The Hedgeweek Interview: Omar Kodmani, senior executive officer, Permal Investment Management Services: “Many of the funds that are closed to new money are open to us”

HW: What is the background to Permal?

OK: Permal was set up in the early 1970s to manage hedge fund investments for Worms & Cie, a European holding company, although the business was headquartered in New York. Over the years the business has increasingly focused the business on funds of hedge funds and in 2005 was sold to Legg Mason. Today Permal has USD35bn under management and is one of the world’s largest fund of hedge funds managers.

HW: What are the characteristics of the Permal FX, Financials and Futures Fund?

OK: This is a global fund, which was launched in 1992 and is the largest in the world, with USD8.7bn under management. The fund invests with some of the world’s most recognised macro traders, focusing on discretionary, systematic, natural resources and relative value strategies.

HW: What is the fund’s objective?
 
OK: Permal FX’s investment objective is to generate net returns of 8 to 12 per cent annually, with volatility of between 4 and 6 per cent

HW: Have there been any recent news involving the fund?

OK: We have recently announced that the fund is to be offered to investors in Dexion Trading, a UK-listed closed-ended investment company.

HW: What is your investment process?

OK: This is a business about talent and investing with the best hedge fund managers. As the industry has grown, it has become harder and harder to find these managers. Each year we meet around 400 new managers, and monitor far more, yet only choose a fraction to manage our funds.

Our history and size certainly helps, having invested with some of the most recognised names in the industry since their early funding. We also know most of the ‘second generation’ hedge fund managers who are setting up and who learnt their trade from some of the older. more established firms.

In addition to manager selection, we seek to add value through strategy allocation. We have a strong record of enhancing returns as well as reducing portfolio volatility through the expression of our top-down views. In the case of Permal FX, the introduction of the natural resources sector a few years ago has been very beneficial and it was done at a time when only a few hedge funds focused on this area.

Finally, risk management and monitoring are an important part of the investment process. There is a separate risk committee, which is based in London and oversees the portfolios from a quantitative standpoint. The risk committee holds a joint review session each month with the New York-based investment committee.

HW: How has the fund performed?

OK: Through to the end of July, the FX Fund has this year returned 5.5 per cent and since its launch averaged net returns of 10.8 per cent per annum.

HW: How many funds and strategies are in your portfolio?

OK: We have 55 managers in the portfolio, with the lion’s share of the portfolio split between discretionary and systematic trading strategies; natural resources and relative value make up the rest.

HW: What makes a manager or strategy special enough for selection?

OK: It comes down to our due diligence process, which is fairly exhaustive, but equally important is knowledge of the hedge fund manager, having a proper understanding of how he or she works, and what they have achieved in the past. The key factors we look for are competitive edge and where it comes from, supporting infrastructure, and the right time for the strategy. In the discretionary macro area, for example, the competitive edge could come from a manager’s previous experience as a central banker.

HW: What are your criteria for removing managers from the fund?

OK: It comes down to various red flags that we monitor on a regular basis for each underlying manager. The main ones are performance, style drift, manager turnover, dramatic changes in assets or changes in terms.

HW: How many managers do you have on the substitutes’ bench?

OK: This varies by fund and strategy, but we generally have about 10 per cent on the bench in terms of the number of managers.

HW: What events do you expect to see in your sector in the year ahead?

OK: We are likely to see the larger funds of hedge funds continuing to increase in size, possibly at the expense of the mid-tier funds.

HW: How will this trend affect your own portfolios?

OK: We believe we have the capacity, so expansion will have little impact on our portfolios.

HW: What are your thoughts on the markets?

OK: Given the recent heightened volatility in markets, we can expect attractive trading opportunities to arise for macro managers, and this makes the Permal FX, Financials and Futures Fund all the more exciting from a timing standpoint.

HW: What differentiates you from other managers in your sector?

OK: It is the size of the fund and history that we bring to the sector. We know and have known most of the big name hedge fund managers since they launched their funds. We have operated in this sphere for more than 30 years, and it is bringing this experience to bear that counts.

Many of the funds that are closed to new money are open to us. Very few, if any, fund of funds can offer this experience or compete with this. We have also been early in accessing new investment areas, whether geographic or asset class, in the pursuit of alpha.

HW: Are investors’ expectations moving upward?

OK: Investors’ expectations are not necessary moving upward, but change is certainly afoot. The sector is become increasingly institutionalised as funds of hedge funds and hedge funds are becoming key asset classes and they gear up to this new market. Consequently you are finding that funds of funds are having to expand their infrastructure to meet the required expectations.

HW: How do you distribute your products?

OK: Mainly through partnerships with major international banks and other intermediaries who serve both private and institutional investors.

HW: Are you planning any further launches this year?

OK: We are always looking at the next steps forward, but we currently have nothing further to say on this.