Fred Siegrist provides a compelling insight into the thinking that underpins the investment processes at RMF, the asset management division of Man Group plc.
RMF is a leading provider of alternative investment solutions in Europe, specialising in hedge funds, leveraged finance and convertible bonds. RMF is headquartered in Pfäffikon/SZ, Switzerland, and also has offices in London, New York and the Bahamas. RMF currently manages over USD 20.4 billion (as at 31 March 2006) of assets, with approximately USD 17.6 billion (as at 31 March 2006) invested in fund of hedge fund products.
RMF began as a hedge fund manager in 1992 with a mandate from one of the world's most prestigious market neutral hedge funds. Since then it has focused on servicing investors by providing a range of comprehensive products and solutions. RMF is part of Man Investments, the asset management division of Man Group plc, a FTSE 100 company.
HW: What makes a manager special enough for RMF to select him?
FS: RMF conducts a very thorough due diligence of all managers in which we consider investing, looking at whether:
When seeding a fund, we also consider whether the manager has the ability to attract other investors and develop their business into a commercially sound enterprise for the longer term.
HW: What is your approach to seeding?
FS: RMF tends to seed funds on an opportunistic basis, rather than with a view to building capability in a given markets as market tend to go through short-term trends while we are looking to secure superior risk-adjusted performance over the medium- to longer-term.
HW: How many funds are in the RMF portfolio?
FS: About 300, though this figure include double counting of approximately 50 MACs
HW: How have RMF's portfolios performed this year?
FS: RMF has a wide range of products/portfolios with different risk/return patterns.
Our highly diversified portfolios (over 40 managers) have clearly outperformed the investable indices and are in the top quartile relative to their peers.
RMF Absolute Return Strategies I returned 6.74 per cent in 2005 while RMF Four Season Strategies returned 6.75 per cent.
For the current year to date RMF Absolute Return Strategies I has returned 6.60% as at 30 April 2006 while RMF Four Season Strategies has returned over 7.24% over the same period. The portfolios could therefore already achieve the same returns as for the whole last year.
HW: What are your criteria for removing managers from your portfolio?
FS: As mentioned previously, RMF implements a stringent and continuous due-diligence process. We consider quantitative criteria such as returns, levels of risk and correlation to other investments in the portfolio and qualitative criteria such as sustainability of returns, risk management process, operational capabilities and other issues. We also pay close attention for any signs of style drift, which would suggest that the manager is deviating from their strategy and are concerned when we see an increasing correlation between funds within a portfolio.
These factors are all given a score and that score is regularly re-evaluated. If a manager's score falls too low in any given area, we would place them on a watch list and liaise closely with them to resolve the issue or, if necessary, redeem if the issue proves to be irresolvable.
If, however, we found evidence of fraud or malfeasance at a manager we would, in almost all circumstances, redeem automatically.
HW: How many managers do you have on the substitutes bench?
FS: If you mean managers on our watch-list then it's fewer than 5 per cent. Being on a watch list does not necessarily imply that we are planning to redeem, but that some event has triggered closer supervision, in which case we will hold a continuous dialogue with the manager in question, including on-site visits, until the situation has been resolved and we can return them to a normal rating.
HW: What sectors/strategies do you expect to perform well in 2006?
FS: Disequilibrium in global markets has kept many investors on the side lines in the last couple of years, stifling financial markets. As a result, we have seen limited volatility in equity markets and limited opportunities in most strategies over the past two years.
While it is impossible to predict exactly when this will turn around, we can see a number of signs that, despite the synchronised growth of the world economy, risks are increasing over time as liquidity tightens, creating market imbalances which must eventually correct. This will increase volatility and provide a much wider range of investment opportunities to hedge fund managers.
That would directly benefit global macro managers, who are traditionally the first to benefit from emerging trends, followed by managed futures, which also generate their best returns when markets have a clear direction. Relative value strategies will also profit from increasing volatility, though returns will remain flat until markets pick up.
HW: How will these changes/future events impact on your own portfolios at RMF?
FS: Portfolios will be reallocated into this direction.
HW: What differentiates you from other FoHF managers?
FS: RMF is a highly experienced alternative investment provider with over USD 20 billion in assets under management, mainly in hedge funds. The strength of our business model can be summarised as:
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?
FS: Volatility in the hedge fund industry has dropped slightly in recent years. For example, the HFRI Fund of Fund Index had an annualised volatility of 4.4 per cent between 1 January 2000 and 30 April 2006, down from 6.0 per cent for the decade ended 1 January 2000. That reflects the increasing institutional participation in hedge funds, as this category of investor tends to be more conservative than wealthy private clients. As a result, funds of hedge funds are frequently reintroducing risk in their portfolio, usually at the asset allocation level, by applying leverage.
HW: In the current environment, are you prepared to invest in some of the more exotic strategies being launched in search of alpha? If so, please detail.
FS: Innovation is a cornerstone of RMF's business strategy. Continuous education and industry research is a major component of our success in staying ahead of the innovation curve to solve client needs. Our presence in a broad spectrum of complimentary areas of alternatives investments (hedge funds, leveraged finance, convertible bonds, and new alternatives) provides information sharing, synergies and exposure to new trends.
This is reflected in some of the products launched in the past three years, such as RMF Commodity Strategies, RMF Asian Opportunities, RMF Alternative Risk Transfer, RMF Healthcare Opportunities, RMF Energy and RMF Longer Term Opportunities.
We will continue to access these opportunities when and if they become available, as long as the managers and strategies meet our due diligence and portfolio criteria.