Hedge Magazine, 2013. Original article (p42-44).
Sohail Malik, fund manager at ECM Asset Management.
It must have been something of a playground scenario for Sohail Malik, to set up a special situations fund just as the Eurozone crisis was truly kicking off. Granted, it was a whole lot less fun for Greece and Ireland, but purely from an investment perspective, was there ever a more ‘special situation’? We’re chatting in ECM Asset Management’s classic Mayfair townhouse, where beautiful maps of the old and new world decorate the walls in a nod to new horizons. So was 2010 an exciting time to start a hedge fund, or was it just terrifying?
“It’s been pretty exciting,” says Malik, whose fund is now approaching its third birthday. “The excitement starts with the fact that no one knows what’s going to happen. When you look to the next three years, the absolute right answer is to say – we just don’t know.” The same was true back in 2010: “You would never have said back then that we would have the kind of Eurozone crises we’ve had. No one really predicted that. … [But] what happened emphasised our strategy around event trading. This is an event that’s been going on for a long time, and it has splinters of opportunity on the long and the short side. This gives us heart.”
In an elegant dark blue suit and shirt cuffs, Malik’s skipped the tie as the heatwave is cresting outside. While the soft-spoken manager readily admits the future is hard to read, this is a feature of modesty rather than lack of insight; his opinions are peppered with facts and figures, as he spends a considerable amount of time on research in pursuit of the next opportunity. “Being a portfolio manager is really about obsessing about things other people don’t. You pretty much live your book. It’s the first thing you worry about in the morning, and the last thing you think about at night.”
Considering the amount of freedom Malik and his team have in shaping this fund, investors may be reassured the manager feels suitably weighed down by the task. “But we like that we don’t have to be so navel-gazing. Our view is that the opportunity within events dictate how long you are, or how much cash you have. We try not to live by any models; it’s not a strategy where you need an algorithm or anything like that.” This translates into a fair amount of travelling, as Malik firmly believes that sitting in an office doesn’t give you real world perspective. He also enjoys meeting investors; ECM is owned by Wells Fargo’s asset management arm and is the largest credit specialist in their stable.
“[Investors] are primarily buying into you as a portfolio manager, and part of that job is to be as open and honest as possible. You need to be able to explain your strategy in a simple way. That may sound straightforward, but this is an industry not especially known for its simple marketing appeal.” Malik laughs at the understatement, but he believes the post-Lehman world requires hedge funds to be more transparent if they want to compete.
A conscious approach to liquidity is also part of the campaign for reassurance; investors can give 90 days notice to exit the fund, which Malik deems as reasonably good for a fund of its kind. He is disciplined about making sure the portfolio reflects this liquidity, resulting in strict rules for asset concentration, both across individual positions as well as industries. “And we have hedges to help us in those down moments, so we would expect to do well also then,” says Malik, whose fund returned 10% in 2012.
To the question of risk, Malik explains how an events-driven strategy means the fund’s assets will often be trading on their own dynamic rather than following the market. For example, Schneider launched a takeover attempt of Invensys the morning of our meeting, meaning Invensys’ stock would be up even if the market is not. “The rationale behind events trading is that your book is made up of those kind of events. … Catalysts like that aren’t going to be triggered all the time, but they are sleeping in your book. You have a view, a timeframe, and an expectation.”
So this fund is really a reflection of you, and your ideas, I ask, expecting him to protest. But he doesn’t: “Well, people are getting this more and more now, that any portfolio manager has a certain style. The way they trade the book, the way they build the book, the way they shape the book. It’s a people business in that sense. It’s key that investors like your style, and the way you look at the world.”
As the crucial three-year anniversary for the fund he designed is approaching, Malik’s core motivation is now to make sure the evolution of the project stays on track. “On a more personal level, I enjoy the daily challenge. There’s a privilege in getting to do something with a daily motivation.”
A tennis fan both on and off the court, Malik is of the “healthy mind in a healthy body” school of thought: “I play a couple of times a week and I follow the grand slams.” He went to the French Open but missed out on Wimbledon this year, as tickets to Andy Murray’s jackpot were hard to come by: “It was a grand moment, also for that kind of losing British psychology in tennis. Hopefully we can put that to bed now, and Andy Murray can actually enjoy his tennis from now on!”
When away from his home in leafy South-West London, Malik likes seeking out a local jazz club if he has a night off, especially in the US: “In my teen years I explored all kinds of music, from the 30s and all the way up to the 90s with Brit pop and house. The era I came back to was the 50s.” We start talking about how history seems to repeat, especially in music. “I guess there’s only so many ways to say ‘I love you’ in a song,” he laughs. “So maybe you have to go electronic at a certain point.”
The new world, whether it be that of music or investing, is a topic close to Malik’s heart. “The world we’re in is fairly unprecedented from a global market perspective. We have never seen this level of central banking interventions. It’s almost as if we have these mini experiments going on,” he says, pointing out how Japan’s so-called experiment with QE has been going for two decades, and both Europe and the US are now conducting their own experiments. “Markets seem to be driven by a skittish psychology, which mean they change like a mood, usually because of someone saying something. That seems to matter more than fundamentals right now.”
These unpredictable, fragmented markets are also the most exciting conditions for Malik and his team: “That tends to be when you get opportunities: when overreactions happen. That’s when you can make the best trades, by keeping a cool head and a fundamental view.” The fund has been keen on strategic M&A for high-yield, leveraged companies over the past couple of years, as big corporates that weathered the recession are now looking to fuel growth through acquisitions. The team has also been positive on the sub-insurance space, although Malik thinks now may be time to start reducing the risk here.
But the real unknown is whether these trends are pointing the way to something new, or if we are going back to the same old world. “People always say the old facts of life never die, and maybe that will be the case also this time,” says Malik; after all the markets will always be looking at inflation and solvency among indicators that fuel real belief. “Right now, the markets don’t have belief. There’s almost something of a guilty conscience about them, as fundamentals don’t justify what we see in the market today. … The real economy is still very brittle in its confidence. As that strengthens, as we hope it will, the outlook may not be so bad after all.” But, concludes the manager, regardless of how the world keeps turning in the same old tracks, change is constant and right now there seems to be plenty of that going around.