The Hedgeweek Interview: Thomas Raber, Managing Director, Key Asset Management, London

HW: What is the background to Key Asset Management?

TR: Key was founded in 1989 by Morten Kielland and the first fund was launched in 1990. Morten was previously with Oppenheimer in London and Kidder Peabody in New York and had seen the value of absolute return investing. In those early days Key was essentially a family office operation manned by Morten and a research assistant and backed by investments from friends and family.

I joined Key in 1998, after 15 years in the City with BNP, Lehman and CSFB, to help evolve and grow the business by institutionalising it. This meant that whereas in the early days we were driven by family office money, we are now geared more towards the institutional market.

Of the USD 1 billion we now have in assets under management, the split today is approx. 80% institutional and 20% HNWI business. The latter is sourced via private client groups through whom we distribute our funds, rather than directly from individual HNWIs. As we continue to take on sizeable mandates, the ratio is shifting in favour of institutional investors. We are keen to continue dealing with HNWIs, but preferably through their IFAs and private banks rather than directly.

We have offices in five locations – London, Geneva, New York, Oslo and Stockholm.

HW: What are your core products?

TR: We have six core ‘Key’ funds of hedge funds:

* Our flagship multi-manager, multi-strategy product, the Key Hedge Fund which has USD 230 million in assets under management.

* A leveraged version of Key Hedge Fund called Key Hedge Fund Plus which offers 2:1 leverage, this has USD 50 million in assets under management..

*  Key Europe, focusing on European long short strategies

* Key Global, focusing on global long short strategies

* Key Asia Holding, focusing on Asian long short strategies

* Key Recovery, which specialises in distressed debt and event driven strategies – it is one of the few fund of funds specialising in these distinct strategies.

In addition to the six funds of hedge funds outlined above, we have a capital guaranteed structured product, Key Delta Fund, where BNP Paribas is the guarantor.

Finally, we also have a single manager product, Key Global Emerging Markets, managed by Chris Palmer at Gartmore.

HW: What are your key lines of business?

TR: Essentially we have two core business areas.

This first is the core range of ‘Key’ funds of hedge funds I have outlined above.

Second, we offer white labelled and segregated accounts. The public ones are with groups such as ACTA, a Scandinavian fund distribution company with whom we have launched several products, including the first Scandinavian retail fund of hedge funds. Last summer we became the sole investment adviser to SEB, the Swedish bank and insurance group. We also have various segregated accounts for institutional investors.

Our strategy here at Key is to pursue only those mandates that will fit us, rather than answer every RFP that comes through the door. We have been rather selective in that department and we expect the segregated account business to grow significantly over the next few years.

HW: What is the size of your research and fund investment team?

TR: Our research and fund investment team is one of strengths. Morten did an excellent job in the early years making astute manager selections, a job which has been continued by the investment team.

In the last year and a half, we have significantly strengthened this research platform by bringing in some very good people and last year we appointed a new Chief Investment Officer, Dr. Jaakko Karki, who has helped continue the development of the investment management and research platform.

The team has eight full time members including Jaakko and a risk manager as well as a research person based in New York.

HW: What is your asset allocation process and how does it differ from your peers?

TR: In terms of differentiation, firstly, we’ve been doing this for a lot longer than most of our peer group. Our oldest fund is fourteen years old and has never had a negative year, annualising at 9.45% – few groups have delivered that kind of record. And on the risk management front, we have been particularly good at avoiding risk by avoiding areas with which we are not comfortable.

At Key, we really believe that a significant factor that distinguishes us from the competition is our investment management approach. In tandem with our bottom up manager selection we have proprietary cutting-edge top down inputs which add value for our investors.

Decisions on managers and guidelines are made by Key’s investment committee that meets once a month. On this committee we have Morten, Jaakko Karki (CIO), Simon Ewart (COO), the risk manager and one of the senior portfolio managers. At this monthly meeting we go through our investment pool and examine all our portfolios.

HW: At any given point, how many managers do you have in your portfolios?

TR: The approved investment pool consists of approximately 110 managers out of which we have investments with around 75 managers.

HW: How frequently do you reallocate your portfolios?

TR: At the investment committee monthly meetings top-down and bottom-up driven re-allocations are made to acclimatise the portfolio to market conditions. We believe an element of turnover is necessary and in our investors’ interests as it reflects an active style of portfolio management.

A lot of time is spent by the investment team before we approve a fund for the investment pool, but no matter how good and rigorous you are, some managers just don’t work out, in which case they are replaced. We are continuously adding and reducing the number, style and weighting to a manager according to risk factor cycles, dealing with funds closing and re-opening, capturing the life cycle of funds’ performance, etc.

HW: What are the key factors that drive your selection of new managers?

TR: We have historically been early investors with managers. This also means that we have to be very careful to ask ourselves first, if the new manager is capable of doing what he says he will do and second, can he raise in excess of USD 50 million – USD 100 million.

As early stage investors, our qualitative manager selection ability is crucial – and we have the people with the experience, understanding and talent to evaluate managers. After all, some of these managers will not have an extensive track record; you need other ways of assessing their future return producing ability. Of course, we have a number of screens to weed out poor players, both quantitative and qualitative – and one of the most rigorous questionnaires in the business to help us ensure we identify managers that are top in their peer group.

We rate each manager not simply in terms of performance, but, equally, and maybe more importantly, in overall terms; he has to have the right business plan, right people, background, risk control etc., and although we are prepared to be flexible on one or two issues, it is ultimately the manager’s ability to satisfy us on the overall package, especially on their integrity, that will qualify him for inclusion in our portfolio.

HW: What are the factors that will lead you to fire a manager?

TR: We’ve a strong sell discipline at Key. When we fire a manager, it is generally because a manager fails to deliver what he has promised. This may be driven by a combination of factors, such as the departure of key team members, inadequate risk controls, underperformance or even outperformance in any given month.

De-selection can also be driven by the construction of the portfolio, where a manager simply fails to fit the construct. We are ultimately selling a fund of hedge funds which is an aggregate of a selection of managers, it’s like building a football team where we have to find different people to fit the positions.

Therefore, despite good performance we may de-select the manager because we have found another manager we prefer for the job – this is rare, but it can happen.

HW: Do you find that some managers are not taking enough risk?

TR: We have had a few managers that we felt had a very good team and a very good business plan, but the aggregate risk that they were taking was too low – we do not like this. For example, certain of our manager roster were slow to react to the paradigm shift that occurred in March 2003.

We have to remember that people come to us because we can find better risk adjusted returns than our investors can find themselves – if managers are not taking their stated level of risk they can’t produce the right level of returns, and on the other hand managers must not take a disproportionate level of risk – they have to find and deliver the right balance of risk versus returns.

HW: Do you feel that investors are currently better educated about hedge funds?

TR: I think the twin misnomers that hedge funds are high risk, and that hedge funds and funds of hedge funds are the same thing, have been dealt with by the industry over the last few years, to the extent that most institutions and HNWIs understand that these were incorrect.

We are continually educating investors, and while there are a few people that are still comparing ‘apples and oranges’, I am reasonably satisfied that most serious investors are now better informed and understand that funds of hedge funds are low volatility, well diversified and low/medium risk products.

HW: How do you distribute your products?

TR: First, we have direct investors that tend to be medium to large institutional investors that put their money to work in either our funds of hedge funds or in our segregated accounts.

Second, we have distribution partners in Europe and around the world. Rather than us running around and looking for smaller clients, they do that for us. These distribution partners are private banks, banks in general, other fund distribution companies and IFAs.

HW: There are indications that some of the larger funds of hedge funds are closing to new business – is this recent trend benefiting Key?

TR: Yes, some of our larger competitors are closing to new business because of capacity issues. This has in some regards played into the hands of Key  – investors have turned to Key and realised that although we are a medium-sized operation we have an excellent suite of products and that all our funds are open.

HW: Would you describe Key’s reach as global?

TR: Yes I would. As I mentioned earlier we have five international office locations. In addition to our core European clients, we have, for example, institutional investors in Japan and the Middle East; we have distribution partners in South America and a joint venture with a family office in New York.

In Europe we have historically been, and remain, strong in Scandinavia through direct investors and also through a number of local distributors in Norway and Sweden serviced by our local offices in those countries; we have the SEB relationship in Sweden and the ACTA relationship in Norway; we also have a number of distribution deals that we are working on with various private client arms of large banks such as CSFB Private Banking in the UK and Bank Carnegie in Luxembourg.

HW: Are you planning further hires?

TR: We are looking for high-calibre talent all the time. In the UK we are looking for people across the board including senior research analysts. We want to increase our penetration in Switzerland, at our office in Geneva.

HW: What are your plans for new products?

TR: In terms of funds of hedge funds, the launch of Key Hedge Fund Plus in February this year has proved a real success, raising over USD 50 million in the first two months and continues to grow.

We are seeing an increased demand for customised mandates, and expect this part of our business to grow this year and beyond.

As outlined earlier, we currently have one single manager fund but we are planning to grow this range. There are many single managers that have established small funds of funds – we have done the reverse and we are now selling the single manager product as a complement to investing in our range of funds of funds.