Setting the chess board for strategic success
Arena Investors: Best Multi-Strategy Hedge Fund – Arena Investors currently manages USD1.7 billion in assets and since its inception in 2015 the firm has deployed USD2.4 billion across 203 transactions. Daniel Zwirn is Arena’s CEO and CIO and oversees the investment team. Arena invests across six verticals, which include: corporate private credit, real estate private credit, commercial and industrial assets, structured finance, consumer assets, and corporate securities.
“Arena is set-up as an ‘enterprise’ (versus a ‘fund’) that includes over 60 professionals plus a vast global relationship network, scanning the breadth of asset and credit-oriented investment areas, and clearly identifies the risk/reward dispersions that exist within and among asset types,” explains Zwirn.
At the heart of Arena’s investment process is a proprietary approach to sourcing opportunities away from the Wall Street marketing machine. Every investment is designed to generate idiosyncratic returns independent of the macroeconomic cycle and aims to minimise risk. The firm focuses on three alpha-generating engines to generate differentiated returns:
1. Mandate flexibility
Arena has built a global investment platform to source opportunities while avoiding areas that are overheated. This also allows for broad diversification to avoid concentration, maximise consistency and minimise downside risk.
2. Proprietary sourcing
Arena is able to seek out opportunities by operating with boots on the ground and leveraging its extensive global network of partners and advisors.
3. Servicing & systems
Operating a special situations “non-bank bank” requires robust process, infrastructure, and controls. Arena’s entire process is systematised, with a proprietary technology platform that has been built and improved over the past 15 years.
Zwirn says the firm’s proprietary sourcing process is critical in its pursuit of generating differentiated returns and that its mandate flexibility is a key edge. “We believe a cardinal sin in the alternative investment space is the vast amount of capital that has been allocated to “hammers that only see nails,” where there is pressure to deploy capital into a narrow mandate (e.g., airplane leasing), versus having the ability to dispassionately assess whether that area presents a compelling opportunity.
“The only thing we feel certain about is that all the areas in which we invest are all only ‘episodically’ compelling. We seek to avoid the moral hazard associated with these overly narrow investment management mandates,” explains Zwirn.
Holding a complex array of loans, ABS and mispriced bonds in the Arena’s investment portfolios requires a highly sophisticated risk management programme. Zwirn says Arena’s ability to directly service and restructure investments “allows us to actively monitor our assets with the goal to ultimately realise value on exit.”
“While we have bespoke origination capabilities, our investment process is highly systematic and governed through our end-to-end IT systems, which enable Arena to take a wide array of investment types and standardise them for evaluation, ongoing monitoring, control, and audit.”
Arena’s mantra is to find ‘9 problems for every 3 actual problems’ and think about scenarios that are 3 and 4 standard deviation left-tail events people ordinarily wouldn’t worry about.
“It allows us to think through in advance what could go wrong, and set the chess board in advance,” remarks Zwirn. He adds that Arena is designed to operate as an orchestra, not a series of individual musicians.
“What we do is the result of bringing together internal and external capabilities (across ‘desks’ and through our joint venture partners) in order to size-up, underwrite, and manage investment opportunities,” concludes Zwirn.
CEO/CIO, Arena Investors LP
Daniel Zwirn began his investing career in 1995. Dan founded and built DB Zwirn & Co, one of the largest independent firms in the alternative credit space. He has participated in over 2,500 illiquid investments in 25 countries, accounting for over USD10 billion. Dan most recently founded Arena Investors and is the firm’s Chief Executive Officer and Chief Investment Officer.