Investcorp and Interlachen are proud to accept the award as Best Multi-Strategy Fund in the 2010 Hedgeweek Awards, recognising the excellent returns produced by the Investcorp Interlachen Multi-Strategy Fund in a very turbulent 2009, with only one modestly negative month (March).
While the managers are delighted with the overall result for the year, a closer inspection of the drivers of those returns reveals something even more compelling. Despite investing in some of the most hard-hit areas of the market in 2008, such as convertibles, credit and fixed income, Interlachen positioned the portfolio entering 2009 to emphasise liquidity and low levels of leverage.
This unlevered approach in the first half of 2009 allowed the fund to meet any investor requests for redemptions without ever impairing liquidity through the use of gates or suspensions, which were prevalent in the dislocated markets in which the fund invests.
By mid-year, Interlachen became more confident that the worst of the financial crisis had passed and allowed a modest (one-half turn) amount of leverage in the portfolio with emphasis on value investments in the credit and convertible markets.
The managers feel their adoption of a ‘clean’ portfolio positioning at the beginning of 2009 produced high risk-adjusted returns rather than simply capitalising on a rebound of levered trades that had gone wrong in 2008.
The Investcorp Interlachen Multi-Strategy Fund has unique characteristics that have enabled it to be successful. First, its size allows the fund to be much more liquid and transparent than many larger funds. Additionally, the Interlachen and Investcorp partners combined are the largest investors in the fund.
This alignment of interests motivates the managers to shift capital in a nimble fashion to the most attractive opportunities and away from the less attractive, while allowing for hedging across the different strategies in a manner optimal for performance characteristics. For instance, if there is more value in the credit arena, the fund may position that portion of the fundamental value strategy to be long risk and simultaneously enter ‘short’ risk trades within the volatility strategy where risk premiums may be lower.
This ‘all weather’ approach with capital allocated to long and short risk across different asset classes in a nimble vehicle is distinctive in an era of opaque, illiquid mega-funds. Lastly, Investcorp provides independent, institutional-quality risk oversight as well as additional transparency and reporting to investors.
The fund also has fee advantages over other investment vehicles. Through the netting of all profit and loss across strategies prior to the deduction of incentive fees, investors benefit relative to those vehicles in which investors bear the netting risk of one strategy producing gains that are not offset by losses in another.
Interlachen continues to find compelling investment opportunities in the marketplace. Further deleveraging and restructuring in the US will likely continue to favour value investing in distressed and high yield debt.
Additionally, declines in volatility have made it more attractive to add exposure to long option strategies in the US and Asia. The uncertainty of both fiscal and monetary policy globally should continue to create excellent trading opportunities for those who are flexible and nimble and able to capitalise with efficient movement of capital.
Jonathan Havice is managing partner of Interlachen Capital