Honing one’s edge to stand out from the crowd
With fund raising set to become even more challenging in 2016, hedge fund managers have their work cut out but as this industry has proven time and again, innovation and coming up with creative ways to attract investor dollars – as well as trade markets – is never far away. Hedge funds thrive on adversity, although one feels that with performance having lagged for a couple of years, 2016 could be a particularly important year.
Not that this was a concern for the fantastic selection of hedge funds at this year's Global Hedgeweek Awards event, with each of our winners having delivered exceptional returns for their respective investors.
James Holloway is CIO of Piquant Technologies – this year's winner for best CTA. The Pegasus Fund enjoyed a fourfold increase in assets during 2015, having returned nearly 20 per cent the previous year, and represents a new class of CTA that uses machine learning to control the systematic trading model.
"We try to get data from a wide range of sources, and we are a heavily technology dependent fund. We've built everything internally so that we can effectively monitor and process all of that data. We are not economists at Piquant, indeed many of us are trained in the sciences. This means that we view data as being literally that; empirical observations from which we try to extract some kind of information, rather than using data to try and support a pre-existing model. We let the data build its own model and our systems then adapt to it accordingly," explains Holloway.
Currently, Holloway thinks that equities are incredibly volatile and are over-valued by just about any measure. "Long-only equities, in our view, seem a dangerous area at present. CTAs, which are highly diversified across multiple markets, have historically performed very well in times of uncertainty or crisis. There is a clear appetite in the market for new types of CTAs and there aren't too many of them around. We are one of a select handful of newer quants that are successfully doing interesting and different things," comments Holloway.
Go to any conference and the chances are, when investors are asked to vote on their preferred strategy for 2016, market neutral will feature prominently. In the current market environment, non-directional strategies are garnering a lot of interest.
The Sabre Dynamic Equity Fund managed by London-based Sabre Fund Management – although awarded best equity long/short fund – is better thought of as being a `market neutral plus' strategy. Launched in February 2013, it is a fully systematic equity long/short strategy with a variable bias.
With respect to fund raising, Melissa Hill, Managing Principal, confirms that Sabre Fund Management has two new partners providing acceleration capital; one in New York, the other in Paris. "They are going to help us with distribution, both in Europe for the UCITS version of the strategy and also in the US for the Cayman fund. We now have our three-year track record for Sabre Dynamic Equity Fund and we want to maximise asset raising opportunities. We have also just launched a fund-of-one for a US institution and as we are able to offer bespoke portfolios to our investors, we are hoping that this will increase our quota of longer term assets," explains Hill.
Another of our award winners this year providing non-directional strategies to investors is Pfaffikon-based Blue Diamond Asset Management – voted this year's best statistical arbitrage hedge fund. The Non-Directional strategy has been running since 30th September, 2011 and has generated a net annualised return of 21.6 per cent net.
According to Jonas Stark, CEO/CIO of Blue Diamond, institutional investors are choosing to allocate to the Non-Directional Strategy for three reasons.
"Firstly, it offers a relatively high absolute return target and it has consistently achieved this target (net of fees). Secondly, the resulting return stream has a low correlation with traditional asset classes, risk factors, and other strategies. And thirdly, their investment gives them access to some of our proprietary research on volatility term structures and the volatility of volatility, which they can incorporate as a variable in their own investment decision-making processes," explains Stark.
Moving aside from fund strategies, one issue that any hedge fund manager is increasingly having to focus on is cybersecurity; a theme that will undoubtedly dominate the industry in 2016.
All of which is good news for third party providers such as ACA Aponix – voted best global cybersecurity services provider. According to James Tedman, Managing Director, ACA Aponix (Europe), vendor risk is expected to become a greater focus during 2016.
"Last year we saw a significant breach at a fund administrator and we believe that there will be others during the course of the year. We are continually developing the vendor diligence part of our offering, asking more pointed questions. We are also introducing first hand inspections of vendor sites such that we can review their infrastructures, meet with their staff and validate of some of the question responses.
"Many clients are keen to go beyond the measures required by the regulators and are looking for us to assist them with this. One such example is the use of table top incident response exercises whereby we simulate breach scenarios and work with members of the client's team to test and practice incident response plans as well as help staff understand roles, responsibilities and actions to take in the event of a breach," outlines Tedman.
Ron S. Geffner, partner at New York law firm Sadis & Goldberg LLP – voted this year's best global law firm – heads up its Financial Services Group. On the subject of cybersecurity, he confirms that "we are actively guiding our clients with regard to the requirements and associated risks.
"The SEC's Office of Compliance Inspections and Examinations examined 49 registered investment advisers and 57 registered broker dealers in 2014 and in January 2015 reported that 74% of the registrants interviewed experienced a cyber-related incident. In September of 2015, the SEC brought their first enforcement case against an investment adviser for allowing a breach of data to occur, exposing personal identifiable information of the adviser's clients to an unknown hacker.
"Moreover, advisers registered with the CFTC are required to have written policies and procedures regarding cybersecurity controls and incident reporting by March 1, 2016," says Geffner.
Perhaps unsurprisingly, cybersecurity is also becoming a key consideration with respect to fund governance. Anne Storie is the CEO of DMS Offshore Investment Services Limited, Cayman's leading provider of fund governance and directorship services and winner of this year's best offshore regulatory advisory services firm.
She confirms that the firm is receiving more cybersecurity questionnaires, not just from institutional investors as part of their ODD but also from clients' service providers.
"We have a full-time cybersecurity officer who goes through all the questionnaires; some are comprehensive, some are just check-the-box exercises. With the technology infrastructure we have in place, we are well positioned to answer any questions and help guide our clients on what the latest regulatory developments are so that they can stay on top of their cybersecurity processes," says Storie.
It is worth stating, in conclusion, that aside from the continual headache of coping with regulatory developments and delivering valuable returns for investors, today's hedge fund management community must also focus on how to build a more effective brand identity. Standing out from the crowd, in an industry that now has more than 11,000 hedge funds, is critical.
"Boutique fund managers, which institutional investors are looking more closely at, need to improve their look and feel and shout about their differentiators. They need more sophisticated marketing and the appetite in the market is clearly building," suggests Anthony Payne, Chief Executive of Peregrine Communications – winner of this year's best global PR firm.
He says that social media is giving managers the opportunity to build their brand and distribute their content cost effectively. "If you add in to that all the analytic capabilities, there's a lot you can do today to build your brand in a sophisticated, targeted way. We've been doing, for example, some interesting education videos; Elm Partners* is one, which has been very successful," confirms Payne.
There's no doubting that hedge fund managers still have a way to go to fully embrace digital marketing and brand building. But if, as expected, the fund raising environment becomes even more competitive, the first movers will likely be tomorrow's winners.