Chris Jones outlines Key Asset Management's investment thinking and the various investment strategies pursued by the firm's range of funds of hedge funds.
Dr Chris Jones is the Chief Investment Officer for Key Asset Management. Chris was previously with IO Investors as their Director of Alternative Investment Strategies for 3 years, where he built their fund of hedge fund business from scratch, offering clients a variety of bespoke and packaged products.
Prior to this Chris worked at State Street as an investment manager of a traditional multi-manager product and as product developer of their hedge fund offerings. Previously, Chris was an associate director at Liberty Ermitage in portfolio management roles. Chris holds a PhD in Mathematical Finance from Cambridge and was a researcher and consultant at the Centre for Financial Research, Judge Institute, University of Cambridge, where he still occasionally lectures. He has been involved in the hedge fund industry for the past 12 years.
HW: What is the background to your funds?
CJ: Key has been managing hedge funds of funds for 16 years now, with our inaugural product, Key Hedge, never having had a losing year. We currently manage USD 1.0 bn, over 65 % of which are institutional assets.
Our funds of funds range from the multi-strategy Key Hedge to single strategy / niche funds of funds: Key Global (13 year track record) Key Asia (11 year track record), Key Europe (7 year track record) and Key Recovery (4 year track record). In addition, we manage bespoke portfolios for some well-known institutions.
We are over 30 people with a full time investment team of 8 with offices in London, New York, Oslo, Stockholm, Geneva, and BVI.
HW: Have there been any recent events such as launches or changes/additions to the management team?
CJ: On 7 November 20005 a new Head of Sales & Marketing, Raul Biancardi, joined the firm.
HW: What is your investment process?
CJ: The investment process consists of strategy allocation and manager selection, run in parallel with risk appraisal. At a strategy analysis level we construct proprietary reports running to 35 pages per month to analyse the drivers of risk and return, asset inflows and opportunity sets for every strategy in which we invest. This allows us to take a forward looking view on each strategy.
The manger selection process is very deep. We meet with over 400 managers a year that, in combination with Key's 15 year store of previous manager analysis, results in an extensive coverage of the investable hedge fund universe. Any fund that passes first stage analysis is subjected to in-depth and on-site analysis as members of our team build an investment report that is often in excess of 50 pages in length and which is not just factual but also contains much interpretation and critical analysis.
We look hard for weak points, potential worst case scenarios, personal issues as well as a rationale for returns to exist and perpetuate. Here it is our job to find and evaluate a clearly definable edge. Also, just because some risks are difficult to measure, it doesn't mean they can be ignored and we spend much time on operational risk, liquidity risk, valuation risk, financing risk etc.
The report is then combined with the risk appraisal and the combination analysis (with our portfolios) using our in-house developed risk management systems before any decision is made to approve the fund for investment. Investment decisions are made at our monthly investment decision meetings where the case is pitched by the appropriate portfolio manager and may be challenged by the other PMs and the CIO, the latter of which has right of veto.
HW: How have your funds performed?
CJ: For 2005 so far, Key Funds' performance has beaten the relevant indices and generally we rank well compared to peers. It's fair to say that niche single strategy funds of funds have outperformed multi-strategy portfolios.
HW: How many funds are in your portfolio?
CJ: We typically invest with around 20 underlying funds in multi-strategy portfolios, and 15 funds in niche portfolios.
HW: What makes a manager special enough for you to select him?
CJ: For us to select a manager, not only must he be able to prove he has an appropriate infrastructure, operational risk control and infrastructure, but he must also have an edge that we can identify, define and understand.
HW: What are your criteria for removing managers from the fund?
CJ: This could be for a range of reasons based on style drift, depletion of edge, assets, infrastructure, turnover or strategy.
HW: How many managers do you have on the substitute's bench?
CJ: For every manager there is a pre-selected alternative.
HW: What events do you expect to see in your sector in the year ahead?
CJ: A continuation of good returns in event driven investing (especially in Asia), a further pick up in European distressed and a resurgence in CB arbitrage. We will see more interest in niche/single strategy funds of funds.
HW: How will these changes/future events impact on your own portfolios?
CJ: We are already lucky enough to have a full stable of niche / single strategy funds ranging back to 1992. In terms of strategy allocation, we have a formal strategy allocation process which looks at future drivers or risk, return and opportunity set for each hedge fund strategy, from which the above commentary was derived. We will prudently rebalance strategy exposure on an ongoing basis in line with the above.
HW: What differentiates you from other managers in your sector?
CJ: A skilled, extremely risk literate investment team; Optimal asset size- nimble portfolios but solid infrastructure; Leading edge in risk management and downside control; Long track record with access to otherwise closed funds; Institutionally experienced and transparent.
HW: Some funds of funds have complained that managers are not taking enough risks in the current environment - what are your views on this and on risk in general?
CJ: There is an abundance of funds out there that take higher levels of risk but these funds are typically closed to new investors or kept deliberately small in terms of asset size. Key's 16 years of hedge fund investing in hedge funds means we have often been long term investors with otherwise closed funds and so we have access to them; our asset size of USD 1.1bn means we are small enough to give our investors meaningful exposure to funds that have been kept deliberately small.
HW: Are investors' expectations moving upwards and how do you deal with this?
CJ: Each one of our investors is different but it's fair to say that their expectations are well managed and there is no significant upward trend in their demands.
HW: Are you planning any further launches this year?
CJ: Key manages hedge funds of funds but we are very solutions minded and so we will always work both proactively and reactively to ensure that our investors get the best solution for their needs. There will always be new solutions and, when required, new products.
(Chris Jones was interviewed on 14 February 2006)
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