Diversify to escape the Black Swan
Hedge fund performance was sharply down in 2007 and industry figures generally ignore the fact that the casualty rate among hedge funds has been rising. Funds do close due to what are known as “Black Swan” events, losing all their clients’ money. But one way to reduce the risk of investing in hedge funds in a rougher market is to invest in a fund-of-funds. This way the risk of a single fund failing is countered by holding a number of funds, and yet the generally higher return of hedge funds is still captured.
In essence this is the specialist type of fund-of-fund managed by Thames River Capital, the latest London fund manager to be licensed by the Dubai Financial Services Authority, which announced its debut at the Dubai International Financial Centre yesterday. “We fully realise that the investment climate changed sharply in 2007, and if there is a bear market coming nobody can escape its impact, we will all suffer,” says CEO and founder Charlie Porter. “But diversification of funds in the multi-manager model will dampen the impact of the failure of a single fund within that fund if a Black Swan event actually happens.”
Thames River Capital is one of a small group of increasingly popular boutique fund managers which are breakaways from the traditional large integrated investment banks. Porter left blue-blooded Barings Bank in 1998 to set up Thames River, which actually operates as a partnership. Fifty-five per cent of the privately owned firm’s equity is held by the fund managers.
“In our business attracting and retaining the right people is absolutely essential and we find that this is a business structure that allows our managers to focus on what they do best, which is managing money. There is not the bureaucracy or politics of a big firm to worry about and equity ownership is a wonderful motivator.
“We have been watching the development of the DIFC and the Middle East for years and have done business in the region on an almost accidental basis. Indeed, we would not have set up now if we had not found the right person in Nigel Sillitoe, one of the region’s most successful fundraisers, who I have known personally for 20 years.
Nigel joins us from Mellon Bank.
“Last summer we took the entire multi-manager team from Credit Suisse so this has been a good period for recruitment for us even if the markets have been bad. But we still have only 154 staff in Berkeley Square in London and the culture remains that of a small and flexible organisation,” says Porter.
Thames River Capital is a relative minnow in the financial world with $12.9 billion (Dh47.4bn) under management of which around half is in hedge funds and the remainder mainly in more traditional long-only investment funds. It is what is known in the business as a boutique investment manager and specialises in funds-of-funds.
This means their fund managers pick the best-of-the-best global funds and then create a portfolio of these funds in another fund.
Does this not mean the expense of paying management fees twice over?
“Well fees are certainly higher because yes there is another layer of management,” admits Porter. “However, we operate at the institutional level and there are many ways that our managers can obtain much lower fees, such as by participating in the seeding of new funds.” Indeed, Thames River Capital only sells to institutional clients, that include 800 big family investment entities, and has no ambition to enter the retail market for funds-of-funds. “It is not the way we are set up, and we have no desire to become a retail operation,” says Porter. “Our focus is on getting the best performance in the various asset classes we cover by attracting the best fund managers and letting them do the job.”
The average length of experience of an investment team at Thames River Capital is 26 years, and out of a total of 154 staff there are 84 investment professionals. It is a very high concentration of expertise to run its 33 funds but still small. “We can not cover every major asset class with a staff of this size,” concedes Porter. “So we have made no attempt to compete with Wall Street for US equities.
Otherwise we are widely spread with funds in UK, European, Japanese and Emerging Market equities as well as property, hedge funds and fixed interest.
“Over the years I have visited the Middle East many times, and first came to Dubai in 1981 when it was a completely different city; and while times may be difficult in the investment world, there is still a lot of money here that needs to be invested. Rule No1 is always to preserve capital but in any set of market circumstances there are always pockets of opportunity that do well.
“We could see a 20 per cent correction in emerging markets and a bear market, for example, but the retracement on the back of that fall would be spectacular. Growth will also continue in the Middle East with oil in no danger of falling below $45 a barrel, which is much higher than in the past. Therefore, there will be surplus revenues and a greater institutional demand for alternative non-correlated investments like our funds.”
Over the past year the hedge fund-of-fund products from Thames River Capital have delivered positive returns, albeit lower than in previous years, and it is this kind of defensive quality, combined with the additional spreading of risk by investing in multiple funds, that is likely to appeal to Middle East investors at this time.
“We have been impressed by the professionalism of the DFSA, which is similar in style to the FSA, which regulates us in the UK,” adds Porter. “Setting up in Dubai has been a good experience and we have ambitious targets.” (Peter Cooper)
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