Opalesque NewManagers Sep 2012

IN THIS ISSUE
EDITORIAL EMANAGERS INDICES
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August 2012s performance of the Opalesque Emanagers indices
NEW FUNDS IN THE DATABASE
Funds that have recently joined Opalesques Emerging Managers Database.
PETER URBANI STATISTICS FUNDANA SERIES FOCUS
An Introduction to Singular Spectrum Analysis
Has the set-up of new launches changed over the last few years? Should emerging managers go to investment consultants?
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SEEDERS CORNER
Investcorp: Institutions can invest in emerging managers through special programs
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SERVICERS SPOT
OPALESQUES EMERGING MANAGER MONITOR
Conifer: Smaller hedge fund managers like cloud technology
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LAUNCHES
A recapitulation of maiden launches and related developments from late July to late September 2012
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PERSPECTIVES PROFILES
Recent views and findings of interest to new hedge fund managers Two emerging hedge fund managers, Sustainable Resources and Fasanara, speak about their new fund.
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www.opalesque.com
Editorial
New Managers | Issue 08 | September 2012
Welcome to the September 2012 issue of New Managers

Dear New Managers reader, Welcome to the September 2012 issue of New Managers, Opalesques monthly monitor of emerging and re-emerging hedge fund managers. Lets start with the good news: you can now access all of New Managers past articles as well as the pdf reports - directly from the new Archive on www. opalesque.com: www.opalesque.com/Archive-NewManagers.html (And also through Opalesques main Archive: www. opalesque.com/Alternative-Market-Briefing-Archive. html) There is only good news. As usual, we start with a review of the EManagers indices, and the latest entrants in Opalesques Emerging Managers database. Then, in Statistics, Peter Urbani makes a fascinating introduction to a method related to Principal Component Analysis (PCA), namely, Singular Spectrum Analysis (SSA). Fundana asks whether the set-up of new launches (number of employees, risk-takers, and past experience) has changed in the last few years. In Focus, we look at whether emerging managers should make their case in front of investment consultants those that advise investors on their allocations. For this, we look at a report from Citi, and talk to Man Group and Allenbridge. Deepak Gurnani, the head of the $5 billion hedge fund business at Investcorp, talks about his firms Emerging Manager Program in Seeders Corner. And Jack McDonald, the CEO of Conifer, a fund administrator, says cloud technology is especially suited for new hedge fund business in Servicers Spot. This months report ends with the usual recapitulation of recent maiden fund Launches, a review of the latest views and findings in Perspectives, and in Profiles, two emerging managers describe their new fund; Michael Young on the Sustainable Resources Fund; and Francesco Filia on the Wilshire-Fasanara Credit Opportunities & Special Situations fund. I hope you enjoy our eighth issue of New Managers. Please contact me if you have any related news. Benedicte Gravrand Editor Gravrand@opalesque.com
Benedicte Gravrand
Opalesque New Manager is edited by
Benedicte Gravrand. Based near Geneva,
Benedicte also writes exclusive stories and fund publication, the Alternative Market Opalesque Roundtables. Benedicte is
special reports for Opalesques daily hedge Briefing (AMB), and occasionally moderates perfectly bilingual (French/English) and has lived in Paris, Geneva and London. Sheobtained a BA (Honours) in Philosophy
from the University of London, workedin the publishing sector, the hedge fund industry and joined Opalesque in 2007.
New Managers | Opalesques Emerging Manager Monitor September 2012
Emanagers Indices
Emanagers Total Index advances 0.99% in August (+4.79% YTD)
Emerging manager hedge funds and managed futures funds continued their upward performance trend last month, according to a first estimation based on the data of 299 funds listed in Opalesque Solutions Emanagers database. The Emanagers Total Index gained 0.99% in August and is now up 4.79% for the year 2012. Estimates for July and June were corrected to +2.23% and -0.19% respectively. Since inception in January 2009, the index posted compounded returns of 64.4%. Over the last 12 months, the Total Index gained 4.45% in 7 negative and 5 positive months, compared to 0.70% for the Eurekahedge Hedge Fund Index. However, the MSCI World Index performed better over the same period, with a gain of 5.62%.
August was a challenging month for CTAs but offered opportunities for most hedge funds: The Emanagers Hedge Fund Index gained 1.90% (+6.09% YTD), while the Emanagers CTA Index lost 0.22% (+1.14% YTD).
Last month was characterized by strong stock market performance (MSCI World up 2.29%), mainly based on a positive outlook for the U.S. economy and the ECBs announcement of a government bond buying program. Forex traders were the main losers of last months events: Event-driven strategies performed best (+3.75%), followed by longbias equity (+2.64%) and multi-strategy funds (+2.11%). Relative value and L/S equity strategies posted results of +1.8 4% and +1.41%. Global
Emanagers Indices
macro strategies gained 1.11%, thus outperforming CTAs. Year-to-date, the ranking is led by event-driven hedge funds with a compounded return of 14.45%.
12-month rolling performance data gives MSCI-correlation coefficients of 93% for Emanagers hedge funds and -40% for Emanagers CTAs, resulting in equity-market betas of 40% and -11%.
Index Emanagers Total Index Emanagers Hedge Fund Index Emanagers CTA Index
August 2012 0.99 1.90 -0.22
YTD 4.79 6.09 1.14
12m 4.45 4.93 1.60
2011 -1.79 -2.83 0.51
2010 18.73 17.07 19.15
2009 34.51 37.59 20.52
Volatility 5.39 8.37 5.56
Beta (bm=MSCI) 22 40 -11
Eurekahedge Hedge Fund Index Newedge CTA Index MSCI World
0.63 -1.19 2.29
3.16 0.89 8.17
0.70 -1.39 5.62
-3.62 -4.52 -7.61
10.90 9.26 9.40
20.62 -4.31 27.07
5.40 7.37 19.46
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- Florian Guldner, Opalesque Research
New Funds in the database
Funds that have recently joined the Opalesque Emerging Managers database
Fund name ST Alpha Event Fund Chilmark Hill Capital LLC Brandywine Symphony Preferred Fund, LP Quant Global Strategy Tusker Investment Fund, LP RCMP Fund LLC Vector Long-Short Futures Protec Energy Futures Diversified Program Pilgrim Asian Macro Fund Three Arrows Fund, Ltd Verto Recovery Fund Stone Drum Pacific Opportunities Fund L.P. Kerrisdale Partners Offshore Ltd Next View Capital LP Breton Hill Master Fund, LP ROW Diversified Fund, LP ROW Currency Fund, LLC Fund Strategy event driven relative value, fixed income CTA CTA global macro, commodity CTA CTA CTA CTA global macro relative value, multi-strategy event driven equity long bias equity long/short equity long bias global macro CTA global macro, currency Manager Location Princeton, NJ, U.S. U.S. Thornton, PA, U.S. U.S. Chicago, IL, U.S. U.S. Tortola, BVI Boca Raton, FL, U.S. Reston, VA, U.S. Singapore San Francisco, CA, U.S. Vienna, Austria Cayman Islands New York, U.S. Deerfield, IL, U.S. Toronto, Canada Newport Beach, CA, U.S. Newport Beach, CA, U.S. $57m $42m $23m $101m Fund AuM $147m $1m $4.4m $350,000 $10m $0.31m $0.2m $19.7m $50,343 $22m Fund Launch Date Jan-11 Jun-11 Jul-11 Jul-11 May-11 Aug-12 Feb-11 Apr-09 Jun-12 May-10 Sep-12 Dec-12 Jan-12 Nov-11 Jan-09 Nov-08 Nov-11 Nov-11
New Funds in the database

Fund name ICS Opportunities Fund, LP Market Bridge Global Macro Market Bridge America Palomar Fund HedgeForward Directional Trading System (DTS) Katmai Commodities+ Wykeham Capital Asia Value Fund Fund Strategy multi-strategy global macro global macro CTA CTA CTA directional / equity long bias Manager Location Seatle, WA, U.S. Paris, France Paris, France London, UK Cambridge, MA, U.S. London, UK Hong Kong
Fund AuM $0.12m Eur20m Eur5m $50m $0.081m $0.25m
Fund Launch Date Jun-12 Sep-10 Sep-10 Oct-12 Aug-12 Oct-12 Apr-09
The Opalesque Solutions Emerging Managers Database is an extremely niche and specialised database of Emerging Hedge Fund Managers, and access is available for eligible investors such as Funds of Funds, Family Offices, Pension Funds and UHNWI globally as well as academia and research analysts. For the sake of this database, we define an asset manager as emerging manager if, 1) The firm is less than 48 months old and 2) The AUM of the firm at the time of the firms inception is less than $600 million. If you want your fund to be in the Emerging Managers Database, please send your details to our database team at: db@opalesque.com
Peter Urbanis Statistics
Peter Urbani
is the former CIO of Infiniti Capital, a now defunct Hong Kong-based Fund of Funds group. Prior to that, he was Head of Quantitative Research for Infiniti, Head of Investment Strategy, Head of Portfolio Management, Head of Research and Senior Portfolio Manager for number of buy-side firms. He started out in stock-broking as an open outcry floor trader in the late 1980s. Some of his VBA code was included in
An Introduction to Singular Spectrum Analysis (SSA)

ost of you will be familiar with Principal Component Analysis (PCA), used mostly in fixed income models where the first three ordered principal components, or dominant eigenvalues, are deemed to represent the level, slope and curvature of the yield curve. This month we review a related method namely Singular Spectrum Analysis (SSA). I have also included a worked example and a spreadsheet implementation that can be downloaded here. The mathematics behind SSA has multiple names. It is also known as: Proper Orthogonal Decomposition, PCA, Principal Value Decomposition, Singular Value Decomposition, Singular System Analysis, bi-orthogonal decomposition, Karmen Loeve decomposition and the Caterpillar method. While most traditional econometric time series analysis substantially lies in the time domain, spectral analysis is performed in the frequency domain. The idea dates back to the 1960s and even earlier to a paper by Edward Lorenz, who proposed its use for the measurement and forecasting of localised weather phenomenon. Its use has mostly been in the fields of Geostatistics and Digital Signal Processing until fairly recently with the recent interest in the Mane - Takens embedding theorem. The main aim of these techniques is to detect low, medium, and high frequency components carrying the most information in the time series, thus providing precise filtering methods, the identification of the signal dominant cycles, trend-cycle separation, business cycles extraction, and the analysis of co movements among different series. Notwithstanding evidence of chaos in economic datasets has not been confirmed yet, Broomhead and King (1986) demonstrate that SSA works well even with mildly nonlinear data, as economic series effectively are. One of SSAs main advantages, with respect to classical Fourier methods, is its ability to detect oscillations modulated both in amplitude and phase (Allen and Smith, 1996). Thus, the original signal is not simply decomposed into periodic sine and cosine functions,
Kevin Dowds Measuring Market Risk and he Construction.
specialises in Risk Management and Portfolio

but rather into data adaptive waves possibly exhibiting non-constant amplitude and/or phase. The method is not conceived to build models, but rather to identify information about the time series deterministic and stochastic parts (Ormerod and Campbell, 1997). In particular, SSA should both accurately forecast the short-term system evolution and capture its long-term features, highlighting some of the system peculiar properties, such as its degree of dynamic mechanisms such as the trend and the cycles. SSA can be used for:

New Managers | Issue 08 | September 2012 SSA is based on a lag-covariance matrix orthogonal decomposition. The eigenvectors represent the lagged sequences of length L providing the new orthonormal basis onto which the signal is decomposed (Vautard et al., 1992). They are generally called Empirical Orthogonal Functions and come directly from the data, while the corresponding eigenvalues represent the socalled Principal Components, i.e. the fraction of total variance explained in the dataset by each orthogonal direction. Vautard et al. (1992) demonstrate that the sum of the PCs spectra is identical to the original series power spectrum. This result is particularly interesting, since it underlies the completely linear nature of SSA, which valuably simplifies the analysis of nonlinear time series through linear tools. Despite the linear summation in the transform between X(t) and X-Hat(t) is nonlinear, since the relation between each EOF and the original series is actually nonlinear: this fact allows a proper decomposition of nonlinear time series. When we perform an SSA analysis, we specify the time delay embedding dimension L. This value specifies the number of EOFs or statistically independent data streams the time series will be separated into. As
Smoothing, Trend extraction, The identification of Seasonal effects, Filling in missing values, Change Point Detection, Forecasting.
It is a non-parametric and model-free method and hence it can be applied to any series. It does not require stationarity of the series. It does not require log-transformation. The signals obtained by SSA decomposition differ from those obtained by filtering out frequency bands with the Fourier transform. The main model assumption behind SSA is that all interpretable sub-series can be approximated by time series described via certain LRRs (linear recurrence relations) of small order, and SSA is able to approximately separate these subseries from each other and from noise. The class of time series which satisfy LRRs consists of sums of products of polynomials, exponentials and sinusoids.
randomness (Gershenfeld and Weigend, 1993). Like Principal Component Analysis, SSA separates the time series into empirical orthogonal function EOFs or statistical modes. Usually the majority of the variance in the time-series is contained in the first few EOFs.

is almost always the first one. When a cycle is present, it will appear as a pair of EOFs which have nearly identical variance. The eigenvector plot lets us visually inspect how the variance is distributed amongs EOFs. One of the criticisms of SSA is that it is non-causal. This is due to the diagonal averaging which takes place in the last reconstruction step. This means that when new-information arrives or the window period is extended the change in the size of the matrix (see X-Hat in the worked example) causes the prior values to change or be re-drawn. This makes it difficult for traders to use SSA as is. Fortunately, it can be made causal by recording only the end point (end point SSA) or forecast values and then iterating over some data window although this is obviously more computationally expensive. The validity of any forecasting performed using the SSA method depends on the extent to which there is underlying structure in the original time series, the persistence of this structure and the separability of the signal from the noise. For natural and highly cyclical phenomenon, this may well be high but for quasi-random data such as financial time series such pockets of predictability may be scarce and temporary at best For interests sake, I have provided a few forecast examples but excepting in the case of the GDP forecasts which do most likely have considerable cyclical structure, they should be treated with caution. As far as I am aware, SSA is primarily being used in finance for pre-processing and smoothing of data rather than primary trade signal generation. Reported results suggest that it performs in line with other time series forecasting methods such as double exponential smoothing (Winters, Holt) and ARMA methods without requiring as much parameterisation. Identification of key components in the grouping stage The frequency domain approach to time-series analysis is based on the Wiener Khinchin theorem, which states the equality between the power spectrum and the Fourier transform of the autocorrelation function (ACF) of a time series. The eigenvalues and eigenvectors define empirical orthogonal functions (EOFs). Signal-to-noise separation can usually be obtained by merely inspecting the slope break in a scree diagram of eigenvalues. Usually the singular spectrum is plotted using the log of the singular values (i.e. the log of the square root of the eigenvalues) ranked using decreasing variance (i.e. decreasing singular value). For the log version of the singular spectrum the uncertainty, or the 95% confidence interval, is +-(1.96 / N) ^ 0.5 where N is the number of data points (p. 408 of Vautard and Ghil, 1989). The outcome of adding together the principal
New Managers | Issue 08 | September 2012 components is clearly a filtered version of the original data. Thus singular spectrum analysis can be used as a rapid method for FIT filtering - for example, high frequency noise can be removed. (Kantz and Schreiber 1997).
Other Links and References

http://www.gistatgroup.com/cat/programs.html http://www.atmos.ucla.edu/tcd/ssa/ http://strijov.com/sources/demo_ssa_forecast.php#2 http://www.math.uni-bremen.de/~theodore/ssawiki/ pmwiki.php?n=Main.Software Book 1 and Book 2 Method The Basic SSA technique consists of two complementary stages: decomposition and reconstruction both of which include two separate steps. Stage 1: Decomposition First step: Embedding Embedding can be regarded as a mapping that transfers the one-dimensional time-series into a two-

dimensional (L , K) matrix of K lagged time-series of length L of the original data. L represents the window length (sometimes called M) and N is the number of data points. K is given as K = N L +1. The result of this step is known as a Hankel Matrix X which has equal elements on the diagonal. Second step: Singular value decomposition (SVD) Generate a lag covariance matrix C of X by taking X.X Perform a singular value decomposition on C to arrive at the Matrix S containing on its diagonal the eigenvalues or singular values of X.X Matrix U containing the eigenvectors of X.X Matrix V containing the Transpose of U Stage 2: Reconstruction First step: Grouping For each of the K eigenvectors - calculate the matrix X-hat as the eigentriple grouping of X-hat = U.U.X or equivalently U.V.X Second step: Diagonal averaging Diagonal averaging transfers each of the K X-hat matrices into a time series, which is an additive component of the initial series YT by reversing the Hankelisation process in step one. Forecasting Step Forecasting can be done by either identifying the Linear Recurrent Formula or by vector forecasting whereby the last eigenvector is used as a basis for extending or projecting the trajectory matrix X-Hat, or one of its reconstructed factors, H steps ahead where H is at most L 1. Decomposition: Window length and SVD The window length L (sometimes M) is the only parameter in the decomposition stage. Selection of the proper window length depends on the problem in hand, and on preliminarily information about the time series. Theoretical results tell us that L should be large enough but not greater than N/2. For more on window length selection and the optimal parameters see: Window Length Selection and SignalNoise. Separation and Reconstruction in Singular Spectrum. Analysis by Atikur Khan http://www.buseco.monash.edu.au/ebs/pubs/ wpapers/2011/wp23-11.pdf Singular Spectrum Analysis: Methodology and Comparison by Hossein Hassani http://mpra.ub.uni-muenchen.de/4991/2/MPRA_ paper_4991.pdf
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Fundana Series
Has the set-up of new launches changed over the last few years?
The Emerging Managers space is currently in vogue. Following the 2008 credit crisis, allocators focused first on the opportunity to invest with previously hardclosed Blue Chip hedge fund managers. Now that most of those funds are hard-closed again, investors are taking another look at Emerging Managers. and Event Driven strategies. For the purposes of this article, we consider two separate periods: the first period runs from January 2006 to July 2008, hence before the industry crisis; and the second period runs from August 2008 to date. The database contains 25 Day One / Early Stage investments in the first period and 44 in the second period.
Bruno Guillemin
The Fundana series of articles discusses Investments in Emerging Managers; it derives from the real world experience of the Fundana team. Fundana is the investment advisor to several Funds of Hedge Funds and directs at least half of its new investments to Emerging Managers. The investment process typically involves allocating a small amount Day One or Early Stage (defined as less than one year after the funds launch) to new managers who have strong pedigrees. The objective of this series of articles is to share thoughts around our key observations. It does not aim to be statistically significant but to create a dialogue around those observations.
Following the new financial regulations and the welladvertised increasing number of launches from exbank prop desk teams, this article looks at the set-up and the framework of the organization of new hedge funds when they launch. This encompasses the size of the team, the number of risk takers, and the previous portfolio management experience of the managers. The goal is to identify any differences between the pre- and post-crisis environments on the structure of new hedge fund launches. We will focus on small and mid-sized fund launches (typical Day One assets under management (AUM) of between $20m and $500m) as Fundana does not invest in the very large new launches (>$1bn at
What about the differences in the number of employees at launch?

The typical set-up of a hedge fund includes a portfolio manager, several investment analysts, a chief financial officer, several operations team members and a few marketers. While the size of an optimal and seasoned hedge fund team is often between 12 and 20 people, the constraint of a low level of assets means the launch is normally undertaken with a reduced headcount. We first look at the evolution of the size of the team at launch. According to our dataset in Table 1, the median number of employees in new hedge funds is 6 people, and this shows no differences between the pre- and post-2008 time periods. The average has in fact moved slightly lower from 6.6 to 6.4 people. 13
launch). The dataset has been compiled from all new investments made in our Funds of Hedge Funds since January 2006, encompassing 69 Day One/Early Stage investments in the Long/Short Equity, Global Macro
Fundana Series
Number of employees at launch Average Median 1st Quartile 3rd QuartileS Pre-July 2008 Post-July 2008 6.6 6 8 4 6.4 6 8 5 Total funds 6.5 6 8 5
This results in the table below, again looking both in aggregate and for each individual period.
Number of employees at launch One risk taker Two or more risk takers Pre-July 2008 Post-July 2008 68% (17 funds) 32% (8) 64% (28 funds) 36% (16) Total funds 65% 35%
Table 1: Number of employees in hedge fund start-ups at launch

The 1st quartile and 3rd quartile are also remarkably constant between the two periods at 8 and 4 or 5 people respectively. These data tend to show that despite the institutionalization of the industry, the number of employees at launch in new hedge fund organizations has not meaningfully changed before and after 2008.
Table 2: Number of risk takers in hedge fund start-ups at launch

For each period and in aggregate as a consequence, we observe that the split between the one risk taker approach and the two or more risk takers approach increased slightly from 32% to 36%. For the entire period, we have had approximately two third of our new investments with hedge funds managed by a single risk taker and one third in new funds managed by two or more risk takers. While the ex-prop desk teams from the large banks (often managed by several risk takers) have attracted a growing interest over the last two to three years, we believe that this has had a small impact on the overall risk taking framework of the new hedge funds in aggregate.
What about the differences in the number of risk takers at launch?

To take the analysis a step further, we now look at the number of risk takers in start-up hedge funds. We define risk takers as the number of portfolio managers in the structure which have a meaningful impact on the portfolio. Hence, a global macro hedge fund where one portfolio manager runs 90% of the assets and the other three portfolio managers run 10% of the assets, as much for idea generation monitoring than the development of their trading skills, is counted as one risk taker. We split the new hedge funds in two categories: the ones that are run
What about the prior risk taking experience of new hedge fund managers?
The prior risk taking responsibilities of our new managers differs greatly amongst the funds. While some did run a full portfolio or a dedicated strategy in a portfolio, others had little direct trading experience. We separate the dataset between new managers
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Fundana Series
who have effective past risk taking experiences and new managers who were former sector heads or senior analysts implied in the research and portfolio construction process but with no/little trading experience. ome did run a full portfolio or a dedicated strategy in a portfolio, others had little direct trading experience. We separate the dataset between new managers who have effective past risk taking experiences and new managers who were former sector heads or senior analysts implied in the research and portfolio construction process but with no/ little trading experience.
Number of employees at launch Risk taking experience as portfolio managers for a fund or a dedicated strategy Pre-July 2008 Post-July 2008 56% (14 funds) 55% (24 funds) Total funds
New Managers | Issue 08 | September 2012 launch their hedge funds, as we saw in a recent article looking at the
increasing managers number of years of experience in the finance industry, our observation suggests that the past risk taking framework is unchanged. While an advantageous skill to launch a hedge fund, it is not a pre-requisite.
Key observations
Looking at the structure and the framework of the new hedge funds, our small sample of data suggests that: 1. The average size of the team of a new hedge fund remains the same after the crisis than before. Because the overall launchs asset size has decreased, as seen in a previous article, this shows that new managers bear more financial risk than before the crisis. 2. The new launches are still dominated by one risk taker. The growth of multi-PM, ex-prop desk team has not yet altered the original characteristic of the industry. 3. The past experience of the new managers doesnt seem different from before the crisis. Previous risk taking experience is an asset, but is not a pre-requisite for launching its hedge fund. Bruno Guillemin Senior Analyst - CAIA www.fundana.ch Fundana SA Geneva
55%
No risk taking experience - former 44% (11) sector heads or senior analysts with no trading responsibilities
45% (20)
45%
Table 3: Risk taking experience of new managers at launch

As can be seen in the Table 3, the split between prior risk taking experience / no prior risk taking experience is 55% / 45%. We are still slightly favoring managers who have run a portfolio previously. However we dont see differences in the split ratio between the two periods. While it has become more difficult for new managers to
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Should emerging managers go to investment consultants?

s long as there is a need for expertise in any industry, there will be expert consultants offering their knowledge and services. The hedge fund industry is no different. Hedge fund consultants service hedge funds with their know-how and network be it in investment strategy, research or marketing. Investment consultants, which are the focus of this article, help investors, particularly institutional investors with their hedge fund allocations. Those consultants are gaining more cachet in the industry and are often directly competing with funds of hedge funds. According a Citi Finances survey published in June 2012, titled Institutional Investment in Hedge Funds: Evolving Investor Portfolio Construction Drives Product Convergence, global assets invested with hedge fund firms could rise from todays $2.1 trillion to more than $5 trillion as a result of two emerging trends. Firstly, institutional investors may add $1 trillion to protect against risks and get more diversification; secondly, as there may be a convergence zone between hedge funds and traditional assets, an additional $2 trillion could come into the hedge fund industry in the form of regulated alternatives and long-only products.
The Citi survey also observes a trend among intermediaries, such as consultants and funds of funds, in which there is also convergence.
The number of hedge funds grew by 66% from 2003 and 2007 (4,598 to 7,637), and the number of fund of fund intermediaries (funds of hedge funds or FoHFs), grew by 251% in this period - from 781 to 2,462 (Source: HFR). During those years, says the Citi survey, FoHFs were the primary conduit through which many institutional investors channelled their money into hedge funds. Eventually, both FoHFs and investors were caught off guard by the asset-liability mismatch they had created. After 08, investors started to invest more directly into single-manager hedge funds and less in FoHFs to avoid another liquidity problem and the double layer of fees, and because they had more experience navigating through the hedge fund industry. According to eVestment HFN, in 2002, assets invested in FoHFs accounted for almost 53% of the hedge fund industrys total AuM; that declined to 48% in 2007, and by an additional 12% by the end of 2011,
to account for 36%. Between 2003 and 2007, some of the institutional investors who wanted to change the 60% equities/40% bonds approach typically worked with industry consultants to come up with a new allocation into alternatives, according to the Citi survey. After 08, investors started investing directly into single-manager hedge funds through their newlybuilt alternatives investments teams and through relationships with an emerging set of alternativesfocused industry consultants to support their portfolio construction and due diligence efforts. Before 08, consultants were almost exclusively focused on providing advice to institutional investors, and though some offered operational due diligence services, this was a little utilized capability, the Citi report notes. The post-2008 shift in the way investors allocated their money resulted in a substantial realignment of the intermediary space. Institutional investors became increasingly reliant on consultants, according to Citi. So much so that consultants now often act as an extension of the institutional allocators team: Not only have consultants maintained their traditional advice-giving
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Role of intermediaries in the hedge fund industry pre-2008
New Managers | Issue 08 | September 2012 role; they are now seen as a critical seal of approval in terms of operational due diligence, and the lists they maintain of approved funds have become an industry norm in terms of access A $10bn+ hedge fund told Citi: More and more, were seeing people use fund of funds as an advisor and more and more pensions are going direct. We saw a $30m ticket from a client of one of our former funds of funds. Having old legacy fund of fund relationships has been very beneficial for us. Weve raised several million dollars from this channel. Many FoHFs now also have a series of investor-aligned portfolios where they decide upon allocations jointly with their clients. So from their origins as access vehicles to hedge funds, they are moving on to bringing many other services to investors. Another intermediary that has emerged of late, especially in the U.S., is the outsourced CIO. They may have been FoHFs managers or direct allocators in the past and then set up firms that work directly with institutional investors to structure their overall portfolios and manage that capital on their behalf.
The consulting business is growing and may grow to even greater proportions.
There is still room for growth in the aggregate demand for hedge funds. The highest allocation of our clients is at 20%, but we have lots of clients that are only at 1%-3% and they could grow to 10%. Thats a multibillion opportunity per client, an alternativesfocused consultant told Citi.
Source: Citi Prime Finance
Role of intermediaries in the hedge fund industry since 2009
FoHFs are adapting. They started offering platforms for funds of one (a separate share class for a single investor, to avoid the proximity risk) or of separately managed accounts (SMAs). Funds of funds could be in real trouble, an outsourced CIO told Citi. Theyre not dying. Theyre just consolidating into consultants.
Source: Citi Prime Finance
FoHF managers are also competing with consultants in the advisory space now. Their extensive investment team differentiates them from consultants who do not have any financial stake in the success or failure of their recommended managers.
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Funds of funds are leaving the one-size-fits-all approach behind
explains. After 2008, pension plans required more diversification and alternatives therefore the amount of resource required increased still.
sides is great news for the pension scheme clients as it does give them more choice all around. So what is Mans stance with regards to competing consultants?
raditionally, for manager searches, consultants would provide a shortlist of managers for the client to select from at a beauty parade, Jenny Morton, head of Global Consultant Relations at Man Group, the $52.7 billion hedge fund firm, told Opalesque. If the funds did not perform well enough, clients would criticise consultants and challenge them to put their skin in the game and make the selections themselves. However, implemented consulting, the idea of outsourcing the manager selection to the consultant (first introduced 10 to 15 years ago), did not really take off, she notes. But it has become more popular of late. With the increased complexity of the asset classes being put in front of Trustees, the amount of resources required to make considered informed decisions had increased significantly over time, she
Jenny Morton
To choose managers on behalf of clients, consultants started to either launch their own funds or to charge higher fees. A number of large consulting firms have done well in this area in the last few years, and are now in direct competition with the FoFs business.
On the other hand, as FoFs are becoming more institutionalised, many are now offering bespoke solutions to better match the needs of pension scheme investors. They are leaving the one-size-fitsall approach behind. A good example would be some of the work that we have done recently with a scheme that wanted to specifically add diversifying hedge fund strategies with low Beta to equity markets to its portfolio, she notes. We built something that only included strategies like Managed Futures and Macro Funds to blend in well with their other assets. She agrees that increased competition from both
Just as we would hope to be chosen by the client in a traditional search, we would hope to be chosen as a preferred manager in each consultants implemented line-up. Consultants offering implemented consulting still look for investment manager fund of hedge fund solutions, although I think it would be fair to say that this has decreased in the last few years as they have developed their own offerings Morton says.
It is a free marketplace and each client has different needs and can choose the solution and firm that best fits their needs, she concludes. She adds that if she were a client looking at the market place for a third party provider to assist around fund of funds, she would look at research resources, experience in manager selection, performance and, especially when looking at alternative investments, operational due diligence capabilities. 18
Focus
Consultants who have practical experience are best
broader, Morley told Opalesque in an interview. So, sometimes we might put an independent trustee on a Board, sometimes we might help them look at corporate governance.
Clients can pick and choose from a variety of services offered by consultants.
Because they [consultants] knew little about it, they mostly forced the clients into long/short equity, Morley explains.
Now, if you are in long/short equity, it is going to be 60-70% correlated to long equity. It proved quite difficult in those days to push clients into CTAs and global macro, because it all sounded very strange and peculiar and the consultants basically did not understand it and when the consultants did not understand it, the clients were not going to understand it. So during the financial crisis of 2008, institutions were disappointed to find their hedge fund investments had not given them the diversification they had sought. In this sense, consultants did not add value in those days compared with FoHFs, Morley says. Although FoHFs had a bad time in 2008, he adds, most of them have a knowledge of the industry that is practical rather than theoretical. Not all consultants have that (he adds that Allenbridges consultants are ex-practitioners). Consultants are not just used for advising and stock picking; they are becoming a useful element of protection in an increasingly litigious world.
Ian Morley
llenbridge, Aksia, Mercer, Albourne are nowadays top investment consultants to investors in hedge funds. Opalesque spoke to one of them; Ian Morley, head of alternatives at Allenbridge. An industry veteran and the founding chairman of the Alternative Investment Management Association (AIMA), Morley started his own alternative assets consultancy, Wentworth Hall Consultancy Ltd, in London in 2006. He is also a senior hedge funds consultant for Allenbridge Investment Consultants. He consults on alternatives for institutional investors and family offices through both channels. Consultants, historically, used to be involved with asset allocation and these days it has got a lot
In 2008 we saw the classic Buffet clich, he says, namely, the tide went out and we saw who had been swimming naked. So funds of funds which had not diversified their portfolios efficiently and invested poorly disappointed investors. Add to that the expensive double layer of fees (underlying hedge funds as well as fund of funds) and the fact that consultants were then cheaper than funds of funds, to find the environment became very difficult for FoFs. Morley notes that the FoFs business grew spectacularly between 2001 and 2008 because pension funds who were badly damaged by the dotcom crash of 2001 took a serious interest in alternatives for the first time. They went to FoHFs - although FoHFs at the time had to go through consultants to get to pension fund clients.
19
Focus
Trustees have personal fiduciary responsibility, he explains. So, if they are going into a complex area which they do not know very well, legally it gives them an element of protection to say we hired the consultant, the consultant recommended Mr. Madoff or the consultant recommended this fund of funds of Mr. Madoff, it is their fault not ours. In its latest White Paper called Whats Ahead for Funds of Funds? Infovest21, a research house, mirrors Citigroup and Ian Morleys predictions about the ongoing diversification of funds of funds: The healthy funds of funds will have a diversified asset stream - an advisory business, a Fund of One business as well as a commingled fund business. They will be able to sit down with the institutional client and determine their tolerance for risk; appetite for returns; need for transparency, liquidity and reporting. They will be able to build a product specifically to meet the clients needs. Infovest21 also predicts more consolidations among FoHFs.
New Managers | Issue 08 | September 2012 little ahead of the curve in terms of understanding that their business model was broken and that they needed to adapt in order to survive, he tells Opalesque. Consultants have continued to pick up business with the institutionalisation of the hedge fund industry, he says. Institutional investors teams are often small and require more due diligence than before, creating opportunities for consultants. Cook also cites the very useful liability issue, mentioned by Morley.
Morley recommends emerging managers to wait to see consultants when they are up and running as professional firms; they will only give you a certain amount of time and it is the old adage you will not get a second chance to make a first impression.
Emerging managers indeed may find it more difficult to get through consultants who work for institutions. The latter often require a minimum AuM of managers before allocating to them - and emerging managers do not yet have that minimum. This turf war between FoHFs and consultants is becoming very interesting, Morley comments, and it will be probably quite good for clients, who will see their fees lowering as a consequence. You would not get on an aeroplane with someone who has only done a simulation course, he explains. You want someone who is a real pilot and who has flown.
So consultants are still providing an extra level of due diligence and an extra level of protection for the institutional investment teams.
In my opinion, funds of funds will always exist and there will always be a place for multi-manager products, particularly at the emerging end of the market, which the consultants do not yet have the breadth to cover particularly well, he notes. The hedge fund world is becoming much more accessible for institutions. Funds of funds, with their experienced portfolio managers and their ever-more flexible business models, would definitely be a more welcoming place for them. - Benedicte Gravrand See our last New Managers piece on funds of hedge funds that invest in emerging managers here: Source 20
Kevin Cook
evin Cook, founding partner of Autumn Capital, believes that funds of funds may continue to see their assets dwindle. Autumn Capital Partners LLP is an investment consultancy firm, working with managers and allocators to identify and develop businesses and investment strategies. But the larger funds were a little bit cleverer, a
Seeders Corner
Investcorp: Institutions can invest in emerging managers through special programs

new funds (3 years or younger), which are assumed to have less assets. We found that over the last seven years, which was the focus period for the study, the emerging funds outperformed the large funds on a risk-adjusted basis. So, the next logical question was that surely the emerging funds take a lot more risk than large funds and as a result they have outperformed, he explained. I think what was most interesting was that most of that outperformance came in 2008-2009. business is divided between funds of funds (16%), customised solutions (about 54%) and the seeding platform (about 30%). He is profiled in Cathleen Rittereisers book Top Hedge Fund Investors (Wiley) as one of the few risk masters in the industry. Institutional investors have been looking at emerging managers of late, and some think one way to get exposure is through partnering with institutions which have an Emerging Manager Program like Investcorps. The firm allocate capital in this program through a fund of funds-like portfolio. This program started in 2005; since then Investcorp has seeded nine managers, and out of those nine, six are active today. What is unique is, in each of those cases we seeded the managers with Investcorp balance sheet capital. So we are completely aligned with the investors, he notes.
Deepak Gurnani
ince 2000, institutional money has been penetrating the hedge fund industry. But since 2088, when a lot of non-institutional money redeemed, most of the hedge fund industrys assets come from institutional sources. Deepak Gurnani, the head of the $5 billion hedge fund business at Investcorp, said during a recent Opalesque TV interview that this is a positive in that it forced the hedge fund industry to focus on risk management and transparency. There is one big concern however coming from this trend, he adds. And that is that most of the institutional money goes to the larger funds. Not that larger hedge funds are bad. But if so much money goes into them, this can lead to dilution of returns. He authored a paper in 2010 that compared the performance of large funds ($5bn +) and that of
I would say just 90% plus of the money going into large funds is setting up things for disappointment in the years to come.
Investcorp was set up in 1982 to help investors in the Gulf States invest in companies in the West. It is now an asset manager focused on alternative investments with $12 billion in hedge fund, private equity, and real estate assets under management. More than 90% of the assets are institutional, and more than 70% are from U.S. institutions. The firm reported a net income of $67.4m for the 12-month period ending June 2012 (compared to $140.3m a year ago), with fee income growth of 20% y-o-y. Gurnani confirmed in the first part of the TV interview that the firms hedge fund
The first capital that takes the maximum risk with these emerging managers is Investcorps balance sheet capital. Then once we get comfortable with the manager and with the set-up of the firm etc., we invite client capital to invest as co-investors along with us.
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Seeders Corner
Gurnani explains that his firm meets hundreds of managers every year. A dedicated team does the sourcing and allocating. There is also a team that does deep due diligence on both established managers and emerging managers. - Benedicte Gravrand Name : Investcorp Headquarters: New York Other offices in: London, Bahrain Established in: 1982 Type: Asset manager focused on alternative investments. Core service offering: Single Manager Platform Total AuM of seeding program: Approx. $4.3 billion of seed investments, funds of funds and customized accounts How many funds seeded so far: 6 current seeds Expected number of funds to be seeded this year and next: 3-4 per year Strategies / geographies: Open Typical seed amounts: $50 million-$100 million Terms / length of investments: Varies Revenue share?: Yes Equity share?: No Founder share?: Offered First Capital loss? N/A Acceleration capital?: Yes Post-seeding activities: Yes Contact: www.investcorp.com/contactus/default.aspx Website: www.investcorp.com
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Servicers Spot
Conifer: Smaller hedge fund managers like cloud technology
called InvestCloud Solutions, a cloud-based data aggregation and reporting portal business. In the asset management world and beyond, the concept of the cloud refers to where the technology infrastructure hardware and software is hosted, how it gets maintained, and it speaks very much to the cost advantages and security advantages around this new type of technology, MacDonald told Opalesque in an interview. As indeed, cloud technology has allowed the firm to revolutionize how it integrates different data sources into one common place and how it renders that data and use it in a constructive and value-added way for its managers and for its investors.
data in their portfolios being transmitted back and forth via secure online network, he adds. In fact, its already happening in many cases. (More on cloud services in this article). According to McDonald, cloud technology appeals especially to smaller managers because it enables them to take on more deeper and advanced technology offerings at a much earlier age.
Jack McDonald
ccording to Jack McDonald, the CEO of Conifer, a fund administrator, we are still in the early innings of the adoption of cloud technology in the asset services industry; yet newer and smaller hedge fund managers tend to adopt Cloud at the outset, as it offers a solid middle and back office infrastructure for a cheaper price. The Conifer Group is a 24-year-old fund administrator and asset servicing firm, headquartered in San Francisco. The group has three businesses; Conifer Securities, which is a broker dealer that does outsourced trade execution as well as prime brokerage; Conifer Fund Services, which is a middle office and fund administration platform; and the newest business, which is a joint venture
Most people already use and trust their financial information to cloud technology with e-commerce websites like Amazon and eBay
Data stored in the cloud-based infrastructure is much more secure than data stored in ones own server because of the disaster recovery capabilities, he says, and the ability to maintain and do upgrades is becoming easier. It is just a matter of time before the assetmanagement industry is fully comfortable with the
Cloud technology and outsourcing means that smaller hedge funds can access many of the systems that they would otherwise not be able to afford to buy and bring in-house.
We are finding that those managers who are interested in adopting a solution like Conifers actually have a more robust infrastructure than their peers who choose to wait until they can afford to buy it, he says. The buy versus outsource paradigm has definitely been shifting over the years as we are seeing more and more demand for outsourcing in general. - Benedicte Gravrand
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Servicers Spot
Name : Conifer Fund Services Headquarters: San Francisco Other offices in: New York City; Tortola, BVI; Los Angeles Established in: 1989 (as multi-manager investment platform), then refocused as a fund administrator in 1999 Core service offering: fund administration, middle & back office operations Related services: prime brokerage, trade execution Supporting how many investment businesses: Approximately 130 FuM: Approximately $12 billion Contact: Jack McDonald, CEO. jmcdonald@conifer.com, +1 415-677-1573
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Launches
Hedge fund launches declined in the first half of 2012: HFR

edge fund launches declined through mid-2012, as managers prepare for increased reporting requirements and investor demand for institutional infrastructure continues to increase, Hedge Fund Research (HFR) reported. Hedge fund launches totaled 245 in 2Q12, down from 304 in the prior quarter and representing the lowest quarterly launch total since 4Q10. Hedge fund liquidations also declined from the prior quarter to 192 funds, although 1H12 liquidations exceeded the first half of 2011 by 14%. New fund launches through mid-2012 declined from the prior year as a result of three factors: weak performance in 2Q12, continued low levels of investor risk tolerance and uncertainty surrounding increased reporting requirements and infrastructure costs, stated Kenneth Heinz, President of HFR. Despite total hedge fund industry assets rising to a record level of $2.14 trillion in the first half of 2012, the capital raising environment continues to be challenging, particularly for small to mid-size funds. Increased certainty about regulation, reporting and marketing, as well as a normalization of investor risk tolerance, is likely to result in more fund launches and improved capital raising conditions through the second half of the year. The number of Emerging Markets (EM) hedge funds reached a record high in 2Q12, overcoming the headwinds of volatile performance and investor redemptions, HFR reported earlier. The total number of EM hedge funds increased to 1,073 funds, approximately 14% of all hedge funds and an increase of 3.5% since 2Q11. Despite the increase in the number of funds, total EM hedge fund assets declined by 3% from the 1Q12 record, falling by $3.7 billion to finish 2Q12 at $123.5 billion. We recently heard of the following ex-hedge funders striking out on their own: 3. Bessemer Venture Partners Rob Chandra is scaling back his role at the venture firm to launch Avid Park, a long/short hedge fund focused on the volatility in the technology sector. Avid Park has already raised a full $250 million and is closed to new investors. may target a mix of public and private equity investments.
4. Kyle Davies and Su Zhu, two derivatives traders, are launching Three Arrows Capital in September 2012 in San Francisco. The fund will focus on Asia market neutral liquidity constrained arbitrage. The fund is seeded and expecting to launch with $10m.
1. Tiger Cub Richard Gerson and his business partner, Navroz D. Udwadia, have raised $1.2 billion for Falcon Edge Capital, based one floor below Blue Ridge Capital in Manhattan (where Gerson also used to work). Falcon Edge will own publicly traded stocks and private companies and plans to invest overseas too. 2. Amit Doshi, who left Chase Colemans New York firm Tiger Global Management in April, is tentatively scheduled to launch around yearend (Coleman is himself a Tiger Cub). The fund
5. India saw its first domestic hedge fund launch as the state regulator, the Securities and Exchange Board of India (SEBI), approved the license of Mumbai-based Forefront Alternative Investment Trust. 6. Paul Crone, the former head trader at Touradji Capital Management LP who left the firm in March after seven years, has started a hedge fund focused on metals derivatives in New York, Citrine Capital Management LLC. Crone, 41, is among traders starting hedge funds this year looking to profit from a bull run in commodities that began last month as policy makers from China to the U.S. ramp up stimulus to boost their economies,
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Launches
7. Jonathan Herbert, a portfolio manager at European equities boutique Zadig Asset Management who launched the Camox fund in 2008, has taken his 25m fund with him to a start-up firm, London-based Cologny Advisors. He leads a team of five people and is now in discussions with seed investors and family offices to try and grow the fund. Former bankers and others who are starting new funds: 8. Chris Boas, who quit last year as global head of credit at Citadel LLCs securities unit, is planning to start a hedge fund; Longwood Credit Partners LLP will seek to profit from price differences between debt securities and is scheduled to start in the first quarter of 2013. 9. Patrik Edsparr, the former head of Citadel LLCs securities unit, and Chris Mikosh, a former Goldman Sachs managing director, are starting a hedge fund that will invest in Asian corporate loans sold by European banks. They have tentatively named their firm Tor and it will have offices in London and Asia. 10. Daniel Bystrom, former head of equity derivatives trading at MF Global Inc., and Neil Boyarsky plan to start Hawksfield Capital LLC, Bloomberg said in mid-September. a New York-based equity volatility hedge fund, by the end of September. Hawksfield will start with $10 million to $20 million of Bystrom and Boyarskys own money, as well as capital from friends and family.
New seeding investments, ventures and platforms: Phoenix Investment Adviser is opening up its employee-funded JLP Institutional Credit Fund and has announced an initial seed investment of $40m from a large European bank. The fund was launched January 1, 2011 using $3.5m of Phoenix employee capital- the new investment will bring fund assets under management up to $55m. (See full Opalesque Exclusive article here). Other: Alp Ercil, the former Asia head of New York-based Perry Capital, closed his own Asia-Pacific fund to fresh money after raising $940 million in the biggest hedge fund launch in the region for 2012 (mentioned in New Managers, May 2012). The Hong Kong-based fund manager leads other major Asia hedge fund start-ups such as Tybourne Capital and Voltex (mentioned above), Reuters says. - Benedicte Gravrand To find how to get full access to the Opalesque Emerging Managers database, click here.
11. Eric Rosen, the co-head of UBS AGs fixedincome, currencies and commodities business for the Americas, is leaving the bank in September, about a year after he joined, to start a credit hedge. Other executives who have left UBS this year include Kaushik Amin, Jim Lanzilotti, Matias Santa Cruz, David Cannon and Stephen Chronert, says Bloomberg. 12. UK-based communications and consultancy firm Sustainable Options Ltd launched the Sustainable Resources Fund, an open ended hedge fund that offers appeal to both green and Islamic investors. The fund aims to raise $100m for investment in a mix of agroforestry, land and sustainable agricultural sectors.
13. Former Nomura Holdings managing director Jean-Noel Payer, 36, is planning to launch a $250m Asia-focused volatility hedge fund that intends to take advantage of price swings in Asian securities. Payers Voltex Asia Capital Ltd will be headquartered in Hong Kong.
26
Launches
Straight from the horses mouth:
Aquantum launches 100% systematic asset manager, UCITS fund to follow

quant asset manager. The firm, which focuses on the design of systematic CTA strategies, obtained a licensing agreement with Royal Bank of Scotland (RBS) and launched a series of indexbased products, which to date have attracted more than $1bn of investment notional. It has offices in Luxembourg, Oxford, Munich and New York. Its name derives from the words Aqua, for liquidity and index transparency, and Quantum, for quantitative investmen t principles. Aquantum AG, the new asset management division, is authorized and regulated by BaFin, the German supervisory authority. As with most CTA managers, it will follow a fully systematic approach to investing with predefined risk budgets. This approach involves applying advanced mathematical models to data in order to systematically exploit market inefficiencies, with all models tested against large data sets, thereby exposing them to a wide range of market, economic, and political changes. It can trade in more than 100 markets and trading strategies cover the areas of trend following, countertrend trading, spread programs, pattern recognition, and machine learning. The asset manager set up two investment programs: Aquantum Global Systematic Program (the AGS Program); and Aquantum Commodity Spread Program (the ACS Program). Both are now available in managed accounts. The planned UCITS fund, which will be domiciled in Luxembourg, will include the AGS program but not the ACS, as this one is a commodity program that uses instruments not eligible for the UCITS format. Moritz Seibert, partner and co-head of the portfolio management team, told Opalesque in an interview that the natural evolutionary step that follows the index business was to go out and find a team of seasoned professionals to grow Aquantum into an asset management business. Key members of the team include himself and Mr Morrow, as well as Aquantum AGs partners Dr Jochen Mirth, Mr Christian Schneider and Mr Oliver Grimm (all former partners of Assenagon Group, the Luxembourg-based fund manager with over 10bn in AuM). According to Aquantums release, together with Dr Oliver Podobrin, a former CERN scientist and leading derivatives expert who is also a partner at Aquantum, they bring significant financial
Thomas Morrow
This article was published in Opalesques Alternative Market Briefing on 29th August, 2012
he Aquantum Group, a provider of sophisticated investment indices, has just started a new asset management division called Aquantum AG, which is based in Munich, Germany. Aquantum AG offers managed accounts and plans to launch its first fund a UCITScompliant fund in the last quarter of this year.
Aquantum was founded in 2008 by Thomas Morrow, who used to be Senior Scientist at Winton Capital Management, a large British
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Launches
engineering and operational expertise to the team. The firms advisory board meanwhile includes Perry Kaufman, the renowned systematic trading expert and widely cited author of books on technical trading. It took almost a year for Aquantums team to get the new asset management firm up and running, Seibert told Opalesque; It takes a good senior team to build a state-of the-art infrastructure in a consistent and convincing way. Start-up costs are substantially higher than three years ago, he noted, but every dollar spent is necessary if you want to attract money. So from the start, Aquantum has had a proper institutional infrastructure in place. Andreas Schuermann, deputy chairman of the advisory board, told Opalesque that in Germany there is a saying which is: in Frankfurt, there is competition, in Munich, there are clients. As indeed, Munich, one of the wealthiest cities in Germany, is home to most DAX companies (the DAX, a German stock index, is up around 19% YTD). He noted that Aquantum is purely focused on offering systematic managed futures exposure. Thats the only thing we do, and we will not mix it with any other investment style. This in combination with Aquantums transparent approach toward clients, and the fact that we are based in Germany, is unique. Munich, in its own way, is a financial hub, Seibert commented. It is not a place to avoid paying taxes, but we are nevertheless committed to Munich, a place in the heart of Europe with tremendous client potential. Indeed, Munich has reportedly the strongest economy of any German city and is a significant financial centre (second only to Frankfurt), being home of Allianz, Munich Re, BMW, Siemens, and many banks. Seibert believes that the systematic managed futures business still has substantial growth potential in Europe. We are no mathematical nerds who cant talk to anyone, he added, as indeed Aquantum means to be transparent and to hold an open door policy. - Benedicte Gravrand
Engaged Capital launches with $85m seed investment from Grosvenor Capital Management
Glenn W. Welling
This article was published in Opalesques Alternative Market Briefing on 12th September, 2012.
ngaged Capital, an activist investment firm focused on investing in small and mid-cap North American equities, announced a strategic partnership with Grosvenor Capital Management, one of the oldest and largest global alternative investment managers, with over $22bn in assets under management. The Engaged deal is the second strategic partnership entered into by Grosvenor since it launched its current Emerging Manager program at the beginning of the year.
Engaged Capital was founded this month by Glenn W. Welling, a former Principal and Managing Director at Relational Investors.
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Launches
Engaged makes concentrated investments in undervalued public companies and through a constructive engagement process serves as the catalyst for strategic change and shareholder value creation. Welling has over 20 years of experience in activist investing and providing business advisory services to companies to help them increase shareholder value and will be bringing his team from Relational into the new fund. Prior to his work at Relational, Welling ran the Buy-side Insights Group at Credit Suisse, where he helped many of the banks largest clients ensure their decisions and actions created value for their shareholders. Before Credit Suisse, Welling was a partner at HOLT Value Associates, where he ran a similar business. He joined Relational in 2008, bringing with him some of the bankers from his team at Credit Suisse to help grow the firms large-cap fund and also launch a mid-cap fund. At the end of 2011, we decided it was time to go out and build a new firm just focused on activism in small and mid-cap companies, using a more a more constructive approach to activist investing, says Welling in an interview withOpalesque. We see a unique opportunity in the small to mid-cap market because the most successful activists are now managing $6-12bn in AUM and cant focus on the $500m-$3bn market cap companies, where the returns are the highest. He explains that many of these companies are under covered by both analysts and investors, creating a variety of market opportunities, you see a lot of mispricing in this segment of the market and often these companies dont have the quality of business advisors and management experience of large cap companies so an activist can come in and provide real value advising them on ways to enhance value for all shareholders. Ive been an advisor to companies for over 20 years, and smaller companies are structurally more simple, usually lack large bureaucracies and entrenched management teams. This, according to Welling, expedites the activist process and fosters change in a constructive way. You are not going to see us making a lot of public statements about our investments, however you can be sure we will be holding managements and boards accountable behind closed doors, Welling says. The partnership with Grosvenor emerged after Welling spent most of this year speaking with a variety of seeding and institutional investing firms. We had several conversations, but it was clear from day one that we were on the same page as Grosvenor in terms of values and investment philosophy, Welling explains. He will bring his team from Relational into the new fund, making an investment staff of five and a back office staff of two including Andrew
Bzura, former CFO of Expo Capital in Los Angeles. We believe we have a best of breed front office investment process and we have focused on putting an institutional quality team in the back office as well, he says. The fund itself will likely include a few companies from his prior portfolio, but the team has a number of new ideas they are working on as well. Our investment process is focused on finding high quality companies, that are trading deep discounts to intrinsic value, where we understand why the company is trading at a discount and have strong conviction that we will be able to fundamentally add value for shareholders and the firm, he notes. - Bailey McCann, Opalesque New York
If you wish to register your new hedge fund (which is less than 48-month old) on the Opalesque Emerging Managers database, please register here or send your funds details to our database team at db@opalesque.com.
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Perspectives
PerTrac: most of H1 gains came from small or start-up funds, but most inflows went to billion-dollar club he total, reported amount invested within the hedge fund industry, including funds of hedge funds and CTAs, climbed to $2.317 trillion in the first six months of 2012, according to PerTrac, the database provider. The total number of all funds reporting to databases also jumped by 4.61% to 14,013, led by single-manager hedge funds, whose ranks swelled 7.46% to 10,754 funds.
FRM: strategies are important criteria for seeders During the recent Opalesque Roundtable in London, participant Blaine Tomlinson, founder of fund of funds group Financial Risk Management (FRM) commented on the firms recent acquisition by Man Group, the future for funds of funds and the development of FRMs seeding business, which has been running since 2007. It is important to be very selective in terms of the strategies, he commented. Do we think a particular strategy is going to work and do we think these are the best people available to make that strategy work? Several of the strategies we have seeded have been idiosyncratic or distinctive in nature, as we want something that is not dependent on market beta. As an example, Tomlinson spoke of a credit fund that lends money to corporates. That strategy has been very successful. Also we seeded a quantitative fund focused on Asian markets that is generating excellent returns. (See Opalesque Exclusive here). Its not a mistake to launch a small hedge fund According to Daniel Strachman, a financial expert who serves as the Director of Research and Strategy for the GAIM Conference Series (Informa plc), you can start a hedge fund with very little. Its reasonable to think that a group of people
could get together and launch a fund for under a million dollars, Strachman told StreetID. You could hire a lawyer, hire an accountant, open a couple brokerage accounts, and get a fund up and running from an out-of-pocket expense of just north of $100,000. To those who question the value of smaller hedge funds, he says that products are launched and created because the market demands them, according to Minyanville.com. He added:
Thats what makes our market the most interesting market in the world.
Some smaller hedge funds that have outshined their bigger rivals A number of hedge fund industry spin-outs are showing up their bigger and better-known brethren by delivering great returns YTD, Reuters reported in August which is not too hard since the average hedge fund returns have not been very exciting. The article went on to say that Marcato Capital Management in San Francisco, which specializes in selecting stocks, and run by ex-Pershing Capital Square Managements Mick McGuire, had gained 17.6% since YTD (to July). Pershing Capital Square only made 3.3%. Murdock Capital, run by Jason Murdock, who spun out of Contrarian Capital and runs $250 million in assets, is up almost 13% YTD. Kepos Capital, a quantitative
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Most of the gains in the number of single-manager hedge funds (75%) came from small and start-up funds with less than $25 million in AuM.
Even if the gains came from small funds and start-ups, investors who allocated to alternatives in 2012 favored the largest funds, PerTrac notes. The billion dollar club of single-manager hedge funds, those that oversee more than $1 billion, saw AuM increase to $1.146 trillion from $1.08 trillion at the end of 2011. The billion-dollar-plus funds represented 60% of all assets invested with single-manager hedge funds at the end of H12012.
Perspectives
fund, which now has some $750 million in AuM, is up 11.2% YTD. Kepos is run by Mark Carhart, who ran Goldman Sachs $10 billion Global Alpha fund. Part of the reason these smaller managers can do well is because of size, Charles Gradante, cofounder the Hennessee Group, told Reuters. You can make more concentrated bets while staying on the radar when you are small and you can unravel them better when you need to. California hedge fund firm closes down after two years Here is one hedge fund firm that, sadly, closed soon after launch. Montecito, California-based hedge fund house Evolved Alpha, LLC is to close the firm and has already returned investors capital. It ran four strategies: Specialized Strategies, Total Return, Global Equities and Global Futures. Closing Evolved Alpha was not a reflection on the strategy or managers. It was a business decision, founder Jesse J. Redmond stated. Evolved Alpha was launched two years ago with the support of a core group of investors. The firms AuM doubled since, but its investorbase remained concentrated. According to the Opalesque Emerging Managers database, Evolved Alphas Specialized Strategies fund was down 0.44% in February 2012 (-0.24% YTD). Bank of Chinas PB business wants to serve hedge fund start-ups If youre setting up a hedge fund in China, you know there is place where youll be welcome: Bank of China International (Boci) aims to ramp up its prime brokerage business and is targeting Chinese hedge fund start-ups in its drive to become a fully fledged investment bank, Asianinvestor.net reported . Graham Ng, deputy head of equity sales and research at Boci Securities, says the firms prime servicing unit has prioritised developing relationships with managers of Chinese hedge funds up to $100 million in size. Crumbs
behalf of the larger funds. Kislay (Sal) Shah of McGladrey, who was selected by the Hedge Fund Association to fill the newly created role of Connecticut chapter director said: One of the (HFA)s most important missions has been - and remains - to speak up for the interests of smaller and emerging managers. However, as a part of our expanding industry advocacy efforts, we also work on behalf of larger hedge fund managers, many of whom are based in Connecticut. Expand your definition of institutional investor as there is more to it than pension funds, we are told. Craig Baker, global head of research at Towers Watson, said: Pension funds have always been and will remain a very large client group for top alternatives managers, but the demand from non-pension fund investors, such as sovereign wealth funds, is only going to increase in the future. Good news for those who want to launch an offshore fund; its becoming an online procedure. The Cayman Islands Monetary Authority (CIMA) has introduced e-registration to enable fund managers hassle-free and paperless transaction for new fund launches.
The hedge fund industry is like the restaurant business: everyone wants to start one but they arent prepared for the high level of failure.
Thats what Omeed Malik, head of the emerging manager program at Bank of America Merrill Lynch, told the New York Times. He added: One thing the vast majority of the top emerging managers have in common is the three Ps: pedigree, performance and product. Remember your three Ps. We know someone who will speak in emerging managers interest when not speaking on
31
Profiles
Fasanara to launch event driven multi-strategy fund in deeply transformational market environment
Europe that committed to us $100 million for a segregated account, Fabbri (pietro.fabbri@ fasanara.com) told Opalesque in an interview. The account now has a nine-month track-record (which cannot be divulged to the public). The firm won a second mandate in the spring, to run Eur80m for a European sovereign wealth fund. This specific portfolio is cued primarily into fat tail risk hedging, Fabbri notes. Fasanara recently entered into a strategic relationship with Wilshire Associates, a managed account platform headquartered in California. (Wilshire also supports The Harvest Fund, which creates and manages private equity investments in emerging hedge fund firms, as seen in New Managers, April 2012). says.
Pietro Fabbri
COSS is not a separately managed account (for one client only), but will have a normal hedge fund structure with more than one investor. Fasanara is the sub-advisor of the fund and Wilshire is the advisor, as well as the independent risk manager. Some investor commitment may allow the fund to launch in the next couple of months. Emphasis on event-driven investment, fundamental bottom-up analysis According to Fasanaras presentations, the asset manager seeks to participate in the second leg of the 07/09 credit crisis and to invest in a down-trending and highly dislocated market characterized by potentially high-impact events.
- Benedicte Gravrand Filia, after a combined 20 years at Merrill Lynch, left the bank to set up Fasanara Capital Ltd in December 2011. Fasanara is an asset management firm that specializes in European event strategies, based in Londons Mayfair area; it runs managed accounts and will soon launch a Cayman-domiciled hedge fund. Francesco Filia, CEO and CIO, was at Bank of America Merrill Lynch since 2000. His last position was that of managing director and EMEA head of the Principal Investors group. Fabbri, COO, was vice president in the same group. We basically started with a family office in
Together with Wilshire, Fasanara is about to launch its first comingled fund: the Wilshire-Fasanara Credit Opportunities & Special Situations fund (COSS).
It will also launch a new series of separately managed accounts with the platform, Fabbri
Alpha generating investments are to be uncorrelated to economic cycles and will be done in a number of asset classes including debt, loans, high yield, distressed securities, securitized assets,
32
Profiles
public equity and other special situation securities.
The emphasis is on event-driven investment scenarios and fundamental bottom-up analysis. However, top-down macro views are still taken into account as they often influence the implementation of the bottom-up investment ideas and of the portfolio fat tail risk hedging strategies. The managers deploy capital opportunistically in response to pre-identified investment themes. As a result, the asset class allocations may shift dramatically over time due to changes in the investment landscape. Their strategy focuses on value companies as well as on proprietary macro fat tail risk hedging programs developed to protect the overall portfolio against extreme scenarios / three standard deviation events. Deeply transformational market environment The asset manager believes that the current market environment is deeply transformational and calls for a ruthlessly opportunistic investment approach. Specific sectors across EMEA region will soon experience stress and periods of extended dispersion, therefore offering opportunities for value-driven investors. Opportunities will be found not only in value but also across relative value and hedging strategies. We think we are in a multi-equilibria market so the course is set for a slow Japan-style deleverage, but the risk is there for fatal scenarios, Francesco Filia recently said on CNBC.
scenario for real defaults, so of the rate cuts, restructurings, [etc.] In the middle of the two is a central scenario, the Japan-style one. There is a very high degree of uncertainty of non-transparency and this is what makes the crisis resolution policies at work currently not very successful, he continues. If you compare them with the times of Roosevelt for example, you would see that there is not any Roosevelttype of resolve in tackling the situations and this is what is killing the markets and keeping them into a very uncertain territory. And within that, at some point, the delicate balance [] could just break, then we could find ourselves in one of the two (above-mentioned) scenarios. Lets hope not. - Benedicte Gravrand
Within the next four years, the possible scenarios could be: Inflation, Default, Renewed credit crunch, EU break-up, China hard landing, USD devaluation. These are fat-tail scenarios, Filia tells Opalesque, which represent some low probability high yield type events.
Wanting to mention two of the scenarios, he explains: the inflation scenario is where you experience currency debasement, debt monetization and nominal default as we call them. And a global scenario which is the default scenario is where inflation does not kick in because the central bankers are unable to prevent sequential failures of banks, corporates and sovereigns across Europe. And that is the
If you want your fund to be in Opalesque Solutions Emerging Managers Database, please send your funds details to: db@opalesque.com.
Francesco Filia http://video.cnbc.com/ on CNBC
33
Profiles
Feed the world and save the environment through green investments
Opalesque in an exclusive interview that it was also designed to invest directly into plantations, joint ventures with local partners, private equities, or in the acquisition of shares in listed agricultural company.
Michael Young inspecting a Asia plantation
he manager of Sustainable Capital Luxembourg S.A. believes in ethical and socially-responsible investments. It is for this reason that the newly-launched $50m open-ended hedge fund called the Sustainable Resources Fund was created to focus on sustainable resource projects and is investing in agriculture, biomass and forestry with the aim of feeding the world and protecting the environment. The Luxembourg-domiciled fund is a sub-fund to the Amiri Shariah Investment Platform SICAVSIF (Specialised investment fund). It has a target return of 15% p.a. net of fund fees. Michael Young, the funds advisor, told
The outlook for agriculture, forestry and biomass is solid. The worlds population is currently at seven billion and continues to grow. Everyday people need to eat food and uses timber products. These are real assets in the ground that you can touch and feel it. Even if the eurozone collapses, the trees will keep on growing and we still need to eat, Young explains.
But more importantly, Sustainable Resource believes that the current commitment to reduce greenhouse emissions across the globe has seen initiatives emerge to encourage the growth of sustainably managed forestry assets and develop renewable energy sources like biomass. In the longer-term, data shows that demand for
timber, biomass and food related commodities remains strong and the global demand for sustainably managed resources continues to exceed supply. A study by the United Nations Food and Agriculture Organization estimates that the world consumption of wood and woodrelated products will rise more than 50% by 2030. According to Young, the sustainable resource strategy is very much under-represented in investment portfolios. He notes, A vast majority of institutional investors and top retail investors I have spoken to have no exposure to forestry or agriculture. They are fully invested in New York hedge funds, equity and government bonds, and real estates. Very few have exposures in forestry and agriculture. I believe there is no fund out there that offers more transparency to investors [than our fund]. The Sustainable Resource Fund was launched the first week of September, 2012. It is currently building its distribution particularly in the Middle East and specifically in Saudi Arabia, the UK and Asia. It was launched with an estimated $50m in assets but Young says they are aiming to raise $100m within a year up to 18 months.
34
Profiles
We are confident to meet Phase One, which involves 10 projects that we have targeted, Young says. Phase One entails investments of between $8m and $12m each in 10 projects in Africa and Asia.
Phase Two of the funds strategy involves executing bigger deals, in the $25m-$30m bracket per project. According to Young, Sustainable Resource is already flooded with projects. Prior to the funds launch, the investment advisory team reviewed approximately 40 projects or investment ideas that were within the parameters of the funds investment objective. 34 of the projects were rejected during the first phase of the review process due to one or more of the following reasons; an unsatisfactory investment horizon; the project is located in a country that fails to provide sufficient investor protection or robust land title rules; an inadequate return for the level of risk to be taken; or the project plantation manager had a insufficient track record in relation to the species proposed. We are currently committed to three projects, with two already in the latter part of due diligence. One is in scheduled to be executed any time, he continues. What differs Sustainable Resource from other hedge funds is that it offers liquidity to investors and flexibility on how the firm invests their money. Most investments in forestry and agriculture biomass are very illiquid, Young says. And clients have to tie their investments to five
or fifteen years, sometimes even longer. We offer monthly liquidity to investors and weve done that by allocating a modest proportion of the fund to listed equities in the sustainable resources sector of agriculture and forestry. In case investors made a redemption request, we can meet those requests. But we are hoping that the majority of our investors will stay with us for five years, as this is a long-term investment. Basically, Sustainable Resource has no lockup period. But the fund prefers to work with committed long-term investors. - Komfie Manalo, Opalesque Asia.
If you want your fund to be in Opalesque Solutions Emerging Managers Database, please send your funds details to: db@opalesque.com
35
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Opalesque NewManagers Sep 2012

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IN THIS ISSUE

EDITORIAL EMANAGERS INDICES

August 2012s performance of the Opalesque Emanagers indices

NEW FUNDS IN THE DATABASE

Funds that have recently joined Opalesques Emerging Managers Database.

PETER URBANI STATISTICS FUNDANA SERIES FOCUS

An Introduction to Singular Spectrum Analysis

Investcorp: Institutions can invest in emerging managers through special programs

OPALESQUES EMERGING MANAGER MONITOR

Conifer: Smaller hedge fund managers like cloud technology

New Managers | Issue 08 | September 2012

Welcome to the September 2012 issue of New Managers

Opalesque New Manager is edited by

Benedicte Gravrand. Based near Geneva,

New Managers | Opalesques Emerging Manager Monitor September 2012

New Managers | Issue 08 | September 2012

New Managers | Opalesques Emerging Manager Monitor September 2012

New Managers | Issue 08 | September 2012

August 2012 0.99 1.90 -0.22

YTD 4.79 6.09 1.14

12m 4.45 4.93 1.60

2011 -1.79 -2.83 0.51

2010 18.73 17.07 19.15

2009 34.51 37.59 20.52

Volatility 5.39 8.37 5.56

Beta (bm=MSCI) 22 40 -11

Eurekahedge Hedge Fund Index Newedge CTA Index MSCI World

0.63 -1.19 2.29

3.16 0.89 8.17

0.70 -1.39 5.62

-3.62 -4.52 -7.61

10.90 9.26 9.40

20.62 -4.31 27.07

5.40 7.37 19.46

- Florian Guldner, Opalesque Research

New Managers | Opalesques Emerging Manager Monitor September 2012

New Funds in the database

New Managers | Issue 08 | September 2012

New Managers | Opalesques Emerging Manager Monitor September 2012

New Funds in the database

New Managers | Issue 08 | September 2012

Fund AuM $0.12m Eur20m Eur5m $50m $0.081m $0.25m

New Managers | Opalesques Emerging Manager Monitor September 2012

Peter Urbanis Statistics

New Managers | Issue 08 | September 2012

An Introduction to Singular Spectrum Analysis (SSA)

Kevin Dowds Measuring Market Risk and he Construction.

specialises in Risk Management and Portfolio

New Managers | Opalesques Emerging Manager Monitor September 2012

Peter Urbanis Statistics

New Managers | Opalesques Emerging Manager Monitor September 2012

Peter Urbanis Statistics

Other Links and References

New Managers | Opalesques Emerging Manager Monitor September 2012

Peter Urbanis Statistics

New Managers | Issue 08 | September 2012

New Managers | Opalesques Emerging Manager Monitor September 2012

Peter Urbanis Statistics

New Managers | Issue 08 | September 2012

New Managers | Opalesques Emerging Manager Monitor September 2012

Peter Urbanis Statistics

New Managers | Issue 08 | September 2012

New Managers | Opalesques Emerging Manager Monitor September 2012

New Managers | Issue 08 | September 2012