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Eurekahedge Interview with GLL Investors

Eurekahedge Interview with GLL Investors

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Published by Eurekahedge
Steve Gilboy, Michael Newlander and Jason Gilboy of GLL Investors share the firm’s investment principle as well as their outlook on the global markets.
Steve Gilboy, Michael Newlander and Jason Gilboy of GLL Investors share the firm’s investment principle as well as their outlook on the global markets.

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Published by: Eurekahedge on Jan 17, 2011
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01/17/2011

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www.eurekahedge.comwww.eurekaprivateequity.com
Interview with Steve Gilboy, Michael Newlander and Jason Gilboy of GLLInvestors
Eurekahedge
Founded in 1995, GLL Investors manages five multi-manager hedge funds – all of which have postedsuperb returns – while maintaining unusually low-risk profiles with little or no leverage. The largest andoldest fund, GLL Investors, LP, has recorded a 10.26% average annual return over 15 years with a betaof only 0.22. Since inception, GLL is up 287.29% net through June 2010 while the S&P 500 is up124.42%. GLL Single Strategy, which we created in 1999, invests primarily in hedge funds thatspecialise in PIPEs (Private Investments in Public Equities). This GLL fund also has a low correlation tothe stock market (0.22 beta) and, for the past 11 years, has produced an average annual return of 8.55% despite a tough market environment. Since inception, GLL Single Strategy is up 137.96% netthrough December 2010 while the S&P 500 is down (16.77%).Although we seek superior returns for our limited partners, we do so only within the parameters of prudent capital preservation. We are committed to hedging to offset risk and make sure that all fundsmeet our stringent requirements.A guiding principle at GLL is to remain small and nimble. Our experience, supported by industryresearch, has shown conclusively that small funds hovering around $100-500 million in assets performbetter at lower risk than larger funds. A large part of our success has been due to early identification of talented fund managers with integrity and experience who invest their personal assets in their own fund.We then invest in these funds before they close to new investors and monitor their performance andinvestment consistency over time.
1)How did your funds of funds fare through the financial crisis and the subsequenrecovery? Has the recent volatility in the US markets affected performance? Which of your funds has delivered the best returns? How do you see the returns of your fund compared with the rest of the industry? 
GLL's hedges have protected us as expected through the crisis. We have recovered well andtoday are close to the high-water marks of our investors. For 2010, our funds have experiencedvery low volatility despite the market's rollercoaster ride the general public has been enduring.As of July, all of GLL's funds are profitable for 2010.
2)Being a fund of hedge funds that invests across various asset classes and strategies,on what basis and to what extent do you diversify the investments of your funds intohedge funds employing different strategies? Do you also look at sector-specific funds? 
At GLL, we prefer picking people over sectors within our investment areas. We feature eightdifferent strategies spread through 15 hedge funds run by highly-experienced managers whohave solid integrity and honesty. We believe that conducting lengthy, in-depth due diligence onthe people managing the funds that meet our strict criteria separates GLL from other fund-of-funds that often focus more on creating the 'perfect' sector allocation.
3)Which strategy has proved the most profitable for you, in terms of risk-adjusted returns over a period of, say, five years? Which sectors and strategies are youcurrently most bullish on, given the present state of uncertainty across markets? 
Our convertible arbitrage and distressed securities funds have performed well for us since 2005.Given the current investment environment, we favour mortgage-backed trading vehiclesincluding agency and non-agency paper. Distressed securities continue to be attractive as wellas risk arbitrage.
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August 2010
 
Copyright © Eurekahedge Pte Ltd 2010. All rights reserved.
4)As a multi-manager, what sort of risk control structures do you have in place in order to safeguard the investments of your fund? Did your risk management protocolschange over recent times due to the high volatility across different sectors? 
Constant communication with our managers is the most critical risk-mitigation practice at GLL.We want to avoid surprises at all cost. GLL's due diligence continues well after an allocation ismade to a fund – in fact, it is just the first step on a path where vigilance is key. We visit theoffices of all our managers regularly as well as maintain frequent telephone and email contact.These risk management protocols have served GLL well over the years, keeping us prepared forthe unexpected. They derive from our extensive trading background where volatility was part of daily life.
5)Can you give us an overview of the qualitative/quantitative research that goes withyour investment decisions? How often do you meet the managers of the hedge fundsthat you invest in? 
Here are just some of the many filters GLL utilises in manager selection: Are they leveraged?How do they correlate to the downside with respect to the stock market? Are they hedged? Arethey risk averse? Are their returns stable? Do they have a strong trading background? Are themanagers themselves the largest investors in their own fund, like GLL’s managers? Are theysector-focused? Is their infrastructure deep enough to manage the AuM? Do they employ high-water marks? Do they have timely reporting which includes monthly estimates, monthlystatements and K-1s? Do they have high employee turnover? Are they cleared by a majorbrokerage firm? Do they have a third-party administrator including an annual audit?We look at past performance to eliminate managers, not select them.As previously discussed, we are in constant contact with all our managers regularly. Aside fromtravelling to see them, they frequent our offices as well.
6)How do you drive synergy between the different funds? Are there similar research and risk methodologies across the different funds and strategies? 
Although counter-intuitive, synergy within GLL's portfolio is achieved by our funds beinguncorrelated. Each fund stands on its own as the best in its strategy. Within a sector, we doachieve synergies by playing on the different ways to obtain alpha with a low beta. For example,a PIPE manager can construct a deal with equities and warrants while another one can obtainprofits by investing in convertible or asset backed bonds. In this case, we have synergy withinPIPEs by the first manager finding profits with equity movement while the second gains withcoupon payments.
7)How do you foresee the amount of stress laid on tightening regulations across thehedge fund industry to affect your firm? 
Tightened regulations should not affect GLL. Since inception, GLL has always committed tocomplete transparency that surpasses any compliance levels required. Much of the debate overstricter controls stems from large institutions that have employed excessive leverage withoutthe knowledge of the investor. From the onset 15.5 years ago, GLL has had little to no leverage.
August 2010
 
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