Erik Serrano Berntsen: The number one seed

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

Screen Shot 2015-09-25 at 14.09.10

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.”

Ramon Vega: A whole new ball game

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

Screen Shot 2015-08-04 at 17.09.05

A whole new ball game

Ramon Vega takes up a great deal of space in the room. He’s tall and broad, slicked-back hair and sharp suit, going in with a firm handshake and a big smile. He should be an imposing presence, but he’s really not – in fact, the most striking thing about Vega is how friendly he is. Later I’ll mention the meeting to a few football fans, who’ll all concur: “Oh, the ex-Spurs player! He’s a nice guy, isn’t he.”

Sports metaphors are all over the world of business, but it’s rare to find a financier with this level of personal experience. Vega is the founder of Vega Swiss Asset Management, but his CV is unusual: Vega was a professional football player for 17 years, most prominently with Tottenham Hotspur. So perhaps it’s fitting that the first thing Vega wants to talk about is ‘From Pitch To Boardroom’ – Vega is co-CEO of Stuart Blyth’s venture for using football methodology to inspire corporate leaders to select and nurture winning teams.

Screen Shot 2015-08-04 at 17.10.11The winning team formula
“I’m merging two worlds together. I was a professional footballer, an international player. Then I went into the world of finance, into hedge funds and asset management,” says Vega. We’re sitting in a suite at the Landmark, a top-drawer Marylebone hotel which is very imposing indeed. Speaking in his European accent, Vega continues: “But as I was building a second career, as we call it, the first career was calling me back.” Vega realised there was a way to combine the two worlds, using sports to provide a fresh perspective for business.

One lesson from football is understanding that people run the organisation, not the other way around: “A football manager needs to know exactly what kind of player he wants. Does he want a defender, a striker, a goalie? In business, it’s the same thing. … As a CEO, whether you inherit your team or build from scratch, you need to get to know people before you start making changes.”

Of course, one benefit of a corporate environment is that you won’t have to deal with the Luis Suarez-types of this world and their biting habits. But, says Vega, there are plenty of egos also in business: “Oh absolutely! In football, you have these young players trying to be everything. In finance, it’s exactly the same! These young traders are making all this money, thinking they’re on top of the world.”

What you have to do, says Vega, is take your Suarez-style trader, and turn them into a team player: “What you’re trying to do, as manager, is make your people feel good, and feel important. Then they are loyal to you, because you made them feel like that. Then you start to have a winning team around you.” The problem, adds Vega, is that lots of bosses actually don’t like managing: “They want to go and fix it themselves! But I don’t know any football manager who goes onto the pitch himself if the striker doesn’t score.”

Screen Shot 2015-08-04 at 17.10.15Good fortunes
Vega lives in London these days, after being born in Switzerland to Spanish parents who’d left their home country during the Franco era. Vega played for the Swiss national team, an interesting experience for an immigrant: “When I started to play football for Switzerland’s national team, when I had the cross,” he says, drawing a Swiss cross on his chest, “then you’re suddenly representing the country! Something changed. I kind of have mixed feelings: first of not being accepted, then later, accepted.”

Having said that, Vega has only good things to say about his early days playing football in Switzerland: ”I was very lucky at the Grasshopper Club Zurich, as I studied banking and finance at university while also playing football.” Not that young Ramon was planning to use this education any time soon – in fact the opposite. When the Grasshoppers wanted him, it was his parents who pushed for schooling, and Vega became the first player for the club to have this kind of play-study deal. “Being a footballer was my dream. I was never thinking: ‘Am I going to make it?’ It was always: ‘This is what I want to do!’ I was very, very lucky that I was able to do it.”

In retrospect, Vega is grateful for the good fortune of being surrounded by forces who pushed him towards education. Because retiring from football can be a brutal experience: “The most difficult part of retirement from any sports profession is – where do you go? … When I retired from football, the first two, three years, those were the hardest years of my life.” Being a top level athlete is akin to living in a bubble, says Vega: “I was doing what I loved, my hobby! And suddenly I had two go to work, like everybody else!”

Vega’s first financial venture was co-founding of Duet Group in 2002, a company operating in hedge funds, real estate and private equity. His name would open doors, Vega found: “They wanted to talk to me, yes. But they want to talk about football!” He laughs, but it was tough: people struggled with the idea of this footballer-turned-banker. I ask if they took him seriously: “Not at the beginning. I was hitting a wall all the time. The first two years were difficult. I’d say to myself: ‘Gosh, this is going to be a hard one. I really need to be better than these guys!’”

Vega set up his own shop in 2008, with Vega Swiss Asset Management. The company prides itself on being independent and specialised, advising US$1 billion in assets while focusing on portfolio management and fixed income. “We wanted to be an old-fashioned account manager. The client knows exactly what’s going on, and everything’s transparent.” Having started VSAM at a crunch time for the industry, Vega points to the effects of changing regulation: “I think it’s starting to clean things up and put structures in place. But at the same time, fund managers are limited in what they can do. It’s not always ideal for investors, because you can’t always go for the bigger upside when you’re limited in what you’re allowed to do.” The upside of VSAM’s personalised attitude to business may be a unique investor experience, although Vega acknowledges this hands-on approach may lead to scalability issues. But as a child of the recession, the VSAM spirit is to be responsive to change: “This is an entrepreneurial point of view. You need to be flexible, see what the market wants, and then you have to adjust.”

Screen Shot 2016-01-31 at 16.30.18Legends live on
Vega (44) often goes to Spain to visit family: “I love Spain. It’s a very nice place to go.” His love of cycling comes up several times, as well as a passion for the opera. And good food of course: Italian, Spanish, French. I ask him what Swiss food is like: “Well you have the rösti, the bratwurst. Then it starts to get a bit tricky … Oh, the chocolate fondue!” He laughs.

I ask if he’s on an old boys’ football team, before realising that may be an offensive term for an ex-pro? But Vega’s a good sport about it of course, nice guy that he is – he plays with the Tottenham Legends: “The old players get together for the charity games, and it’s great. We used to play together for all those years, and now we’re old farts!”

It’s nice, he says, when Tottenham fans come and watch: “I always loved it when I would play for Spurs supporters, and now, 15 years later, they still appreciate what you’ve done for them.” Every now and again, Spurs and Celtic fans will to say hello in the street: “I appreciate that, because that was your life.” And just maybe, club life may become a part of his life again: Vega walked away from a bid for Portsmouth FC in 2009, but he’s not ruling out considering another opportunity: “If a sports franchise or football club comes up, either for running or investing in, I don’t think I would be hesitating! This is a good time to do it.”

Aref Karim: The systematic approach

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

Screen Shot 2015-04-08 at 16.16.03

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).

Screen Shot 2014-10-13 at 18.19.20

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.”

Screen Shot 2014-10-13 at 18.20.07

Screen Shot 2014-10-13 at 18.25.47

Simon Ruddick: The village mentality

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

Screen Shot 2014-05-31 at 13.28.11The choreographer
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!”

h30

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.”

kos mal