed strategy as well as business risk ensuring excellent transparency.
I am still surprised though, that roughly eight out of every ten emerging managers who come to see us do not have a business plan - my advice to any emerging manager is to prepare a coherent business plan setting out your investment strategy, team strengths, detailed costings and financial targets before you visit seed investors.
HW: How are you tackling the US market?
Cadby: I began visiting North America in June 2002 along with my colleague Jonathan Wauton, taking in a range of institutions, from wealth offices to foundations and endowments. We reminded these institutions that Liberty Ermitage has one of the longest track records in the European hedge fund space, dating back to 1984 - it is a core strength of the firm - and spread the message that European hedge funds are performing well against their US counterparts.
We highlighted the fact that these US institutions could gain solid exposure to European hedge funds by utilising our expertise, as opposed to say building out their own research capability on the ground. This message has been well received and we are fast expanding our activities in both the United States as well as Canada..
HW:How are you growing your business in the US ?
Cadby: We are building the US business on three fronts. First, we have made considerable progress over the past few months in leveraging the US distribution networks of some of the founding partners in the Strategic Partners Fund along with our existing distribution alliances.
Second, we have recently established a new and highly significant partnership with two leading figures in the US alternative product arena, namely Nina Lesavoy and George Skouras of Cue Capital LLC.
Third, we are also in the process of hiring a number of senior investment and marketing professionals to join our US platform beginning with Lincoln Singleton, who joined us from Highline Capital, a long/short US equity fund.
These moves, together with our continual focus on developing and maintaining a robust investment team and track record in Europe, should stand us well in the US market.
Background Note: Liberty Ermitage Group (LEG) has over US$2.5bn under management with US$600m in money funds, US$800m in equity and bond funds and US$1.1 billion in hedge funds. LEG's hedge funds have more than doubled over the last year.
LEG is a research led asset management firm. Its disciplined approach encompasses rigorous analysis at the macro & strategy levels. This top down approach is complemented by bottom up manager evaluation with emphasis on extensive qualitative and forensic analysis. LEG tracks over 4,000 hedge funds with an investment team of 16 including three former hedge fund managers.
LEG is owned by Liberty Group, the third largest Life Assuror in South Africa, which in turn is part of the Standard Bank Group with combined assets under management of US$48 billion and aggregate market capitalisation of US$6.3 billion
LEG offers five core services:
LEG is headquartered in Jersey, Channel Islands and has operations in London, Bermuda and Luxembourg.