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The importance of early-stage strategies

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Arrow Hedge Partners, one of Canada’s largest and most experienced providers of alternative investments, was founded in 1999.

Arrow Hedge Partners, one of Canada’s largest and most experienced providers of alternative investments, was founded in 1999. Arrow Hedge is headquartered in Toronto,  with its research team covering the Canadian, US, Latin American and Asian markets. The firm also has a Geneva office providing additional research coverage from a distinctively European vantage.

In addition to its strong global research coverage, Arrow Hedge has adopted an  investment process that has capitalised on some of the most innovative and dynamic  developments in alternative investments: early-stage managers and strategies. Investing  in these early stage managers and strategies represents a  ore differentiator of Arrow’s  investment approach.

There are many reasons for the emphasis on the early-stage market. Competitive return  profiles relative to their more established peers and an ability to  focus on niche   markets and investment styles make these managers an attractive source of new ideas.  Early-stage managers have more flexibility in managing smaller pools of capital,  enabling greater tactical control into and out of their positions. This enables Arrow to  scale additional resources into the anagers as they grow, a critical component in the  firm’s asset allocation decision-making. In addition, the early-stage focus represents a  more efficient method of deploying capital that encourages longerterm allocations, since  Arrow’s investments are able to grow alongside the assets of the underlying manager.

These opportunities come at a price, however. The due diligence and oversight efforts required to assess and monitor new managers and strategies are  significant, so any firm  hat aims to focus on managers at this stage of their growth needs to approach the task  with a view to creating the infrastructure necessary to supporting these oversight  functions. This focus has also compounded the importance of thorough and rigorous due  diligence on all underlying investments. Our due diligence process is a continuing  process and is designed to capture not only the dynamics of the investments by  underlying managers but also their business and organisational models. Arrow uses a  number of proprietary risk tools for determining individual and aggregate level  exposures, and has supplemented these with solutions from Bear Measurisk, enabling even  more robust risk monitoring and measurement.

The investment model constructed by Arrow’s research and investment management team is showcased in various distinct fund of funds portfolios, which are designed to suit  different investment objectives and investor requirements. These funds of funds are at  the centre of Arrow’s business model and are constantly monitored and rebalanced.

Arrow manages four flagship funds of funds for Canadian investors, including a multi- strategy product that encompasses a broad spectrum of investment styles including equity hedge, relative value, event-driven and global macro. The firm’s other fund of funds portfolios comprises a dedicated global equity  long/short strategy, a  concentrated focus portfolio, and a higher yield product for investors seeking  alternative sources ofincome. Arrow has mirrored this customerneeds approach to its  offshore investors through its Compass and Voyageur funds. With a total of nearly USD1bn in assets under management, the popularity and success of both the onshore and offshore products is a testament to Arrow’s unique global research coverage and focused investment process. 

Mark Purdy is chief investment officer with Arrow Hedge Partners in Toronto

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