Jean-François Comte: The man with the plan

Hedge Magazine, 2015. Original article p48-50.

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The Man with the Plan

Jean-François Comte is in full London exploration mode still, having moved here a year ago when Lutetia Capital opened its UK office. It takes a while to crack the nut that is London – the city is amazing, sure, but not necessarily the most welcoming – although it helps if you’re a global citizen like Comte. The co-founder and managing partner of Lutetia Capital spent 12 years in New York before going back to Paris to establish his company, whose success in merger arbitrage has quickly ensured its position as a rising star in the hedge industry.

We’re meeting in Lutetia’s Mayfair office, a classic townhouse filled with modern art, where Comte is equally stylish in blue (suit: navy; shirt: powder) and a knitted black tie. It doesn’t take long to realise just how serious Comte is about his work, but his confidence translates into a friendly openness about the state of the business. “We’re now establishing a stronger presence in London. It’s a question for the future, whether we move the gravity centre here from Paris,” says Comte in his crisp French accent. “In the alternative space, you get more visibility in London.”

Screen Shot 2016-02-01 at 17.22.18Things have been progressing nicely this autumn for Comte and his co-founder Fabrice Seiman. M&A activity is now at its highest level since the all-time high of 2007, according to Citi. The Lyxor Lutetia Merger Arbitrage (UCITS) fund has just taken in another $25 million, bringing the total assets to a cool $225 million in just four months since the launch. And Lutetia keeps getting nominated for, and winning, industry awards. What’s the secret?

“What is specific to us, but not unique,” Comte says, careful to be exact, “is that we have a very strong qualitative approach because of where we come from. We come from M&A. … We have the experience to examine the detail of every single deal, and understand the environment, the regulation, the contracts – because we negotiated those contracts when we were on the other side.” There are lots of practical elements that go into it, says Comte, as he tackles the question in a most pragmatic manner – because to run a successful business you have to thoroughly understand distribution too, and not just focus on the part most managers like best: investments.

Lutetia’s M&A arbitrage positions usually work out as anticipated, says Comte, but sometimes the situation blows up – that’s what happened last year with the AbbVie-Shire deal. “We had a relatively small position,” says Comte, explaining that the outcome took a lot of managers by surprise. It was a known risk that the US Treasury was moving to limit the benefits of so-called tax inversion deals, so the reason investors tripped up had more to do with the way the acquiring party handled the situation. “The language and behaviour around the deal had been very positive, until the AbbVie board changed its recommendation.” Usually, says Comte, a manager can tell if there’s an issue by looking at these kinds of things; the business rationale and regulation may be in flux, but the wording and body language can tell you a lot.

M&A can be pretty stressful, says Comte, with things moving quickly and sometimes unpredictably. “That’s when you have to keep calm, analyse the facts, and see what makes sense.” This has been the case with the FedEx-TNT deal, which has been overshadowed by the fact the European Commission had blocked UPS from buying TNT two years ago. “Because of that, a lot of people had smaller positions than they would normally have. Many US managers have become more careful about European regulators over the past few years.” Lutetia decided to keep its position in the FedEx-TNT deal following an in-depth analysis of the rationale behind the regulator’s decision, concluding this deal should reasonably clear. “Sometimes you need to relax – look at the facts and keep your cool – in order to make money.”

Screen Shot 2016-02-01 at 17.22.22Before Lutetia, Comte spent nine years in the M&A trenches at Lazard Frères in New York, while Seiman earned his stripes at PAI Partners. “This has been my life for the past 15 years! I went straight into M&A after law school. I must say, I didn’t see those last ten years go by – looking back it seems like a couple of years,” says Comte. So why did he decide to make the move to the investment side? He thinks about it for a moment. “Some people are meant to be advisors. It can be extremely interesting. Lazard in New York is one of the best possible places to do M&A in the world: you work with extremely smart people, there’s no inefficiencies – you say something once and it gets done!” This may explain why Comte is so methodical when talking about how Lutetia gets its edge: “People can come out of that environment with something of a military thinking – there’s this discipline. In M&A, at that level, there’s no margin for error. One of our staffers used to say to new recruits: ‘The difference between this and war, is that you get to go home’.”

So when Comte went to establish his own company at 35 (he’s now 41), it was because it felt like the right time to try something new – coupled with a careful consideration of the practicalities, of course. “Some people thought I was crazy at the time, leaving my position,” Comte laughs. “But the desire to go to the investment side was stronger. … I truly believe [it’s important to] love what you do, and have fun with it.” Not to mention how this is part of a tradition: Comte comes from a family of entrepreneurs. “It means you have the inspiration to build something, and grow it not only for yourself, but also for bringing people onboard and giving them opportunities.” That’s another reason why establishing Lutetia isn’t just about investments, but also about good corporate culture: “You don’t re-invent the wheel. We consider ourselves to have been in some of the best possible working environments in terms of discipline, corporate culture, and excellence. We have the opportunity to replicate that culture, so that’s what we’ve been doing.”

Screen Shot 2016-02-01 at 17.21.47There must be quite the contrast though, I ask, in essentially running a startup after such a structured environment? Comte has never actually worked anywhere other than Lazard, making for an unusually streamlined career. “Thank you,” says Comte, pleased with this characterisation. “I don’t think it’s good when people jump from one thing to the other every two years. That says something about their thinking process. I’m proud of the fact I was with the same firm almost ten years.” Having said that, Comte also has plenty of observations about the transition to running his own shop:

“I don’t like it when people stop being producers because they’re used to being assisted – when you just give directions and have other people do the work. … It’s critical for senior managers to stay involved in everything, including understanding systems and risk control, because if you get too removed you actually create risk.” That’s why Comte is happy to dig into an Excel sheet once in a while, and change his own office light bulb: “It’s about entrepreneur culture. A lot of people had the idea for social networks, but there’s only one Mark Zuckerberg. He won the execution battle. The idea alone is worthless! We knew going in, leaving our beautiful offices, great assistants and smart analysts, that it wouldn’t be the same. That’s why you have to have fun in the process and be excited about it, otherwise you’re going to suffer!”

So that’s what Comte is doing now: having fun building the London office, while also enjoying living in a new city. He’s more reserved when talk veers away from work, but it’s good to be back in a more Anglo-Saxon culture, he says, having spent time in Paris after leaving New York, which he loves. “I never lived in London before, so it’s exciting. Exploring the culture, finding great places to play tennis, and ride horses – we’re looking to move our horses to England now.” The horses are in France still, and they have jobs: they’re sports horses. Comte isn’t the one to jump them in competitions, he’s quick to add, preferring to ride them at a more leisurely pace. “No, that would be … “ He laughs. “Asset management is a lot about risk management. Horses are quite special, but you have to admit, jumping can be risky.”

David Tawil and Ryan Kalish: The next generation

Hedge Magazine, June 2015. Original article (p42-45).

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The next generation
David Tawil and Ryan Kalish are a tag team. “We’re old friends. We went to school with each other and travelled the world together,” says Kalish. The company founders keep finishing each others’ stories: “I moved here from South Africa when I was 16, so David and I arrived at school on the same day, all those years ago,” says Kalish. Tawil continues: “I wanted to make some friends, so I had a look around, thinking: ‘Who’s the tallest guy in the room? That’s a good guy to make friends with!’ And that was Ryan.”

HedgePo is a story of the power of networking, and it all started that day in a sixth form classroom in North London. A lot has happened since then, though: HedgePo launched in April 2013, and today the hedge portal has over 700 institutional investors and family offices as members, accessing data from 1500 funds. The big idea is to use the power of networks and data to empower investors to make better decisions.

We’re meeting in opulent surroundings at the Dorchester Hotel, the site of tonight’s Investors Choice Awards, hosted by HedgePo in partnership with CNBC. Our suite looks like old money: gold chandelier, plush carpet, mirror-covered bar, pungent flowers. The co-founders look more modern: both in dark, slim suits over white shirts with open collars. One is tall and the other shorter, both are soft-spoken but excited about what’s happening in their growing company.

“We’ve always been quite good at bouncing ideas off each other,” says Tawil. “I think this collaborative approach is a really powerful thing, and for us it’s been the energy behind the business.” Their office isn’t far away, just off Regent Street, where the team of 12 is growing rapidly as HedgePo is focusing on developing the technology platform. “We see ourselves as a financial technology company,” says Kalish. “I used to work for fund of hedge funds, where I’d speak to managers, recommend investments, and then manage those investments. Part of what we’ve tried to build is a tool that’s useful to somebody sitting in my old seat.”

Screen Shot 2015-06-03 at 10.20.06A private community
So a network where fund managers and investors interact digitally, that’s a bit like a LinkedIn for hedge funds? That’s what CNBC called the company. “Well, I think we’ve moved on from simply being like LinkedIn,” says Kalish, laughing. But his reluctance is understandable: HedgePo wants to be a far more vital component to its world than that. “There’s definitely a network element though, that’s fantastic. But I think the reason why it’s so active is because it’s useful.” That’s due to the investor-centric nature of the platform: “Everything we do is about building useful tools for investors to discover interesting investment opportunities, but also to understand their current investments. The technology is there to help them do that.”

I’m taking the co-founders’ words on what the portal looks like, as I’m not allowed to see it: “Well, the data is confidential!” But apparently, funds can see things like information about investors, their preferences, and what strategies they’re interested in. Investors can read up on the funds, including performance, weekly estimates, and the team. There’s also a newswire where funds are pushing commentary, newsletters, video and time-sensitive information, and everything can be filtered according to interests.

In a sense, HedgePo is one of those ideas which may seem so obvious it makes you wonder why it hasn’t already been done. But technology and the financial industry have been a reluctant pairing, and the advantages have only recently started proving themselves. “In light of recent regulation and compliance issues, fund managers are realising technology can actually empower them to manage their privacy,” says Kalish. With HedgePo, managers can select which investors on the platform have access to their information, which results in better control over who sees it than to sending out documents via email.

This should appeal to the nature of the hedge fund industry, says Tawil – he’s careful to call the industry “selective”, not secretive. But, adds Kalish: “There’s also an element of HedgePo being a bit like a private members club where, on the surface, people in the industry can request access, but we only grant access to individuals and companies that meet our requirements. […] This private community is what give fund managers a safe space to share information.”

The co-founders see HedgePo as something they want to focus on for the next 20 years, at least: “We want to be a big part of what the industry looks like in the future,” says Kalish. Maybe joining the industry in 2008 has something to do with that: “We got involved when everything was gloomy [and] didn’t participate in the bull run of the early 2000s. We have a hunger to leave our mark!” In that sense, joining the industry in a time of crisis may even have freed up the co-founders to embrace a different approach: “We feel excited about technology and innovation. We’re passionate about bringing this to an industry that is very much older and established. Now, new managers who’re more open and a little bit more transparent are coming onto the scene – we’re a part of that wave.”

But as much as HedgePo is about embracing new tools, make no mistake: “This is still very much a relationship-driven industry,” says Kalish. “When we speak to family offices and institutional investors, it’s still those relationships the business depends on.” The co-founders are grateful for the support they’ve received, from investors, the financial technology industry, bigger businesses who want to work with them, and the UK Trade & Investment, which invited HedgePo to represent the London fintech scene on a recent trade mission to New York. Not to mention the support from Kalish’s old employer Stenham Asset Management, which let them work out of their offices while they were setting up.

Early dedication
Back before any of this happened, after sitting next to each other in sixth form, Tawil and Kalish travelled together during their gap year. I try my best, but I can’t get the two to admit to anything other than having been terribly nice boys: “Ryan used to DJ our parties at school,” says Tawil. “I was the DJ,” Kalish nods. “I was really into music.” Back then they had no idea they’d be going into this line of business together. “No, not at all,” says Kalish, shaking his head. “Although maybe there was an indication, in the sense that a lot of what we do is based on data and quantitative metrics. David and I used to cram for exams together, sitting at David’s dining room table and his mother would bring us water.” He laughs. But, Kalish figures, this interest may well have been the reason why he was able to carve out a place for himself at Stenham, graduating from the London School of Economics in the depths of the financial crisis. Tawil took a similar route to Credit Suisse via Bristol University. And anyone with half-decent maths skills will have worked out this pair’s age bracket by now: “We’re 28,” they confirm. Is that something they tell people? “We don’t advertise it.” We all nod quietly, moving swiftly on.

The idea for HedgePo was cemented during a long flight, says Tawil, although, Kalish adds, the desire to run a business stretches further back: “I always wanted to start a business and to do something entrepreneurial. […] We both wanted to create something of our own and be able to run with a vision of our own.” The co-founders both live centrally in London. “I play tennis, ski, travel. I like to hang out with friends and go for a drink. Very simple pleasures,” says Tawil. Kalish’s family is spread all over the world, and he spends a lot of time in Zurich, where his fiancee is from. “But I love London. I think it’s the best city in the world. I’ll often walk around London for hours, just looking at the street scene. That’s where I think our best ideas have probably come from: walking around Hyde Park.” Tawil adds: “They are our walking meetings.”

HedgePo has already started expanding beyond the world of hedge funds, to also include venture capital and other real assets. For the first time since the launch, the company is looking to raise money, and a second office will open soon in New York. Things are happening quickly, but what’s the ultimate goal? “We want to become – and we feel like we are becoming – the network that connects investors with the fund managers that they care about,” says Kalish. “We always see ourselves as being independent and impartial: not too closely aligned with either the investor or the manager, and if anything, leaning towards being aligned with the investor.” So forget about being the LinkedIn of the investment industry: “We want to be the Bloomberg of this industry! We want to be the platform that everybody needs to be plugged into.”

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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.”

Dixon Boardman: For the love of the game

Hedge Magazine, 2014. Original article (p43-46).

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For the love of the game:
Dixon Boardman, founder and CEO of Optima Fund Management

London mornings are a reprieve for Dixon Boardman’s busy schedule, providing a few hours of unusual calm. “I love being in Europe because the mornings are free, as everyone’s asleep in America So I can get things done in the morning which I wouldn’t normally be able to do.“

One of these things is sitting down with this journalist, although Boardman would never say this outright; the New Yorker is much too polite. Boardman’s reputation as a hedge industry leader precedes him: the founder and CEO of Optima Fund Management has been in the thick of it for 26 years, he knows everybody, and several of those people describe him as a “guru” without irony. What the research doesn’t reveal, however, is how this industry wizard a perfect gentleman with a knack for making you feel at ease, as he punctuates his stories with laughter.

Our luxurious surroundings are those of 5 Hertford Street, the private members club in Mayfair. You gain entry through an unmarked door, rendering the place unexpectedly difficult to find, considering the solid hint in the name. Of course, this is an exclusive place for a certain elite, and simplicity is not a requirement. Privacy, however, most certainly is, so the photographer must wait outside. The hedge fund manager is in a corner room in the labyrinthine building, where paintings and knick-knack cover every wall and shelf, the result being kooky yet curiously elegant. Boardman is equally stylish, in a charcoal suit with a magenta shirt and maroon tie, and tortoise shell glasses dangling from the hand. He tells his stories calmly with a smile, like a man with plenty to say and nothing to prove.

A good reputation
Boardman normally comes to London at least twice a year, visiting with clients and sometimes managers too: “I try and combine business with pleasure. I love it over here.” This feeling goes all the way back to the American’s school days at Stowe, which may be partially responsible for the crisp mid-Atlantic accent with only the rarest Americanism slipping in.

Founded in 1988, Optima Fund Management now has $4.4 billion in assets under management. The company advises on multi-manager portfolio as well as runs its own single manager hedge fund programme. Institutional investors now make up 70% of the client base. Boardman is known for playing a long game: “We’re risk hypochondriacs. We are quality-obsessed, we know our way around the industry so well. I think that’s helped us very, very much. We have a good reputation.”

What this also means is that Optima can get access to funds that may be closed to other investors. This is in part because this good reputation is not just among clients, who enjoy the returns, but among the managers as well. “We’re beginning to see managers who worked in some of the old funds, start their own new funds. Having been doing it for so long, when there’s someone good – we hear about it. It’s awfully nice when [Tiger Management founder] Julian Robertson picks up the phone and says to me in a Southern drawl: ‘Dixon, I got this really good new guy you got to come and meet!’ That’s good, that’s terrific.”

Asked how he picks managers to invest with, Boardman deems the question “unanswerable”, but he will try: “Sometimes you just know, when it’s such raw talent and such incredible analytical skill. Having been doing this so long, maybe one has an edge in being able to see it? Sometimes one watches them grow in their old firm before they have started their own firm, so that’s a huge advantage.” And recommendations from the likes of Robertson, or Chase Coleman of Tiger Global Management, will of course be an indicator that a new manager is worth considering. “I have befriended many of the managers we have money with. I’ve got to know them well and see them socially, and I know their children. It’s old-fashioned, but I think to know someone really, really well, to know what’s going on in their lives, means you know when they’re focused. […] But let me tell you, we don’t always get it right!” Boardman laughs. “But we get it right more often than we get it wrong.”

The best ideas
Still, Boardman’s experience as one of the very first hedge fund company founders means he has a keener eye than most. “When we started in 1988, it wasn’t even a cottage industry. There were 600 hedge funds and only 100 of them had more than $100 million. Today, in some regards, you could say it’s become the tail wagging the dog, investment-wise. The industry has got some very, very, very, very smart people.”

A commitment to innovation is arguably a key factor in Optima’s success over the years, as the company has, despite its resistance to risk, presented fresh investment ideas at times when few others were doing anything like it. This includes the Japan fund launched with Platinum Asset Management founder Kerr Neilson, and a healthcare fund with David Chan of Jennison Associates, “a super brilliant guy”. The award-winning ‘Best Ideas’ fund gave Boardman’s top managers the chance to execute their number one niche convictions. Now, Optima has established a fund of American farmland, diversified across geographies and types of crop: “Our plan is to actually take it public. People will be able to invest in farmland instead of having that as a different asset class, and not having the disadvantage of it being illiquid. I think that’s an innovative idea.”

Asked if his experience has left him immune to being surprised, Boardman seems to think it has, but he is quick to point to the position the hedge industry is currently in: “The awful blow to the whole investment industry was the Madoff scandal – I would say we’re still not fully recovered from that.” He thinks about it for a moment. After the Madoff scandal people would ask him how the business was doing, and he’d respond by telling them the funds’ gains. “Then I thought to myself: ‘They probably don’t believe me! They probably think I made the number up!’” He cracks up. “It changed the credibility of the industry. Not to be boastful, but if something’s too good to be true, it usually is. We have a whole set of rules before we invest, and it’s really not rocket science. One rule is that we insist that whatever hedge fund we’re investing with uses one of the top accountants to do their audit.” Madoff’s auditors were in a suburban strip mall. “So yes, we knew him. Yes, we looked at it. Yes, we were impressed with the consistency of the claimed returns. Did we invest? Of course not.”

The best managers
In Europe, one of the consequences for the hedge fund industry in the aftermath of 2008 has been an increased focus on transparency and liquidity. While expanded transparency is “universally appealing” and is happening across the board, says Boardman, increased liquidity is an effect felt more in Europe than in America. Boardman points to how the first hedge fund, founded by AW Jones in 1949, only allowed investors to get in and out once a year, in part to prevent them from acting out of greed and fear. “The Europeans have never really liked that, but the American institutions have accepted it pretty well. […] If anything, I would say the trend towards liquidity [in European funds] has calmed down a bit, and if anything it might be changing back to less liquidity.” Boardman thinks for a moment. “The best managers in the world, by and large with very few exceptions, don’t offer instant liquidity. I’d rather be with the best manager.”

While the office is under strict instruction to absolutely interrupt if they ever need him, Boardman does take time away from work on occasion. “I visit my wife’s family in the south of Spain every summer. This year, a friend has a yacht which we’re going to be on, cruising around Majorca. That will be lovely, I’m looking forward to that.” He pauses. “But two weeks is max before I get itchy! I love what I do.”

Part of this passion for the work comes from the thrill of being surrounded by “some of the smartest investment brains in the world”. Boardman is also active in charity, having donated a dormitory to Stowe, his old school. Optima also has a philanthropic foundation that benefits from part of the fees on one of its funds. “It’s very, very nice to give back. But the real honest answer, I just love my work. Love it.”

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Simon Ruddick: The village mentality

Hedge Magazine, 2014. Original article (p36-38).

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Interview with Simon Ruddick, co-founder and Managing Director of Albourne Partners

There are bales of hay inside the offices of Albourne Partners, providing a surprisingly folksy feel for a global hedge fund advisory firm. The village environment is a heritage from the company’s roots in Albourne, Sussex, where it all started 20 years ago. But in spite of the decorative apples and cows it’s clear we are in Westminster now, and Simon Ruddick has his eye on the world. In the most literal sense, this is: Ruddick is one of the key architects behind the Opera initiative, a global effort to standardise how hedge funds monitor risk.

“I think that’s possibly the most fun part of my job,” says Ruddick, who has frequent meetings with regulators about the Open Protocol Enabling Risk Aggregation, Opera for short. The co-founder and Managing Director comes across as surprisingly casual despite his striped tie and grey trousers, of the kind that seem likely to have a matching jacket left on the back of a chair somewhere. He is personable and cheerful, as his speech turns into a rapid fire when on the topic of his enthusiasms. Because that’s what work is for Ruddick: an enthusiasm. And why yes, he certainly wants Opera to become the golden standard for the global hedge fund industry.

Opera: A date with destiny

“I think it’s not only possible, I am bold enough to think it’s probable: the Open Protocol has a potential to be a unifying language of risk across all forms of regulatory reporting. That would be a huge win-win-win,” says Ruddick. The three winners here are the investors, the fund managers and the regulators – all standing to benefit from a system for streamlining risk information: “You need a word beyond irony if you’re looking for systemic risk, but you don’t ask questions in a systematic way. Regulators have absolutely awoken to this need.”

APRA, the Australian pensions regulator, explicitly references Opera in its proposed regulation. “That was a real breakthrough for us,” says Ruddick, explaining how even though the Open Protocol has no commercial agenda, it’s still unusual for regulators to reference something with roots in the private sector. “But the regulators have a date with destiny. They’re under huge pressure to show they have cracked the challenge of market risk reporting.”

The Opera refuseniks are few and far between among hedge fund managers, with the main split occurring between those eager to adopt Opera, and what Ruddick calls the ‘slow yes’ group. “There’s a marked difference between the enthusiasts and the ‘slow yes’ group,” says Ruddick, who was fascinated to try and find the defining factor whether a company would embrace risk reporting or not. “Was it a question of how big they were? How long ago they were set up? How much in assets? Geographical location? Strategy? But none of those were simple explanatory factors of whether they were early or reluctant adopters. We realised the bifurcation is its own definition: old school and new school.”

New school funds were not only more enthusiastic about Opera, Ruddick found, but they were also lighter in protocol and more likely to produce administrator transparency reports. The punchline: “And they’re more likely to have institutional money!” So if Ruddick’s assessment is correct, the willingness to accept risk protocols could actually be an indicator for how likely a hedge fund will be to attract money from institutional investors. “I think it’s quite a schism, and what’s at stake is secure capital from institutional investors. … What I hope the ‘slow yes’ group will bear in mind is that the institutions will always know who was an enthusiastic adopter, and who was not.”

In the Village: A life of constancy

One place where these sorts of whispers may be shared is the Albourne Village; not the real one in Sussex, but Albourne Partners’ online hedge fund community which now boasts over 80,000 active residents. Asked why the Village is so popular, Ruddick laughs: “It’s free!” It’s interesting to note how the Village’s 2001 launch means it pre-dates the social networks, which have certainly found ways to commercialise spaces where people get together to discuss the things they have in common.

“The reason we launched the Village in first place was that we wanted to collect information that was in the public domain. If we became a portal, people would bring information to us, says Ruddick. “But we haven’t invested hugely in the commercial aspect of it … maybe in the future.” But in that case, any profits from the Village would go to charity: “We will never monetise it for our own gain, because we are very straight: we will make money in just one way, which is providing research advice to investors on alternatives.”

As the topic moves to the strategy of Albourne Partners, Ruddick’s chattiness is replaced by a clear, determined voice. Virtual village pubs aside, Albourne provides advice to over 270 hedge funds, private equity and real asset clients, whose combined investments top $350 billion. And proving that transparency isn’t just for for their clients, the cost of Albourne’s service is actually right there on the website, displayed for anyone to see. “We’re very passionate about this: transparency in all things. We also get a little excited about the simplicity of our model in that it’s a fixed price in dollars, not basis points or percentage of performance.” This is where it goes above and beyond, because Albourne has actually never increased its prices. Not even by inflation? “No! In fact, the amount we deliver against the price is constantly increasing, because as the firm grows we hire more analysts who write more research, and the clients get the benefit from our increased scale.”

His colleagues tease him about this, says Ruddick, but he can’t help it: “I’m a huge fan of what we call constancy as opposed to consistency. Consistency is when two things are different but you try to make them similar. Constancy is when you actually try and keep things the same.” The pricing is one example of this, and a low churn of people is another: “We hope this is a comfort to clients and prospects, that they know us as people and they know our price. The best of all is worlds is when they like our service and want to make it part of their long term plans.”

Make Money Not War

As Albourne Partners celebrates its 20th year, Ruddick has maintained the village roots as an inspiration for more than just the decoration: “We’re a bit of hippie commune!” He says this jokingly after telling me about Hedge Stock, a company event a few years back where The Who provided the entertainment. The motto was ‘Make Money Not War’. On a more serious note, Ruddick nods to the company’s “village creed” not just in terms of the transparent pricing, but also the clear rules on how profit is distributed: 50% goes to base cost, 25% to bonuses, 25% to the firm.

The company also equity available to partners every year, and makes a point of avoiding outside stakeholders or debt. Holding around 40%, Ruddick remains the largest shareholder: “I feel intensely wedded to what I describe as the fierce independence of Albourne. I’d much rather my equity pass on to my colleagues; I absolutely prefer to earn less and keep the company fully independent, because I think that in the long term, and in the super-long term, that’s the better business proposition.” The rapid fire speech has gone completely now, as Ruddick stresses that there will be no outside partners: “We feel comfortable, possibly to the point of smugness, with our independence.”

Ruddick’s love for his company is clear to see. He explains at length and in detail how he has gone to great trouble to establish Albourne as a well-oiled machine, one that’s a good place to work while also providing great service to clients. But then there’s that self-confessed “obsession” with industry initiatives again: “I can’t describe completely why it matters so much to me, I just know it does!” He laughs. “I’d love to feel I can do something useful, but when you’ve done Politics, Philosophy and Economics you can’t save a life. Any good I can do can only be indirectly, so if I can make the industry a better place, that’s my personal motivation.”

Does that mean he may one day go and join the regulatory machine? Ruddick answers carefully: “I feel hugely confident that if I step away from Albourne, I know Albourne won’t miss a beat. That’s by design.” But is that the plan? “I’d be really surprised if any regulator wanted someone as opinionated as me!” He laughs. And then: “We’re lucky to have a business model that brings us to contact with a wide range of investors and funds. … There’s a lot of things we can’t do, but the things we can do is try and nudge along various industry initiatives.”

He pauses. “I’m never quite sure, and my wife says the same, whether I work for Albourne or I support Albourne the same way you support a soccer team. … Even if I was less active day to day, I couldn’t detach myself from that emotional investment.” The way he says this makes me think he’s not trying to avoid the question – maybe he genuinely doesn’t know if he can bear to leave Albourne. “I absolutely love it here. I can’t think why would I ever retire when I am having this much fun.”

Not that Ruddick (53) doesn’t have a life outside of work, far from it. Ballroom latin dancing is where it’s at, as Ruddick and his wife both dance socially and take weekly lessons. And sometimes they will put on headphones and dance in railway stations and shopping centres, to the dread of their three children. “We’re mad keen on dancing. And some of the most fun in life is embarrassing your children!” Ruddick laughs. He tells the story of how his wife always loved dancing and he was terrified of it, but ended up learning for her sake and now he may be the one who’s more hooked. Ballroom is the main addiction but the couple also dabbles in salsa, tango and cha-cha, and recently there’s even been a few lessons in Angolan Kizomba. “Later in life you lose your fear of looking ridiculous. Now I don’t have enough fear of looking ridiculous!”

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Rory Powe: Playing the long game

Hedge Magazine, April 2014. Original article, p30-34.

poweRory Powe, founder and portfolio manager at Powe Capital Management
“I’m a bruised and battered investor. But life’s all about learning lessons, so I think it’s made me a better investor.” By the time Rory Powe says this I’m halfway out the door, meaning we are off the record. Nice guy that he is, Powe allows the quote anyway, even though he knows it could be taken the wrong way. Because Powe doesn’t want to dwell on the past, is the thing, but to look forward. But even so, Powe is the first to admit that the lessons of the past have played a significant part in shaping the investor he is today.

Nowadays, what Rory Powe is doing is minding his own business. There isn’t much trumpeting from Powe Capital Management (PCM), the company Powe founded after leaving Invesco in 2001. That was the scene of Powe’s first bruising, when his lauded Invesco Perpetual European Growth fund suffered badly in the dot-com bubble. The second battering came in 2008, when the liquidity squeeze forced a roll-up of PCM’s Modulus fund. Since then, Powe has been running the PCM Europe, which is up 80% since inception four years ago. This is ahead of the market, but Powe is clear: “We have no claim to say we are successful. We can only say that in 20 years.”

Because what Powe wants most of all these days is to “observe the beauty of compounding”. We’re in PCM’s office on the second floor of a Kensington townhouse, where freshly painted walls are decorated with art Powe has brought in from home. It’s just an eclectic mix of things he happens to like, Powe is quick to point out, nothing fancy. Dressed in a checked shirt with formal cufflinks but two buttons undone, there is a friendly sincerity about Powe. He is thoughtful as he describes his fund, its strategy, and its holdings, clearly passionate about the work. There’s a weight to the things he says, hinting at the kind of confidence that comes only from hard-learned experience.

Steely concentration
“We are very proud of what we have built here. PCM is now in its fifth year and we are focused on building on the track record. … I look for businesses that are scaleable and ambitious in what can be achieved, who do it in a repeatable and steady way, year in and year out. Inevitably we are going to have bad months, and when that happens we take it on the chin, learn from it and move forward,” says Powe, who is personally invested in the €20 million fund. “We are focused on absolute return, meaning we are not trying to beat an index. If you don’t try and beat the index the irony is you probably will. If you try too hard to avoid volatility, the irony is you will probably create volatility.”

This attitude stems in part from Powe having just 19 positions, which he thinks is about right, even as the portfolio is kept fresh by introducing new ideas each year. As one holding, Ryanair, has been a source of recent volatility, Powe explains how he has stayed the course because he has done the research and believes in the plan. This is the case for all of Powe’s holdings: he does the work himself and knows how the news of the day will affect each company. “My typical day involves researching companies. If i spend a whole day just looking at one company, that’s a great use of my time.”

Half the fund is invested in companies which Powe considers to have “formidable” market positions, pricing power, and competitive powers which will be sustainable for years to come. 30% of the fund is invested in companies in pole position to take advantage of a key trend. “These are growing quicker so they are riskier. One of them is Asos: they are in the vanguard of the shift to online from bricks and mortar, but have done it for long enough and well enough to be in a very strong position vis a vis their competitors.” Powe, never one to leave a claim unbacked, proceeds to list why this is, from the margin projections and all the way down to the free returns policy.

Do-It-Yourself
Has he always approached fund management in this careful, meticulous way, I ask, or does this stem from experience? Powe thinks for a moment. “I’ve always been analytical and detailed in my approach, but lessons have been learned. One is to have fewer positions in order to keep on top of them. I don’t want to run a big fund again.” Another lesson is to do the work yourself. “However good the analysts you work with may be, you are still a bottleneck. Here, I am the analyst,” says Powe, whose company now has only three people. “Some portfolio managers are very good at running teams of analysts, but I don’t think I am. I’m much better doing my own work.”

Is that realisation part of the reason he left Invesco, I ask; Powe departed shortly after his charge, the £1.8 billion European Growth flagship fund, lost half its value in the dot-com crash. In fairness, Powe can look back at a 379% return over the decade he ran the fund, even including the crash. “Yes, I left because I wanted to have my own business, and be completely focused on fund management and run a smaller fund,” he says. But Powe resents any implication he abandoned Invesco Europe at a weak point: “It was not done in a hurry. I restructured the fund after the sell-off and left it in very good shape. It was very blue chip oriented, it was away from tech, it had a good cash position. What they did with it thereon was up to them, but I had taken action to deal with poor performance.”

Now, Powe has a rule of avoiding leverage when investing in smaller companies. PCM Europe keeps 20% in cash, and “is liquid enough to be converted to cash within ten days”. This lesson presumably stems from the Modulus Europe fund, which Powe had to liquidate just as the recession started. “The problem I had in 2008 was that the majority of my investors wanted their money back around the same time. That was quite a shock, but it was a reflection of what was going on, which was a flight to cash,” says Powe. “It was very clear to investors we were taking a liquidity risk, as we had a disclosed stake in a number of companies.” The decision was made to liquidate the fund: “Albeit stressful for our investors and for us at the time, it was the right decision.” But, adds Powe, let the record show: the Modulus fund provided a 57% return to over its lifetime.

Ploughing on
All these lessons are now being funnelled into PMC Europe, which is trotting along quietly but solidly. It seems Powe prefers it this way. Would he rather they’d never called him a star manager, I ask. “Did they actually call me a star? Such language usually ends in tears!” Powe laughs. Then: “Well, Invesco Europe was consistently among the leaders of its peer group.” But, I press, was that a good or a bad thing? “A bad thing probably. It ended up with that fund being very big. People either overestimate you or they underestimate you. It’s better to be underestimated.” So is that what’s happening now then? Powe answers carefully: “Yes because we have kept a very low profile. We are just doing what we do in a steady way. I think we have managed expectations well with our investors, and we just want to be boringly steady.”

Powe, now 50, comes across as someone who genuinely enjoys what he does, to the point he’d certainly recommend fund management as a career for his children: “Absolutely! I think it’s a brilliant industry. It’s a very privileged occupation, because you have a front-row seat on what is going on. You are always learning about new things: yesterday it was low-cost carriers, tomorrow it may be research antibodies, then it may be online luxury. It’s fascinating and carries significant responsibility.”

Living with his wife and their two teenagers in Cambridge, each workday is sandwiched by a train ride: “I’m one of these people who enjoys commuting as it’s a great opportunity to read and think. It’s a very valuable time for me.” Powe sits on the boards of a few charities, but generally, most of his free time goes to his family. “I want to make the most of the time with the children before they fly the nest. We travel a lot as a family, we recently went to San Francisco and down the coast. It’s good to open our eyes to the world.”

Powe enjoys following sport: “My son’s very much into his rugby. I’m fascinated by what makes teams win and the ingredients to success, and sports is a very good example of being competitive and looking to win, but also how to come back when you lose.” Powe pauses for a moment. “Invesco Europe and Modulus had very strong track records, but reputationally it was damaging. I’m determined to learn from that experience and apply the lessons learned to run PCM Europe a lot longer.” Having run Invesco Europe for 10 years and Modulus for six; Powe would like to run PMC Europe for at least another 20, health permitting. “I’m fascinated by how sports people, and business people, deal with setbacks. If you see a team that’s successful, can they sustain it? Can they repeat it? A steadfastness of purpose. Just ploughing on.”

H29

Robert Kosowski: Taking an alternative view

Hedge Magazine, 2013. Original article (p30-33).

kosowskiRobert Kosowski, director of the Centre for Hedge Fund Management and professor at Imperial College.
“History never repeats itself, but it rhymes.” Mark Twain said it first, but hedge fund researcher Robert Kosowski knows it’s true: “History is full of patterns that repeat, and unfortunately the financial services industry doesn’t necessarily learn. Things get given new labels. But if you look at the various crises, going back to the 1930s, there are a lot of similarities to the current crisis.”

This is partially what Dr Robert Kosowski, Associate Professor of Finance at London’s Imperial College, wants to teach his students. He has two mugs from Lehman Brothers in his office, left by an old colleague: “They always make me laugh. It’s an interesting reminder of the historical context. I intend to keep them.” We meet in an airy, modern lobby of the Business School, where Kosowski has an office across the street. As director of both the Centre for Hedge Fund Research and the Risk Management Laboratory, both students and industry professionals look to Kosowski and his research for insights into the cutting edge of hedge funds. But who has the best questions – the students or the fund managers?

“I think it’s a mixture of the two. There’s a lot of synergy between the academic work and the practitioner work,” says Kosowski, in his analytical, somewhat reserved manner. “Ultimately we try to educate students so they are prepared for the real world. We also want to produce research that’s high quality but also practically relevant. It’s absolutely fundamental to get feedback from executive education buyers, and from students and consulting clients.”

Real life academia
Kosowski’s research into trend-following funds and momentum strategies is a good example: this is not only academically interesting as it relates to return-predictability, but it can also deliver practical strategies for investors. While clients often want to hear about the latest academic insights into portfolio construction and return-generation, the key questions Kosowski faces are as you’d probably guess: how to recognise which hedge funds will do well in the future, how to distinguish good from bad funds, how to construct a sound portfolio, and so on. But if hedge funds remain an emerging field, how predictable can these factors really be?

“One of the strong predictors is fund flows. People tend to rush into things, and then those things eventually become overpriced. The more informed people enter first, then the less informed rush in later. That’s human psychology and that’s not going to change,” says Kosowski. But, he stresses, the reasons why alternative strategies generate returns can be traced back to both behavioural and rational explanations. “Rational explanations mean, if I ask you to hold a certain risk, you ask for a premium. Behavioural explanations may mean that there are genuinely some opportunities where there’s no compensation for risk.” Sometimes investors may find themselves on a winning streak without being able to fully understand why, which sounds like it should be frustrating for a researcher. But Kosowski doesn’t seem overly concerned about the anomalies: if a fund manager hits on a pattern that creates results, why shouldn’t he or she exploit it? “Now what we try to do, of course, is to rigorously analyse why something works. Because if we don’t have an understanding why it works it may just be statistical fluke, it may be temporary, it may just stop working. And there’s a very large amount of examples of that happening.”

Proven alpha
Kosowski has published research demonstrating that the hedge fund industry delivers annual alpha returns of just over 4 percentage points, while only 1.32 percentage points worth of returns are down to beta – proof that the industry at large generates “statistically significant performance over long time periods”. But he’s not so willing to go along with the idea that the hedge industry has a PR problem. The last few years have been more challenging for the industry, he concedes, before pointing out that this happens to all asset classes so it’s nothing special for hedge funds. “Picking out one or two years to say that there are questions to be asked about the industry – I think it’s just spikes. But the same goes for picking out the best years and saying things will continue forever at the highest levels. I think this mean reversion is normal, and what’s important is to look at long time periods.”

Kosowski first started his research activities looking at mutual funds, but found this to be “intellectually restrictive” due to the regulatory restrictions. “And when you look at the whole universe of alternative strategies, it’s so much richer, much more interesting. It seems there’s a convergence of the traditional and the alternatives on this tree. I think the alternatives industry is becoming increasingly relevant, and there are still a lot of interesting questions to study,” says Kosowski, pointing out how the latest innovations are often considered alternative until they become traditional. “So it’s intellectually very interesting to work on that intersection, at the cutting edge of research.”

Current projects include research into trend and momentum funds, alongside Nick Baltas, and the related issues of capacity constraints. Another research topic is how to correctly measure alpha, and how this relates to leverage; “We’ve pioneered a new method to distinguish true skill from luck, and this has generated quite a bit of interest.” So are luck and intuition dirty words in the world of research? “Experience is certainly helpful, and intuition means you probably apply the thought process that you’ve gone through many times, just more quickly and almost subconsciously.” Kosowski thinks about it for a moment. “It all goes back to understanding what drives the returns. If we can’t trace it back to experience, if we can’t trace it back to a model or to superior information, then it may not be real.”

Doctor, swimmer, skipper?
Outside of work, Kosowski is drawn to the water, having initially excused invisible goggle marks on his forehead following his morning swim. While work keeps him very busy, the international nature of the research community means he does a fair bit of travel, having visited Australia last year and New Zealand high on the wish list. “I really like sailing and wind surfing, and I hope to get a skipper license this year. Last year I had a chance to take a sailing lesson in Airlie Beach near the stunning Whitsunday Islands. At one stage I was concentrating on the sails, when my sailing instructor pointed at the water and asked whether I had seen the dudong. I’d never heard of a dudong. It turns out it’s a large marine mammal, similar to the manatees found in Florida, and one has to watch out for them since they move so slowly.”

While Kosowski confirms that yes, he does get asked this a lot, I can’t help but want to know: why is he not a hedge fund manager? “It’s a fair question. My colleagues and I do apply our research through advisory work, some which may also be for firms that manage assets. The synergy between research and consulting is most interesting.” So it’s not because he doesn’t think he’d be any good? Kosowski laughs, before delivering the understated answer: “Since I get asked repeatedly to do consulting work which clearly is used in investment management, I guess I must be somewhat good at doing that work. But I like doing other things too. So my main position is at Imperial College.”

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