Not just surviving… thriving
Another year, another fantastic awards event. The Reform Club Library, venue of the 2017 Hedgeweek Global Awards, was full of optimism and a palpable sense of excitement at what the year could bring. Of course, there are significant forces of change that hedge funds need to navigate, not least of which is MiFID II, which comes into play next January. But as global monetary policy shows signs of divergence, and markets return to fundamentals, the environment for seeking out alpha is improving.
On the regulatory side, working with the right partner to navigate MiFID II and countless other regulatory compliance demands, has become pivotal to hedge funds. What has become increasingly apparent is the need to not only be kept updated on regulations, but crucially how they impact firms.
"It's important to help our clients by explaining the various nuances in regulation and the way regulation is phrased," says Julian Korek, Global Head of Compliance and Regulatory Consultancy at Duff & Phelps. "In the US, people come from a legal background whereby they read the regulatory rules and interpret them and they struggle with markets like the UK, which is more principals-based and requires you to provide substance on what you are doing.
"Our global clients appreciate having both broad knowledge across the major regulatory markets such as those overseen by the FCA, the SEC, etc, but also having access to deep, technical expertise as and when needed."
Over at SS&C GlobeOp, a division of SS&C Technologies and one of the world's largest hedge fund administrators, it has built a team of dedicated experts in its regulatory solutions business.
"For all existing regulations, and upcoming regulations, we have a process that aims to figure out the requirements and then systematise them. This is then delivered via a web-based application that helps hedge fund managers collate the necessary information and manage the workflow. We have approximately 600 clients for whom we handle all their regulatory processes," confirms Rahul Kanwar, Head of SS&C GlobeOp.
Increasing regulatory scrutiny on best execution, and conflicted business models will likely benefit Prime-of-Prime providers going forward, potentially putting them in a stronger position than single prime brokers. One such firm is Sydney-based Invast Global.
"We have a core philosophy of focusing on where we think the market or regulators should be and work towards delivering a solution that suits this future state," asserts Gavin White, CEO of Invast Global.
This is particularly true in a global environment dominated by regulatory change. Increasingly, managers need to think about: What are the regulators looking to achieve? What specific structural changes do we feel need to be made to benefit market participants and satisfy future regulatory states? How can we structure our business and our products to best cater for this future?
"We realise this could take time but feel that our approach will be rewarded as regulations continue to favour those Prime‑of-Primes who have structured themselves in a way that benefits all market participants and promotes transparency," adds White.
The more support that hedge funds receive in these matters, the more time they can devote to the task at hand of trading and spotting the next best market opportunity. Credit markets, in particular, are proving attractive for managers to generate returns on the long side as well as short.
La Française Investment Solutions, part of the EUR60 billion La Française Group, manages the flagship LFIS Vision – Credit Opportunities Fund, a long/short credit vehicle.
Renaud Champion is Head of Credit Strategies at LFIS. He explains that the aim of the fund is to generate through-the-cycle performance whilst remaining agnostic on credit and the various segments within the asset class.
"We want to try and find the cheapest longs, within a wide range of credit assets, as the name of the fund suggests," says Champion. "This ranges from vanilla corporate bonds to structured credit and also cash assets and complex credit derivatives. We screen the entire credit market in Europe and the US to find the cheapest longs."
"We want to be sure that we capture everything within the credit space and that we pick out the right longs. What differentiates us from our peers is our focus on moving across the capital structure as the credit cycle rolls out," adds Champion.
On the global equities side, London-based Quadra Capital, manager of Quadra Capital Global Equity Alpha, a UCITS V-compliant vehicle, takes a unique multi-thematic approach to identify the most promising trades. Specifically, it uses three themes in its stock selection programme that are uncorrelated to each other: demographics, resource scarcity and innovation.
"It is impossible to track 10,000 global equities so you have to take an angle," says Quadra Capital CEO, Guillaume Touze. "Take demographics, for example. One firm we like is Mead Johnson; one of the leading infant milk powder production companies. They have a big exposure to Emerging Markets, where some 25 per cent of their turnover comes from China. China has scrapped the one child policy and this has led to a huge increase in milk demand."
Funds like Quadra Capital are appealing to investors because they fall into the `liquid alternatives' category, offering daily/weekly liquidity and greater investor protections.
Another such firm enjoying success in the marketplace is New York-based Wavelength Capital Management.
"Liquid alternatives provide access to alternative strategies at lower costs, with more regulatory oversight, a higher degree of liquidity, and greater transparency than hedge funds," says Wavelength co-founder, Mark Landis. "In the first wave of liquid strategies that came to market, many hedge fund managers utilised sub pieces of their strategy to retrofit into a liquid category.
"Our systematic strategy, utilising liquidity calculations on data, has not changed. We were built to give a liquid positive return stream in any economic environment. We have not changed our process and look forward to helping our clients and outperform our peers who are trying to squeeze pieces of a strategy into a category."
This is also an area that leading seed investor, Tages Capital, is targeting. Last year, Tages began to launch UCITS absolute return single manager funds on the Tages International SICAV fund platform domiciled in Luxembourg and the firm sees further opportunities in 2017.
"We see good opportunities to grow our geographical footprint and work with many new investors across all our core areas, including seeding, liquid alternatives/UCITS investing, customised and specialist portfolio management as well as infrastructure investment," says Jamie Kermisch, CEO, Tages Capital. "This year Tages will launch some exciting new funds and expand our specialist alternatives offerings."
As institutional investors become more sophisticated with their allocation programmes, the more they are considering the use of segregated managed accounts on private platforms. This is reaping dividends for HedgeMark, a BNY Mellon Company and one of the industry's leading pure play dedicated managed account providers.
HedgeMark's DMA business model is to help institutional investors set up and operate their own managed account platform. "Every client gets their own bespoke platform fully customised to their needs," explains Andrew Lapkin, CEO of HedgeMark. "They are able to leverage HedgeMark to operate the platform, but importantly, maintain greater ownership, and long term portability.
"Many institutional investors are not comfortable investing with smaller managers because of operational concerns. Investors can overcome those concerns using a dedicated managed account. It gives them access to a broader pool of talent, and to innovative investment ideas that previously might not have been a viable investment option," concludes Lapkin.
From managers to platforms and service providers alike, the 2017 Hedgeweek Global Awards underscored the enduring ability of the hedge funds industry to thrive, no matter how challenging the conditions.