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Optima Fund Management: The risk hypochondriac

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It’s fair to say that Optima Fund Management has seen a lot of change in the hedge fund industry, given that it is preparing to celebrate its 30th anniversary; an achievement few hedge fund firms can lay claim to.

Since Dixon Boardman founded the New York-based firm in 1988, it has steered a steady course. It has continued to evolve in line with market trends so as to unearth the best hedge fund talent, which feature in a range of multi-manager funds, the first of which, a long/short equity FoFs, has been running since the year of Optima’s inception.

“Despite all the changes in the industry, Optima’s success is based on some important common denominators,” says Thomas S T Gimbel (pictured), partner and Chief Portfolio Risk Officer. “First, we stick with the fundamentals that drive performance. Second, we avoid undue risk exposure. And third, we make strategic adjustments when it makes sense to do so.” 

It is important for Optima to be knowledgeable of the changes in strategies and tactics being used by portfolio managers and to be at the leading edge of technology. Especially as artificial intelligence is used more and more in enhancing hedge fund research and trading efficiencies.

There are, according to Gimbel, five pillars to Optima’s operation. 

The first is high quality control in everything it does, primarily with respect to the research process and the people it works with. Second is risk management. 

“Dixon Boardman has characterised the firm, and himself, as a risk hypochondriac. On both the operational risk side and the portfolio risk side, we are extremely diligent and analytical,” says Gimbel.

The third pillar is innovation. Optima has been an innovator from day one. Back in 1988, there weren’t many FoHFs around; indeed, there were probably only 400 hedge funds compared to the 10,000 or more today.

“We’ve been innovative in some of the FoHFs we’ve put together. For example, our global macro fund was one of the first of its strategy to ever launch, and our multi-manager strategy, which launched in 2007 to invest in the “best ideas” of a select group of hedge fund managers, was well ahead of its time. 

“The fourth pillar is client service. We place the utmost importance on understanding the return targets and other parameters sought by our clients, and staying in constant communication with our clients. 

“Finally, the fifth pillar is technology. We have a team of code writers that do nothing else but advance the technology of the firm. This is critical to all aspects of our business, especially in a changing environment,” explains Gimbel. 

Not that Optima only runs hedge fund programs. Back in 2009, the firm launched a REIT to invest in America’s farmland; something Boardman described in the firm’s 25th anniversary letter to investors as “one of the most overlooked investment classes”.

Prior to joining Optima in 2004, Gimbel had hired the firm as a sub-advisor to a fund-of-funds for a major institution ten years previously. It was during that period that he came to the conclusion that the culture at Optima was unique. This is doubtless the conclusion BNY Mellon Wealth Management also came to and led to them buying an ownership stake in 2000. 

Speaking to Hedgeweek about the culture that Boardman has instilled at Optima, Gimbel pauses to reflect, before responding: 

“It is quality-obsessed, risk averse and innovative. It’s unique. We have looked at other firms to potentially acquire and typically have failed to find a culture fit. What has been created at Optima is a business with the highest quality standards and a commitment to both risk management and innovation.”

“It’s about sticking to your core principals, maintaining the standards, and never growing complacent,” says Gimbel. “While we look to the future and always look to make enhancements, we never do so at the expense of our core principals. 

As one would expect at a FoHF firm, investment research is a fundamental skill-set that Optima’s team has built over the decades. Like an apex predator, Optima always looks forwards, never backwards. Just because a manager has had a good run of returns for one, two, three years, there is no guarantee he will remain a staple of the portfolio. 

“Today, the markets are much more global, much more efficient in incorporating information, and the landscape has changed. Over the last five years, the markets have been driven by liquidity and capital flows. 

“However, in the last 18 months we have seen the re-emergence of strong performance based on a return to fundamentals as opposed to liquidity-driven markets. We’ve seen more differentiation between stock values. This has favoured the astute stock picker who avoids believing that a rising tide lifts all investments equally,” explains Gimbel. 

As Dixon Boardman would say, brilliant investors don’t become stupid overnight. Some of the most brilliant investors are hedge fund managers and they are prevailing once again. “We are well in to the start of an exciting, positive cycle of investment and performance is coming back,” states Gimbel.

Back in the day, risk management was based on qualitative analysis. As technology has infiltrated every facet of trading, hedge funds became much more quantitative, using multi-factor risk analysis. Most recently, it has become a blend of the two: machine-driven investing (using sophisticated algorithms) and machine-driven risk management coupled with real-time, discretionary human involvement to obtain the best of both worlds. 

“I think with artificial intelligence and systematic strategies, it is essential that those systems are constantly being improved and adjusted because not only do markets change, with the advent of more systematic and AI-driven trading that changes the markets as well; it’s a constant feedback loop that is required,” suggests Gimbel, confirming that Optima is incorporating AI-based strategies into its universe, provided it understands how these managers control risk.

So what has Gimbel, and more specifically Optima, learned over the years?

“Certainly many lessons, but a key one in any industry, is that one has to avoid group think, the herding effect. 

“It’s important to do one’s own fundamental research. That’s what we pride ourselves on.  We are a specialist investment firm, we’re not all things to all people, and for those clients who do their homework they recognise we have something special to offer,” concludes Gimbel. 


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