Erik Serrano Berntsen: The number one seed

Hedge Magazine, September 2015. Original article p60-62.

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Erik Serrano Berntsen, CEO and co-founder of Stable Asset Management

Those cufflinks Erik Serrano Berntsen is wearing, are they sharks or dolphins? It’s hard to tell, yet those are two very different impressions for a financier to wear on his sleeve. It’s a muggy summer morning in the Mayfair offices of Stable Asset Management, and I’m pondering this as I wait for Serrano Berntsen to return – he’s getting a copy of his book. Stable, the hedge fund seeder firm where Serrano Berntsen is CEO and co-founder, has been in this elegant white space since January, just before rebranding. “Oh it was very painful to come up with the name,” says Serrano Berntsen, as he hands me the book. “Tell me, did you first think of a horse stable, or stability?” The name reflects both: a stable of funds, and a stable investment. The CEO looks the part in a dark suit with pocket handkerchief, yet not too serious with two shirt buttons open and artfully tousled hair. Later he’ll apologise to the photographer for looking “a bit scruffy” – he’s due for a haircut this weekend.

I flick through the book, ‘A Guide to Starting Your Hedge Fund’, co-authored by John Thompson. Even at first glance it appears dense with practical information. “It’s a good introduction, pretty broad,” says Serrano Berntsen. The text is intended for those with genuine interest in the sector, as there’s little in the way of inspirational fluff. Although there’s the occasional quote by luminaries like Jerry Maguire and Gordon Gekko: “Those are a bit tongue in cheek! We don’t take ourselves too seriously.” I ask if I’ll be able to start a hedge fund after reading the book, and to my surprise he claims I would: “It’s not rocket science. Insiders make it look harder than it is.” Investments are an art, asserts Serrano Berntsen, but the business side of things, that’s science. “So if you read that book, you’ll at least know which questions to ask.”

Screen Shot 2015-09-25 at 14.10.32Stable Asset Management, which started in 2009 as Energy Alpha Strategies, looks for emerging managers who haven’t run their own fund before. They like it when traders have an entrepreneurial streak: “With a new hedge fund, you’re basically starting from scratch. It’s like a startup: three, four people in a small office, figuring out how everything works,” says Serrano Berntsen. That entrepreneurial spirit is particularly important when a manager has come from a big company, where they may be used to a big support network to help with things like research or compliance. “Occasionally some of them are arrogant, thinking all those people in the back office were an expensive waste of space, and it’s all about them!” The star manager may get all the attention, he adds, but they can’t do it alone: “It’s not just about you. It’s about starting a business as part of a team, and if you don’t understand that, you won’t succeed.”

Stable seeds about one new firm a year, most recently backing a team from Millennium to set up Arctic Blue Capital. “They wanted to spin out and have their own fund. We decided their strategy of macro systematic [investing] would do particularly well in the next couple of years.” The way Stable chooses which fund to back is by choosing which strategy looks best for the current climate: “Managers at the top of their game are relatively similar, so it’s easier to choose the tide than the boat.” Stable gets pretty hand-on with its charges too, says Serrano Berntsen: “We’re involved in all stages of the fund’s lifecycle. We [participate] at the beginning with brainstorming about strategy and risk parameters, and then we set up the business side: the limited company, offering memorandums, directors, lawyers, accountants, offices – often they’ll sit here with us [for a while].”

Stable has invested in seven funds to date, and currently has an interest in four – those four add up to $1.5 billion in assets. The biggest investment so far has been $20 million, as the company focuses on specialist funds; this avoids competing with the big seeders who put up three figure sums for more mainstream funds. “Right now we’re looking to do an equities seed, with a spin: we’re looking for a female manager.” This is partially because of a volume of research suggesting women managers often outperform men – that’s found to be the case both in hedge funds and retail funds, asserts Serrano Berntsen. Then there’s the fact that investing in a woman fits the company’s specialist mandate: “We see it as a specialist strategy, because the fund will behave differently from our other portfolio managers.”

Screen Shot 2015-09-25 at 14.10.43Serrano Berntsen grew up in Madrid, but you’d never know that from his accent: “Yes I get that a lot. Maybe it’s when you learn the language at an English school abroad? That, and the Norwegian twang.” The latter is the influence of his mother, a diplomat at the Norwegian embassy. His Spanish father was a doctor by training and had his own market research company. Serrano Berntsen first came to Britain to read politics, philosophy and economics at Oxford, and he’s been in the UK ever since – except for an MBA in Chicago and a highly recommended gap year travelling the world. After school, Serrano Berntsen spent a few years at Bain as a cross-sector consultant, before setting up what is now Stable:

“I saw what I thought was a good business opportunity,” he says, “and I also wanted to try and build a business that, looking back, we would be proud of.” He was just 26 when this happened, making him 31 now. But he won’t accept that he’s accomplished for his age: “There are people out there who’re far more successful, at least if your definition of success is financial gain. […] I find hedge funds tend to be a young man’s game, at least on the investment side,” he says. The biggest names tend to be older though, he adds, “because you need to have at least 20 years of being continually right to get that reputation. That’s very difficult to do.”

Stable Asset Management has its ducks in a row these days, but it wasn’t always easy: “I could tell you how difficult things were in the beginning, or about the times we messed up,” says Serrano Berntsen. The company started out in a windowless basement office, but it was on Pall Mall so it projected the right image. “Setting up in 2009 [meant] people thought we were crazy! The timing on the surface seemed pretty bad.” But it actually ended up working in the company’s favour, as the shake-up meant people were more willing to take calls from new names: “I think we got a lot opportunities because there was a moment – with dislocation came an opportunity to break in.”

I ask if he’s planning to stay in the hedge fund sector – he could technically make time for a whole second career? “Yes I suppose I could!” He laughs, but actually, ending up in hedge funds was a bit of a fluke: “I was looking at starting businesses, and it so happened to be hedge fund businesses. […] What excites me is finding people who want to do something new, set up something they’re proud of, make money for people but also create working environments that are rewarding.” His mother wants him to get a job at the UN though: “She wants people to do good in the world. So she’s a bit disappointed I’m not working for a supranational organisation.”

Serrano Berntsen lives in Notting Hill these days, with his significant other, Katherine. “She runs a fashion company, which is refreshing as there’s no ‘how big is your fund’ conversations there!” The couple loves to travel, but even more they like to eat: “Yes that’s pretty much what we do!” He laughs. London favourites include Israeli food at Palomar, and Barrafina, a Spanish restaurant. Then there’s Hedone, a Scandinavian restaurant in Chiswick, to balance out his two sides. Those places aren’t fancy, he assures me – it’s less about white napkins and more about the food.

We chat for a bit about how transparency is increasingly a factor in discussions about hedge funds – is that a generational thing? “Younger people are more willing to show they don’t know the answer, and how that’s not necessarily a bad thing. They’re more willing to ask for help. Maybe the older generation was more about having a facade of knowing exactly what they were doing,” says Serrano Berntsen. I ask if he feels like he knows what he’s doing, and his modest answer feels honest: “I like to think I’ll know better what I’m doing tomorrow than today? But things are going well, so I guess to some extent we know what we’re doing! I think it’s more about learning.” That’s part of the reason he likes investing in other people’s companies: “The broader you can keep your focus in life, the more fun it is. You have to specialise in an area, like finance, but it’s good if you can keep a bit of variety.” The moment seems right to ask about the mystery cufflinks, and Serrano Berntsen studies them for a second. “They’re sharks,” he decides, “though they might be dolphins?” They were a gift. “Maybe we can just call them fish? Or semi-aggressive dolphins!” He laughs. “I don’t want to pretend I’m too aggressive.”

Aref Karim: The systematic approach

Hedge Magazine, April 2015. Original article (p48-50).

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Aref Karim, CEO, CIO and founder of Quality Capital Management
For a manager of a quantitative hedge fund, Aref Karim has a distinctly personal approach. “I generally believe that investing is using a combination of the left and right side of the brain. No matter how systematic you are – and we are running everything systematically – the idea generation part of it, that’s all art.”

To be able to blend together these two sides is a major part of the appeal for Karim, who founded Quality Capital Management (QCM) in 1995 and remains in charge of the investment strategy. “This industry is full of great, innovative people who’re all trying to do the same thing: enrich people’s lives, and indirectly, create wealth,” he says, highlighting enrichment before wealth not for the last time during our chat. On that note, Karim could have moved to the US after his 13 years with the Abu Dhabi Investment Authority, but chose London for his family: “In 1995 my three children were quite young, so schooling was important. One of the better independent schools in a relatively safe, green area happened to be in Surrey.” Of course, London is not a bad place to run a business either: “The other reason was from a time zone perspective: London is very well positioned for the business we run.”

Return to form
London is just up the rail tracks from QCM, which is headquartered near Karim’s home in Weybridge. It’s a freezing winter day in the picturesque Surrey town, as we’re sitting in QCM’s offices, sharply decorated in white and red. Karim himself is sharper, in cufflinks, black and white tie, and a handkerchief in the suit pocket. He’s calm and business-minded when talking shop, as 2015 represents “a return to opportunity” for QCM. The firm’s investment strategy is driven by a wholly integrated model that’s mainly long volatility:

“I feel that QCM today is a leaner, stronger firm. We have revamped all our products. A considerable amount of research has gone into it,” says Karim, deliberate with his words. “Yes, we’ve had a blip. But there’s no reason why we cannot come back with more vigour, with an enhanced and streamlined QCM, to move forward in order to serve the investor society in a more meaningful manner.”

This has already started to happen, as the quantitative hedge fund has seen a return to form over the past year. Assets under management now stand at just over US$60 million, after a gain of nearly 13% in 2014. This is still a way from the 2012 peak of nearly US$1 billion though – that’s the aforementioned blip – as the QCM model struggled to maintain its position during the sluggish low-volatility period: “Particularly given our style of trading, we tend to like directional moves, divergences and flows of capital across regions, because it create waves of opportunity,” says Karim. “And so this quiet period, when interest rates were being targeted to virtually zero, it took away those opportunities.” While the post-crisis years were great for QCM’s investment style, the problem came later, when “uncertain conditions” turned to market inertia:

“To navigate through that kind of environment is trickier. We didn’t have the tools to position ourselves correctly. Now we have done an extensive amount of research to better deal with these kind of environments.” The upgrades started in 2013 and finished in 2014: “I wish we’d done it earlier,” says Karim. “We delayed it because we were waiting for the right timing. 2014 was still a good year for us, but we could probably have done a lot better.”

QCM’s upgrades have also meant adjusting the investment model: “We don’t like to interfere in the actions taken by the models we have developed. We’ve tested these ideas over years of data. […] But because we’d had a setback we were being overly cautious, so we held back on implementing changes.” This was in part because Karim ultimately believes the investment model can read a situation better, working without emotion or bias as it simply analyses the market behaviour. “Can the systems do it better? The answer is, in my mind: yes it can.”

Screen Shot 2015-04-08 at 16.16.14The appeal of futures
QCM offers daily liquidity to investors, an unusual feature for a hedge fund. But Karim’s decision to invest solely in exchange-traded futures came before the downturn put the spotlight on liquidity: ”We started with futures way back, as that was an area of expertise for me from the Abu Dhabi Investment Authority (ADIA). For me there’s no difference in the nature of the exposure: it’s a derivative, there’s an underlying asset.” Another benefit to futures is the nimbleness, says Karim: “We can margin things, so your $100 [exposure] can be funded by only a part. That opens up an avenue to use this strategy as what we would call portable alpha.”

But possibly the most appealing element of managed futures is the “extremely low” correlation to the behaviour of other assets. “That’s the beauty of it: in an equity bull market, chances are we’ll also do well by being likely long on equities and other assets in the portfolios. Where things change completely is in bear markets, as we saw in 2008 when the markets crashed – that’s when these strategies really come into their element by providing a huge risk offset. They do it by going short on equities and long on safe haven assets.”

The sovereign experience
Karim got his start in accountancy, an experience which has followed him into alternative investments: “Accountants are trained to look at micro and macro pictures, which is a good habit.” QCM’s long term investment outlook is a heritage from Karim’s 13 years at ADIA: “Abu Dhabi provided a unique experience. The fund manages the excess oil revenue of the country – it’s huge! And it’s always been fairly low-key. […] I was very privileged to be in a position where they did not have, at the time I joined, an alternative investment portfolio. To be involved in the project at its embryonic stage was a greatly interesting experience for me.” Karim took the hedge fund portfolio from idea to execution, balancing the extreme long-term mandate with proving the merits of alternative assets for a sovereign wealth fund: “This was a huge experience, a fantastic experience.”

QCM represents a scaling down of this same long-termism to “a miniscule level” compared to ADIA: “But it’s fun. We brainstorm investment ideas with the researchers, go through the challenges of running the business, deal with issues and downturns, and then enjoy the upticks.” That Karim cares deeply about his company is obvious from the way he talks, but in any case he’ll say it outright: “I love what we do. If somebody says: ‘What is the purpose? Why does QCM exist? Why are you running the business still?’ It’s because I’m very passionate about it, and more importantly it’s because there’s almost a philosophical and societal purpose behind it.” The capital already invested into the business is one element, but there’s also the firm’s experience: “We’ve navigated good times and the periodic storms. We’ve learned a lot, and there’s no reason why we cannot pass that on.”

Screen Shot 2015-04-08 at 16.16.16The greatest support
This outlook hasn’t changed since the company started 20 years ago, says Karim, who’s now 62: “I could have retired and walked away, but that doesn’t complete my own mission. I get a great amount of satisfaction from knowing I can share this pool of capital with investors.”

The CEO has a wide range of hobbies: literature, poetry, art, culture, travel: “Last year we were in Namibia, which I was fascinated by. We flew over the largest sand dunes in the world, over Skeleton Coast, heading right up to the northern tip of the country. We met this tribe called the Himba, a nomadic tribe who are dwindling, sadly. It was quite remarkable, seeing how content they were with simplicity.” He talks about going to Cambodia with his daughter, where the French have abandoned train tracks near the Thai border: “The kids in the Battambang villages create these roofless carriages for the tracks, where you can sit on a bamboo mat and go through the countryside. They call it the Bamboo Train. Fascinating, absolutely.”

Life in London is pretty good too: “I really love the city: the culture, the diversity, it’s just phenomenal.” And the schools, of course – Karim came to London twice for the sake of education: the first time in to finish university after the independence war broke out in what is now Bangladesh, and the second time for his children: “My eldest outgrew the grade school in Abu Dhabi, and being a single parent, I didn’t want to send her to boarding school. I didn’t like the idea. I spend a lot of time with my children. They are some of my best friends.”

It would seem Karim’s three children appreciate that sentiment, as they all live close by and two of them, Raami and Faaria, now work at QCM. Faaria Kenny, the firm’s director of Business Development & Marketing, admits that working with family might seem a nightmare for some: “But for me, it’s business as usual. The added benefit is having a truly inspirational man as my line manager, incentivising me to work harder for the greater good of the business, clients and shareholders, and for trying to make a difference in the lives of others.” Concludes Faaria: “The greatest lesson I take away is that family offers the greatest support.”