Crisis management: Credit hedge fund Palmerston’s Jesse McCormick discusses Covid-19’s impact on business functions
From the historic stock market sell-off and volatility surge that wreaked havoc on investment portfolios during March to the continued working-from-home practices which have thrown up various operational obstacles spanning technology, cybersecurity and infrastructure, the coronavirus crisis has upended all corners of the hedge fund industry.
For hedge fund chief operating officers, the pandemic has brought its own unique set of challenges. Managers of all sizes and strategies implemented extensive business contingency plans for home working in order to continue operations. But as firms slowly begin to return to the office following more than four months of lockdown, the concept of a “new normal” continues to be somewhat vague and undefined.
In a wide-ranging interview with Hedgeweek, Jesse McCormick, chief operating officer at London-based credit-focused hedge fund Palmerston Capital Management, discusses how his firm adapted to remote working, the benefits of being a smaller organisation, and the ways in which the crisis may shape hedge fund business models in the future.
Established in early 2014, the firm today manages around USD1.1 billion in assets across its flagship long/short European credit strategy, named the Palmerston Credit Master Fund, and a single managed account offering.
The lockdown begins
McCormick – who leads the business and support team at Palmerston – began planning ahead of the formal lockdown in March as the number of coronavirus cases in the UK and Europe began to surge.
“It was inevitably coming, so we were spending a lot of time sitting down with everyone in the organisation, painstakingly going through every single little thing that they do in their role; all kinds of minutiae from someone’s working day,” says McCormick, who oversees the firm’s structural and compliance responsibilities.
“We’d always had good work-from-home capabilities anyway, and there are few of us in the organisation who had used them quite regularly.”
When social distancing measures became more strictly enforced and non-essential workplaces were ordered to close, the firm’s business continuity plan – typically reserved for one-off incidents such as natural disasters or terrorist attacks – kicked in. With the firm’s 13 staff split evenly between the investment and operations functions, the London-based firm was able to adapt swiftly to remote working during the coronavirus lockdown, says McCormick.
“While myself and our CTO knew it worked, our biggest challenge was getting people up on that learning curve, and to have them comfortable logging on and doing things from their homes rather than in an office. That comes with challenges because there are varying degrees of working-from-home experience, but it worked. It had been forced upon us collectively - and when people are forced to do it, they figure it out pretty quickly.”
As well as internal continuity planning, the pandemic has also impacted firms’ relationships with investors, with client updates and operational due diligence meetings now conducted digitally.
For McCormick, though, client contact has proven remarkably trouble-free. He says there was a “slew” of conference calls that took place during the early lockdown period on the back of the dramatic turbulence that shook markets towards the end of Q1. Since then, things have quickly returned to normal.
“We have investors from all over the world so we’re typically doing a lot of phone calls and that hasn’t really changed,” he says. “If anything, on the investor side, it now feels like it’s returned to the normal stream of catch-up calls we would typically have with clients.”
A unique setting
Palmerston is headquartered in Somerset House (pictured), a grand neoclassical structure overlooking the banks of the River Thames in London. Attracting some three million visitors annually, the landmark building is also home to a number of gallery spaces, several cafes and restaurants, and is a popular filming location, all of which have brought their own unique problems during the coronavirus pandemic.
But as the lockdown has eased over the summer, Somerset House has implemented extensive social distancing policies and dedicated one-way entrances and exits, with additional hygiene measures as other tenants return to work and its public spaces reopen to visitors.
“Obviously, being in an estate like Somerset House comes with additional policies and processes – you’ve got this entire building with multiple residents in it,” McCormick adds, noting that as restrictions eased, a handful of staff visit the office a few times per week. “We have our own office set up for social distancing to make sure it was Covid-secure.”
He explains: “As a business, we’ve made it quite practical in that if you can work from home we prefer you to work from home; if you need to come into the office, you're also welcome to do so, but there’s no requirement and there’s no pressure to do it. Working from home is effective, but it is equally important to be together and I feel that’s particularly important for smaller organisations.”
Those words echo a survey published earlier in the summer by the Alternative Investment Management Association, which found that firms with smaller headcounts are more confident in returning to work, resuming client contact and overseas travel later this year. In contrast, larger fund managers appear more reluctant, indicating they face bigger practical challenges in ensuring social distancing among employees.
“I’m very much looking forward to the time where we’re all back in the office together,” says McCormick. “But I don’t envy any of my peers who are managing hundreds of people. There are more things to think about, and I’d imagine for smaller firms it’s easier to roll out processes.”
He continues: “We have 13 people – seven on the investment side and six on the operations side – so being nimble has been a massive benefit in allowing us to adapt.”
AIMA’s poll – which explored how the global hedge fund industry has tackled the battery of operational issues thrown up by the coronavirus lockdown – also found that more than half of hedge fund managers (59 per cent) surveyed did not expect on-site meetings would recommence until early next year.
Reflecting on the extensive changes to the working environment, McCormick is adamant that the collaborative spirit of hedge fund firms, regardless of size, thrives best in a physical setting, something that cannot be replicated in the digital space, regardless of technological advances.
“We’re social animals, and that’s really important for businesses,” he observes of the deep networks that continue to be the foundations of this industry. “With video calls and chat rooms, you just can’t work as efficiently, in my opinion, as a quick 30-second conversation with someone sat next to you, no matter how good the technology is.”
McCormick sees the 2008 global financial crisis as a defining marker in the development of the hedge fund industry, with the crash bringing about a decisive shift away from the pioneering days of the ‘two-men-and-a-Bloomberg’ cottage industry towards the established, institutionalised nature of the business today.
Yet while Covid-19 has shaken the asset management industry to its very core, the long-term impact of the pandemic on the way hedge fund firms operate remains unclear at this point.
“This could go a few different ways,” he notes.
“If working from home is really entrenched in a year’s time from now, that will bring serious changes to the way people operate in terms of technology, outsourcing, all the way down to the real estate which people will be looking to utilise. But at this point, I feel it’s still too early to say - we’re still a long way away from that.”