ISSUE 05 • May 2012

Opalesque’s Emerging Manager Monitor

ISSUE 01 • • May 2012 ISSUE 05 September 2011

2 3

EdiTOriAL EMAnAgErS indiCES
April 2012 performance of Opalesque’s indices of emerging manager funds

27 Q&A

Topwater: A risk-based managed account platform can remove a lot of the business risk

31 SEEdErS COrnEr 33 SErviCErS’ SpOT

newAlpha: Emerging manager ‘asset class’ is gaining traction

5 7

nEw fundS in ThE dATABASE pETEr urBAni’ STATiSTiCS
Big is not always beautiful

funds that have recently joined the Emerging Managers database

Citco: Administrators can help hedge funds face today’s rapid evolution

35 LAunChES 37 prOfiLES

12 fundAnA SEriES

A recapitulation of maiden launches in late April and May 2012 so far

is the performance in the first year of a new hedge fund a leading indicator for a good investment?

16 fOCuS

recent views and findings on what could relate to new hedge fund managers

part i – Attractive but mysterious, Brazil offers potential for serious suitors part ii - LatAm statistics

39 prOfiLES

Younger managers need a certain type of May 2012 New Managers | Opalesque’s Emerging Manager Monitor - director

25 47n SEriES

Two emerging hedge fund managers speak to new Managers: Mike dever of Brandywine Asset Management, and Mohannad ALrashoudi of Mr Capital.

1

Editorial
welcome to the May 2012 issue of new Managers, Opalesque’s monthly monitor of emerging – and re-emerging – hedge fund managers. in Statistics, peter urbani reviews a research piece on whether emerging fund managers add value, using a larger database. The results are fairly unequivocal, he

ISSUE 05 • May 2012

Benedicte Gravrand

finally, two very different emerging fund managers speak to new Managers in Profiles: Mike dever of Brandywine Asset Management, and Mohannad ALrashoudi of Mr Capital. we added in this section a couple of interviews done for Opalesque’s Alternative Market Briefing (AMB) of soon-to-be-launched funds: Abydos Capital Management and Belaco Capital. i hope you enjoy our fifth issue of new Managers. please, do contact me if you have any related news.

concludes. Then Fundana looks at the performance of hedge funds in their first year of operations, how it has evolved over time, whether it can give a good insight into the future success of a fund, and reaches a few conclusions. Our Focus this month is on the Brazilian – and LatAm – investing landscape. Three emerging fund managers – from ipanema Capital, Sagil Capital and Marlin investimentos – speak to Opalesque in part i, and Eurekahedge provides the vital statistics in part ii. 47N recommends the type of directors emerging managers should look for; Bryan Borgia of Topwater Capital partners explains the mechanics of his risk-based managed accounts platform in Q&A; Antoine rolland of newAlpha discusses new projects and trends in Seeders’ Corner; and Oliver Scully of Citco fund Services comments on the evolving relationship between fund managers and administrators in Servicers’ Spot. Then we have the usual recapitulation of recent maiden Launches and a review of the latest views and findings in Perspectives. 2

Benedicte Gravrand Editor gravrand@opalesque.com

Opalesque new Manager is edited by Benedicte Gravrand. Based in geneva, Switzerland, Benedicte also writes exclusive stories, special reports, co-edits Opalesque’s daily hedge fund publication Alternative Market Briefing (AMB) and occasionally moderates Opalesque roundtables. Benedicte is perfectly bilingual (french/English) and has lived in paris, geneva and London. She obtained a BA (honours) in philosophy from the university of London, worked in the publishing sector, the hedge fund industry and then joined Opalesque in 2007.

New Managers | Opalesque’s Emerging Manager Monitor - May 2012

Emanagers Indices
Emerging manager hedge funds and managed futures funds experienced slight losses in April, according to a first estimation based on the data of 291 funds listed in Opalesque Solutions’ Emanagers database.

ISSUE 05 • May 2012

Emanagers Total Index down 0.38% in April (+3.05% YTD)
Both hedge funds and managed futures funds saw losses in April. however, hedge funds clearly outperformed managed futures strategies in 2012. The Emanagers Hedge Fund Index had its first negative month this year, losing 0.49%. Year-to-date, the index is still up over 5%. Managed futures funds tracked by the Emanagers CTA Index continued their negative 2012 trend with a loss of 0.13%, lifting the yearto-date loss to 2.08%. despite mixed results, both sub-indices outperformed the all-funds group represented by the Eurekahedge hedge fund index and the nedwedge CTA index over the last 12 months.

The Emanagers Total Index lost 0.38% in March, reducing its yearto-date performance to +3.05%. Estimates for March and february were corrected to -0.15% and +1.55% respectively. Since inception in January 2009, the index grew 61.6% and outperformed both the global stock market and its hedge fund peers.
Over the last 12 months, the index lost an estimated 2.18% with 8 negative and 4 positive months, compared to losses of 3.17% for the Eurekahedge hedge fund index and 6.81% for the MSCi world index.

New Managers | Opalesque’s Emerging Manager Monitor - May 2012

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Emanagers Indices

ISSUE 05 • May 2012

Analysis of 12-month rolling data shows a growing negative correlation of managed futures strategies with the stock market, while their volatility remained relatively low. As a result, Emanagers CTAs had an MSCi-beta of -5%, compared to +49% for Emanagers hedge funds.

Performance (in %), Volatility and Equity Market Beta (in %)
Index Emanagers Total Index Emanagers Hedge Fund Index Emanagers CTA Index Apr 2012 -0.38 -0.49 -0.13 YTD 3.05 5.60 -2.08 12m -2.18 -2.84 -3.11 2011 -1.79 -2.83 0.51 2010 18.73 17.07 19.15 2009 34.51 37.59 20.52 Volatility 5.93 9.19 3.16 Beta (bm=MSCI) 31 49 -5

Eurekahedge Hedge Fund Index Newedge CTA Index MSCI World

-0.28 0.06 -1.37

3.59 -0.47 9.42

-3.17 -7.00 -6.81

-3.81 -4.52 -7.61

10.79 9.26 9.40

20.60 -4.31 27.07

5.80 7.49 18.16

30 -8.6 100

- florian guldner, Opalesque research

New Managers | Opalesque’s Emerging Manager Monitor - May 2012

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New Funds in the database
new funds in Opalesque Solutions Emerging Managers database
(second half of April and first half of May 2012)
Fund name Muskoka Fund I Revere Tactical Risk Fund LP Strategy Equity Long/Short CTA Manager Location Larkspur, CA, u.S. new York, u.S. Malta Schindellegi, Switzerland Schindellegi, Switzerland u.S. holte, denmark worth, TX, u.S. Singapore Singapore gibraltar Zurich, Switzerland Malta paris, -france Zurich, Switzerland Fund AuM $ 5.2M $ 1m € 11.9m $ 0.2m $ 5m $ 6.9m dKK29.2m $1m € 14.3m

ISSUE 05 • May 2012

Fund Launch date May-05 Aug-11 Mar-12 Jan-12 Jun-11 Jan-12 nov-11 Jul-10 Jan-09 Jan-09 feb-12 Mar-11 Mar-12 Mar-12 Jun-11

RP Systematic Emerging Markets (UCITS) Fund - Equity Long/Short EUR Institutional Rodex New Normal Strategy Rodex Black Swan Liquid-Ator Mountaineer Partners LP Secure Opportunity A/S Shad Trading LLC The Earth Element Fund Ltd (EUR) The Earth Element Fund Ltd (USD) Systema Trend Fund Vienna Global - Klimt Fund Wanger European Smaller Companies UCITS Fund Aequam Diversified Fund I2 (USD) Rialto Global Macro Systematic global macro CTA Event driven Event driven CTA CTA CTA CTA global macro Equity Long bias CTA global macro /multi-strat

$ 14.3M
€ 1.2m € 1m € 1m $0.5M € 1m

New Managers | Opalesque’s Emerging Manager Monitor - May 2012

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New Funds in the database
Fund name Fat Pitch Capital, LP Zencap Octra Fund RiverCrest Global Equity Fund RiverCrest European Equity Alpha Fund Mandrill Master Fund Mayar Fund Namira Capital Fund - AMANA Share Class B Strategy Equity Long bias Credit Long/Short Equity long/short Market neutral Multi-Strategy Equity long-bias CTA Manager Location Charlotte, nC, u.S. paris, -france London, u.K. London, u.K. new York, u.S. Saudi Arabia Zurich, Switzerland Fund AuM $ 3.8m € 340m $ 1.2m $ 3.45m € 7.2m

ISSUE 05 • May 2012

Fund Launch date Jun-11 Apr-10 Oct-11 dec-11 Jan-09 May-11 Oct-10

The Opalesque Solutions Emerging Managers database is an extremely niche and specialised database of Emerging hedge fund Managers, and access is available for eligible investors such as funds of funds, family Offices, pension funds and uhnwi globally as well as academia and research analysts. for the sake of this database, we define an asset manager as “emerging manager” if, 1) The firm is less than 48 months old and 2) The AuM of the firm at the time of the firm’s inception is less than $600 million. if you want your fund to be in the Emerging Managers database, please send your details to our database team at: db@opalesque.com.

New Managers | Opalesque’s Emerging Manager Monitor - May 2012

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Bigpossible criticism of the Emanagers Index is its relatively One is not always beautiful
One possible criticism of the Emanagers index is its relatively be possibility that the returns of the Emanagers index may small sample size ofsurvivor 300 funds. This gives rise to the possibility that inflated by around bias or possible cherry picking of funds. To the returns against this, I this index may be inflated by survivor bias or mitigate of the Emanagers month updated some earlier research possible cherry picking of funds. To mitigate against this, i this month on http://www.scribd.com/peter_urbani/d/93883691-Do-EmergingManagers-Add-Value-Mar-2012 Do Emerging Managers Add Value?, updated some earlier research on do Emerging Managers Add value?, using the larger using the larger Eurekahedge database of over 10,000 funds.

Big is not always beautiful

Peter Urbani’s Statistics

ISSUE 05 • May 2012

The results are fairly unequivocal.

small sample size of around 300 funds. This gives rise to the

Emerging v.s. Established and Large Indices
1200
Eurekahedge < 36 months old and < $300m AUM - CAGR: 14.94% Opalesque Emanagers Total Index - CAGR: 14.62% Eurekahedge All - CAGR: 13.09% HFR New Managers Index - CAGR: 11.71%

1000 800 600 400 200 0

http://www.eurekahedge.com/indices/hedgefundindices.asp Eurekahedge database of over 10,000 funds. in this research, we constructed Emerging and Established manager
indices that control for both size and age. The three main emerging In this research, we constructed Emerging and Established manager indices constructed are:

Eurekahedge > 36 months old - CAGR: 11.02% TOP 100 Funds by AUM - CAGR: 10.96% HFR Established Managers Index - CAGR: 9.25%

Eurekahedge < 36 months old and < $300m AuM, Eurekahedge < 24 months old and < $200m AuM, Eurekahedge < 36 months old and < $300m AUM, Eurekahedge < 12 months old and < $100m AuM.

manager indices that control for both size and age. The three main emerging manager indices constructed are:

And their established manager counterparts which are age-based only: Eurekahedge > 36 months old, based only: Eurekahedge > 24 months old, Eurekahedge > 12 months old. old, Eurekahedge > 36 months

Eurekahedge < 24 months old and < $200m AUM, Eurekahedge < 12 months old and < $100m AUM.

And their established manager counterparts which are age-

Eurekahedge > 24 months old, Eurekahedge > 12 months old. in, addition we constructed a size based index:

In, 100 funds by AuM. TOp addition we constructed a size based index: And, as a control, compared our results against the hfr new and TOP 100 Funds by AUM. Established Managers indices and the Opalesque Emanagers Total index.

And, as a control, compared our results against the HFR New and Established Managers Indices and the Opalesque The results are fairly unequivocal. Emanagers Total Index.
New Managers | Opalesque’s Emerging Manager Monitor - May 2012

19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11

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Peter Urbani’s Statistics
whilst the magnitude of the alpha (excess return between Emerging Emerging and Established Manager Index) differs in magnitude and Established Manager index) differs in magnitude depending of depending of which database is used, the results are broadly which database is used, the results are broadly similar. The excess similar. The excess returns of the HFR New Managers Index is returns of the hfr new Managers index is around +2.46%, the around +2.46%, t he Eurekahedge Emerging Managers < 36 Eurekahedge Emerging Managers < 36 months and < $300m AuM months and < $300m AUM +3.93%, and the Opalesque +3.93%, and the Opalesque Emanagers Total index +3.60%. The Emanagers Total Index +3.60%. The Top 100 Funds by AUM Top 100 funds by AuM index has slightly positive to slightly negative Index has slightly positive to slightly negative alpha depending alpha depending on which Established or Overall index it isto. on which Established or Overall Index it is compared compared to.

ISSUE 05 • May 2012

Whilst the magnitude of the alpha (excess return between

Emerging Managers versus Established Managers
2500 Emerging Managers less than 36 months old and less than $300m AUM Established Managers older than 36 months 1500 1533

2000

1000 711 500

The above results are for the 17 year period for which data is The above results are for the 17 year period for which data is available available for the HFR New Managers Index. Over the longer for the year new Managers index. Over available for the 19.25 hfr period for which data is the longer 19.25 year period for which data is available for the Eurekahedge database an arithmetic Eurekahedge database an arithmetic excess return of +4.13% excess return of +4.13% has+3.66% geometric or CAGR this has been achieved. The been achieved. The +3.66% geometric or CAgr this represents translates into a +99.84% cumulativereturn represents translates into a +99.84% cumulative excess excess over over the Eurekahedge > Month Index. returnthe Eurekahedge > 36 36 Month index.

0 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

New Managers | Opalesque’s Emerging Manager Monitor - May 2012

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Peter Urbani’s Statistics
To be sure, there have been periods when Emerging Managers To be sure, therehave been periods when Emerging Managers have underperformed their established brethren, typically following have underperformed their established brethren, typically major market tops and crisis periods such as periods such as those following major market tops and crisis those experienced in 97-98, 02-04 and 09-10. This 02-04 and 09-10. decline in issuance of new experienced in 97-98,probably reflects aThis probably reflects a decline in issuance of new fundsperiods but is a topic for such funds immediately following such immediately following further periods but is a topic for further investigation. investigation.
Cumulative Excess Returns of Emerging Managers
120 100

ISSUE 05 • May 2012

Excess Returns of Emerging Managers less than 36 months old and less than $300m AUM over Established Managers older than 36 months 100

80

60

Notwithstandingthese periods of relative underperformance, the notwithstanding these periods of relative underperformance, the magnitude of drawdowns experienced by the Emerging magnitude of drawdowns experienced by the Emerging Managers Managers Indices has generally been materially lower than indices has generally been materially lower than that of the that of the Est ablished Managers (Maximum Drawdown of Established Managers (Maximum drawdown of -13.73% versus -19.45%). -13.73% versus -19.45%). The slightly higher tail risk caused by moderately higher kurtosis The slightly higher tail risk caused by moderately higher kurtosis is is more than compensated for by higher upside returns available from Emerging Managers. upside returns available from more than compensated for by higher Emerging Managers.
Best Fit Distributions Emerging versus Established Managers

40

20

Periods of relative underperformance

0 93 -20 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

12m Rolling Maximum Drawdown Emerging versus Established Managers

0.0% -2.0%

Best Fit VaR -1.79% Best Fit VaR -2.17% Best Fit CVaR -3.17% Best Fit CVaR -2.95%

Best Fit Emerging Managers less than 36 months old and less than $300m AUM PDF (Modified Normal)

-4.0% -6.0% -8.0% -10.0% -5.50% -6.52% -6.59% -8.71% 12 Month Rolling Drawdowns Emerging Managers less than 36 months old and -13.73% less than $300m AUM 12 Month Rolling Drawdowns Established Managers older than 36 months -18.95% -20.0% 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

Best Fit Established Managers older than 36 months PDF (Normal)

-12.0% -14.0% -16.0% -18.0%

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

New Managers | Opalesque’s Emerging Manager Monitor - May 2012

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Finally, we also investigated the life cycle of a hedge fund, looking at the major life cycle of a hedge fund, looking at the major finally, we also investigated the AUM Milestones and the average time AuM taken the average them. Milestones and to achieve time taken to achieve them.
The current average size of the hedge funds hedge funds listed on the The current average size of the listed on the Eurekahedge database is around $234m, but the average size is around $234m, but just $25.9m. size Eurekahedge database per fund at inception is the average per fund at inception is just $25.9m. It takes the average hedge fund around 16 months to grow its AUM to over $100m. It takes the average hedge fund around 16 months to grow its

Peter Urbani’s Statistics

ISSUE 05 • May 2012

Time to achieve AUM Milestones versus % Achieving AUM
1500 1400 1300 1200 1100 1000 900 800 700 600 500 400 300 200 100 26 0 0 5 10 0% 7.80% 9.39% 3.72% 1416 10% 20% 30% 40% 50% 60% 587 70% 449 345 237 131 15 20 25 30 35 Average Fund Size at time % of Funds achieving AUM 40 45 50 55 60 80% 90% 100%
Average tim e in Months

11.68% 15.27% 21.19%

AUM to over $100m. The average AuM of the 21.19% of funds that manage to do so after 16 months is $131m. Only around 7.8% of all funds manage to reach $500m in AuM. On average, The average AUM of the 21.19% of funds that manage to do so it takes them 40 months to do so at which point their average AuM is $587m. Only after 16 months is $131m. Only around 7.8% of all funds 3.7% of all funds grow their AuM to more than $1bn and it typically takes 55 months to do so manage to reach $500m in AUM. On average, 55takes them has after which the average fund with assets > $1bn and it months old 40 months to do so at which point their average AUM is $587m. $1.4bn in AuM. Only 3.7% of all funds grow their AUM to more than $1bn and it typically around 7 years, the performance which the average After 84 months ortakes 55 months to do so afterof the average fund that has survived fundlong falls to the $1bnrun average return old has $1.4bn is irrespective that with assets > long and 55 months of +8.52%. This in AUM. of when the fund launched. After 84 months or around 7 years, the performance of the The bottom line is that, in line with various other studiesfalls to the long run average fund that has survived that long that have been conducted, Emerging Managers do indeed add alpha and statistically significant the fund thereof. average return of +8.52%. This is irrespective of when amounts They very significantly outperform the largest funds and despite any biases that may launched. exist in the data generate more than enough Alpha to cover the entire cost structure (200bp) of most funds. plan sponsors who have the manpower necessary to conduct The bottom line is that , in line with various other studies that sufficiently in depth due diligence to offset any heightened business risk are remiss if have been conducted, Emerging Managers do indeed add they do not consider Emerging Managers. alpha and statistically significant amounts thereof. They very significantly outperform the largest Funds and despite any biases that may Peterin the data generate of infiniti Capital, a now exist Urbani is the former CiO more than enough defunct hong Kong-based fund of funds most funds. Alpha to cover the entire cost structure (200bp) ofgroup. prior to that, he was head of Quantitative research for infiniti, head Plan sponsors who have the manpower necessary to conduct of investment Strategy, head of portfolio Management, head sufficiently in depth due diligence to offset Manager for number of any heightened of research and Senior portfolio business risk are remiss if firms. he started out in stock-broking as an open they do not consider Emerging buy-side Managers. outcry floor trader in the late 1980’s. Some of his vBA code
Peter Urbani
was included in Kevin dowd’s Measuring Market risk and he specialises in risk Management and portfolio Construction.

Average Hedge Fund Returns versus Age in Months
14.0% 13.0%

The Seven Year Itch ?

Returns ( Annualised )

12.0% 11.0% 10.0% 9.0% 8.0% 7.0% 6.0%
0 6 12 18 24 30 36 42 48 54 60 66 72 78 84 90 96 102 108 114 120 126

8.52%

Age in Months

New Managers | Opalesque’s Emerging Manager Monitor - May 2012

% Achieving AUM

AUM $m

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Interactive Screening Tool

ISSUE 05 • May 2012

New Managers | Opalesque’s Emerging Manager Monitor - May 2012

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Fundana Series

ISSUE 05 • May 2012

Is the performance in the first year of a new hedge fund a leading indicator for a good investment?
The fundana series of articles discusses investments in Emerging Managers; it derives from the real world experience of the fundana team. fundana is the investment advisor to several funds of hedge funds and directs at least half of its new investments to Emerging Managers. The investment process typically involves allocating a small amount day 1 or Early Stage (defined as less than one year after the fund’s launch) to new managers who have strong pedigrees. The objective of this series of articles is to share thoughts around our key observations. it does not aim to be “statistically significant” but to create a dialogue around those observations.
dataset has been compiled from all the new investments made in our funds of hedge funds since January 2006, encompassing 58 day 1 / Early Stage investments in the Long/Short Equity, global Macro and Event driven strategies which have been operating for more than 1 year as of the end of April 2012.

How has the first year’s performance of hedge funds evolved before and after the crisis?
for the purpose of this article, we consider two separate periods: the first period runs from January 2006 to July 2008, hence before the industry crisis; and the second period runs from August 2008 to date. The database contains 25 day 1 / Early Stage investments in the first period and 33 in the second period (funds with at least one year of returns, hence which started on or before May 2011). rather than comparing first year absolute returns between the new funds over time, which is difficult to analyze considering the volatility of the last few years, we analyze the over- or under-performance of the new hedge funds against a portfolio of hedge funds. for the purposes of this study, we look at the relative performance of the new hedge funds vs. our flagship fund of hedge funds (prima Capital fund, or “the proxy”) as this is a good proxy for a blended mix of existing and older hedge funds.

The Emerging Managers space is currently in vogue. following the 2008 credit crisis, allocators focused first on the opportunity to invest with previously hard-closed Blue Chip hedge fund managers. now that most of those funds are hard-closed again, investors are taking another look at Emerging Managers. This article looks at the performance of hedge funds in their first year of operations, how it has evolved over time, and whether it can give a good insight into the future success of a fund. we will focus on the small and mid-sized launches (typical day 1 assets under management (“AuM”) of between $20m and $500m), as fundana does not invest in the very large new launches (>$1bn at launch). The

New Managers | Opalesque’s Emerging Manager Monitor - May 2012

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Fundana Series
Table 1 presents the overall relative performance of the new hedge funds vs. the proxy after one year. Day 1 / Early Stage Number of hedge funds positive performance vs. the proxy after 1Y negative performance vs. the proxy after 1Y Pre July 2008 25 18 7 Post July 2008 33 22 11 66% Total funds 58 40 18 69%

ISSUE 05 • May 2012

the hedge funds vs. the proxy after one year. Since the crisis, we have observed that the relative outperformance of the new funds after one year has been much less impressive than those launched pre-crisis.

Ratio of positive funds vs. the 72% proxy after 1Y

Table 1: relative performance of the new hedge funds vs. a proxy after 1Y
it confirms our overall observations that current new launches are as successful now as they were before the crisis at delivering a positive relative performance, as 72% of pre-crisis launches were positive and so were 66% of the post-crisis funds. however, we are mindful of the problems of drawing conclusions from these statistics (firstly, because of the low number of observations and secondly, due to the inherent selection bias implied by an investment with a successful fund made 6-12 months after it launched). in contrast, looking at the details of the relative performance of the new launches after one year, we do see a change in the relative performance of the new managers as shown in figure 1 below. The horizontal axis shows the launch date of the day 1 / Early Stage investments in which we invested, and the vertical axis represents the relative performance of

figure 1: details of the relative performance of the new hedge funds vs. the proxy, one year after they launched.
Aggregating those relative performances in Table 2 below, we see that 8 out of 33 of the post-crisis new launches (approx. 25%) have been successful (defined as >+10% relative performance) after one year, compared to 15 out of 25 of the pre-crisis new launches (approx. 60%).

New Managers | Opalesque’s Emerging Manager Monitor - May 2012

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Fundana Series
Day 1 / Early Stage Number of investments >10% relative performance after 1Y < -10% relative performance after 1Y Pre July 2008 25 15 3 Post July 2008 33 8 2 +4.0% Total funds 58 23 5 +7.3%

ISSUE 05 • May 2012

to build up their portfolio, compared to 2-3 weeks pre-crisis. 2. The increase of start-up costs (mostly linked to the institutionalization of the industry and the increasing compliance and regulatory burden) is discouraging new managers from taking more risk at the start. 3. The increase of backing by large institutional seeders and large institutions is creating a sense of “less short term business risk” mentality for the new managers (through the use of investor level gates for instance). 4. few hedge funds have been strong performers over the last few years, and new hedge funds were not immune to the more difficult trading environment. we have drawn a few conclusions from our experience thus far are:

Average relative performance +11.5% after 1Y

Table 2: relative performance of the new hedge funds vs the proxy before and after the crisis
Consequently, the average relative performance pre-crisis was +11.5%, compared to +4.0% post-crisis. This is the main difference we have observed thus far with the recent new launches.

What are the possible explanations for this pattern of results and what conclusions can we draw based on these results?
Several explanations exist for the change of this return pattern, all of which we have experienced over the last three years. Some are more objective, others are more subjective, but we do think they have played a role in the recent behavior of less outstanding performances from new launches: 1. A more volatile environment has pushed new managers to take longer to build the portfolio to avoid setting off on the wrong foot from the start of their new fund. post-crisis, we often see new managers taking 2-3 months
New Managers | Opalesque’s Emerging Manager Monitor - May 2012

1. Most successful new launches (>+10% relative performance in the first year) have been good or great investments, meaning they have been large positive contributors for our funds of hedge funds. for instance, out of the four successful new launches since January 2010, three managers are already significant holdings as of today, of which two were day 1 investments. 2. however, this early outperformance does not give any indication as to the long term success of the managers. Some of them were good / great for just a couple of years; others generated strong outperformance for five years and more. 3. none of these successful new launches were bad investments (i.e. no large negative contributors to our funds).

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Fundana Series
4. very few flat / negative relative performers during the first year were subsequently strong performers and contributors to our funds of hedge funds. 5. Although we took “increase or out” decisions with our new investments after 12 months of performance before the crisis, we are now typically waiting longer as we understand that the change of the industry with its related costs, as well as current market volatility, have changed the way some managers operate during their first year.

ISSUE 05 • May 2012

Bruno guillemin Senior Analyst - CAiA
www.fundana.ch

Fundana SA
geneva

Bruno Guillemin

New Managers | Opalesque’s Emerging Manager Monitor - May 2012

15

Focus

ISSUE 05 • May 2012

Part I – Attractive but mysterious, Brazil offers potential for serious suitors
The economic crisis in western economies has driven some new hedge fund managers to explore investing in new frontier markets, particularly if they have some experience of those regions. Brazil has proved popular with new hedge fund managers as the first of the famous quintet of emergent economies in the acronym “BriCS”, but it is not at the top of investors’ lists – and neither is the rest of Latin America. furthermore, the local hedge fund industry is healthy but there have been fewer launches in the last few years. Opalesque surveys the landscape.

Investing in Brazil
despite all the advances and evolution of the Brazilian market, Brazil is still considered a “mystery” to some foreign investors, a participant said during Opalesque’s recent Brazil roundtable. Brazil – and LatAm in general - is attractive but still at the bottom of the investment opportunity list. however, there has been more foreign money coming into the Brazilian market than before of late, in ipOs, the Bovespa (Sao paolo’ stock exchange), M&A deals and the private equity space. Economic conditions in Brazil have improved over recent years, with a more attractive interest rate (around 9% - compared with an average of 17% in the last decade), and a 38% public debt to gdp ratio (down from around 60% a few years ago), which is low compared to that of other countries (for example, germany’s is 83% (Eurostat 2010)). investment banks, trading firms, service providers, international investors, foreign exchanges are – slowly but surely – establishing a presence in Brazil, it was said at the roundtable. But Brazil and other Latin American (LatAm) countries are still a very small part of most global portfolios, especially compared to Asia. indeed, most large foreign investors, including institutional investors, who have an allocation into emerging markets will mostly invest in Asia despite the fact that Brazil, has plenty of cheap stocks. Even though the country only has 400 listed companies (100 of which are shells), the roundtable participants said. But more than 30,000 companies could eventually list 16

Participants at the recent Opalesque Roundtable in Brazil
(LEfT TO righT) Mauricio Levi (fAMA investimentos), Eduardo Moreira (plural Capital), Mariano Andrade (polo Capital), raquel gonzalez, Matthias Knab (Opalesque) vassilis vergotis (Eurex), Marcia rothschild (Citi’s Securities and fund Services), Otávio vieira (fides A.M.)

New Managers | Opalesque’s Emerging Manager Monitor - May 2012

Focus
there, apparently. So the region is still in a growing phase, with more foreign investments and more listings on the way.

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“Brazil and other LatAm countries are still a very small part of most global portfolios, especially compared with Asia”
Meanwhile, companies in Brazil are finding it easier to raise money locally; this will have a direct impact on the equities market since they are using debt at much lower rates than they could before, which works as leverage for the equity part of their balance sheet. indeed, the pace of lending in Brazil is accelerating as interest rates and bank spreads are declining, Brazil’s deputy finance Minister nelson Barbosa said on May 8th, according to The wSJ. The benchmark interest rate in Brazil has fallen from 12.5% in August to 9%, and the government has also pushed banks to reduce the spreads they charge for lending. furthermore, Barbosa predicts that gdp should expand at a pace of 5% or 6% in the second half of the year. The financial Times reported that economists forecast that Brazil’s benchmark interest rate, the Selic, could fall to between 7% and 8% after president dilma rousseff changed the rules on the politically sensitive accounts. The government is keen to slash Brazil’s high interest rates to prop up an economy that is still sputtering, said the report – in spite of steps by the central bank to ease monetary policy and a series of measures to support industry. not everybody thinks that is a positive move. The galloway global Emerging Markets fi fund, for example, recently liquidated its position

in Banco BMg, following actions by the Brazilian government to reduce interest rates. The managers of the fund foresee a “hard road ahead, particularly for medium sized banks, as they adapt their business to the new Brazilian banking reality.” This action will likely extend durations of local corporate debt issuance, limiting offshore corporate debt issuance in uS dollars. (See Opalesque article). participants at the Opalesque roundtable, which was sponsored by Citi and Eurex, seemed to have a sunnier view. They said that there is much more liquidity in the country now. The need to finance Brazil’s growth is fuelling the need to create private instruments to raise money. The fixed income market is evolving. furthermore, there are many arbitrage opportunities in local credit markets. however, participants felt that it is not an easy ground for fund managers who want to start a quantitative strategy, as liquidity without large transaction costs is needed for that, as well as a large universe of companies that fits the minimum liquidity pre-requisites. high frequency trading, for example, is reduced to a few dozens stocks. roundtable participants reported that several high frequency trading firms have entered Brazil in the last three years. These firms, participants said, have added liquidity, changed the technology that local exchange and brokerage firms were offering and competed with local market participants. Another problem, common in emerging economies, lies in the few convertibles or CdS that are available and that are not traded constantly. investors in Brazil can only short around 100 stocks and while a typical large cap investor can invest in Brazil from anywhere in the world, they may find that information on small local companies is hard to gain. investors then need to do local checks and for activist investors, participants believe it is much better to use a co-operative approach, as “confrontation does 17

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Focus
not pay off in Brazil.” private equity managers may well find that this activity is expensive and that too few companies are willing to deal and turn instead to more enticing valuations in the small-cap sector. And finally, real estate managers will also find more opportunities in the smaller projects; and could take advantage of the growing middle class, which currently is over half of the population, by investing in consumer projects such as shopping malls. in terms of regulation, in Brazil, hedge funds must report their nAv daily and positions each month; these positions are posted publicly on Comissão de valores Mobiliários (CvM)’s website (Securities and Exchange Commission of Brazil). Also, funds hold liquid positions as investors disapprove of lengthy lock up periods.

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things that look certain may not be certain in Brazil, said Mauricio Levi, the founding partner of fAMA investimentos.

Brazil now
hSBC global Asset Management’s pedro Bastos, who recently spoke at a briefing to investors in Malaysia, touted the health of Brazil, the world’s sixth largest economy (by nominal gdp) and one of the world’s leading commodity exporters, saying that it had been the best performer in the last ten years among emerging markets (both in equities and fixed income). “Companies see Brazil as a major consumer market. we have an increasing middle class, which is about 55% of the population. in the last ten years, personal income growth has been consistent at 4.5 to 5%,” he said. Anthony Johnson, a partner at Alternative Asset Analysis, also at the briefing, explained that the demand from inside Brazil for steel is exceptionally strong as the country is due to host the football world Cup in 2014 – a very important sport in the country – and the Olympics in 2016. in the meantime, the country is also going through some major growth and is improving its infrastructure as a result. “The steel industry needs charcoal and charcoal comes from timbers,” he added. “Brazil has passed laws to try to prevent the industry taking charcoal from forests and, as a result, there is major demand for sustainable produced charcoal.”

“Local hedge funds in Brazil are regulated by the same set of regulations as the local mutual funds.”
participants of the Opalesque Brazil roundtable said that local hedge funds are regulated by the same set of regulations as the local mutual funds, and that corporate governance in onshore funds is better than in offshore funds. furthermore, all pricings are done by an independent administrator, who applies “the same price for the same securities across all the funds from different managers that are under their administration.” Administrators are legally responsible for the funds, and can fire misbehaving managers. Margin requirements are all the same, as they are set by CBLC (the Brazilian clearing and depository corporation) rather than prime brokers. A word of warning from one of the participants: don’t get into a legal fight in Brazil. The experience could be akin to “going through hell.” Even
New Managers | Opalesque’s Emerging Manager Monitor - May 2012

Reputational risk must be investigated
ipanema Capital is a Brazilian fund of funds manager with offices both in rio de Janeiro and new York. pedro henrique Jardim, rio-based COO of 18

Focus
ipanema Capital, and vinita Badlani, new York-based Marketing director, told Opalesque in an interview they are in the process of setting up a maiden fund of funds (fof), which will invest in underlying Brazilian managers and be available to u.S. and non-u.S. investors. The launch is expected for the third quarter of 2012. Jardim founded an asset allocation company in Brazil in 2008 called doral investimentos, which focuses on the Brazilian equity, credit and hedge fund industry. ipanema, which was launched a year ago, is based on the same business and allocation model. ipanema also currently manages separately managed accounts and tactical allocations for non-u.S. investors. The strategies invested in include Equity Long Only, Equity hedge, Quantitative, high Yield fixed income, Macro, Arbitrage, Small and Mid Caps. The firm does have a focus on new managers, but does not as yet offer a seeding facility. To source new entrants, Jardim closely monitors the Brazilian hedge fund industry through a tight network. That process is supported by his presence on the ground and an in-house database. Vinita Badlani when looking at new managers, reputational risk is the first thing that the firm assesses. Then it looks at the qualitative aspect.

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“we strongly emphasize the qualitative aspect of the managers, because … a portfolio manager can provide good numbers, but that does not mean that they have a good operational due diligence -- like an operational process or risk process in place,” Badlani explains. On the domestic side, fees are negotiated with the asset managers and Brazilian clients do not pay any fees.

“in Brazil, the asset management industry is at a very early stage of understanding the international market.”
when asked about the challenges that new managers are facing in Brazil, Jardim says that on the operational side, the main challenge is achieving a break-even financial position, which depends on the size of the team at the firm. On the regulatory side, he echoes what was said at the roundtable. “we believe, in Brazil, the asset management industry is at a very early stage of understanding the international market. There are a lot of things to be done relating with the legal side…” he notes. But on the domestic front, hedge funds are very well regulated “and it is a mature industry from that perspective,” Badlani adds. ipanema has seen about 578 hedge fund launches in Brazil since post2008. Enough to keep a fof house busy.

Pedro Henrique Jardim

If you know the region, it is relatively easy to set up a fund
London-based asset manager Sagil Capital was founded in August 2008

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Focus
to take advantage of investment opportunities in Latin America. The team, which has been looking at the LatAm market since 2003, spun out of a proprietary trading desk of rand Merchant Bank and was backed by the bank, and by weston Capital. They run the Sagil Latin American Opportunities fund, featured in Opalesque Solutions’ Emerging Managers database. it is up 8.7% YTd (to end-April) and manages $50m. its investment strategy is described as “fundamental long/short”.

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Adrian Landgrebe

According to Landgrebe, the region saw a “massive ipO boom” in 200607, which changed the structure of the local markets. Brazil has come out of its commodities focus to gain a “much greater breadth and variety of equity opportunities.” political risks change regularly too – Argentina being one of the highest risks at the moment (the fund has zero exposure to the country, despite its many good investment opportunities).

The current government involvement with the economy in Brazil means that one should not only look at fundamentals. “we have seen certain sectors particularly banks, petrobras, [and] potentially some of the mining companies coming under a bit of pressure in terms of government interventions”, he explains. “But we are seeing the government actively taking a role in trying to devalue the currency to help manufacturing, to specifically lower taxes on certain industries.”

Sagil Latin American Opportunities fund – performance since July-09 inception.
“we focus only on Latin America, but we focus on the stocks both those listed in the region as well as those listed out of the region with significant exposure to the region,” Adrian Landgrebe, portfolio manager and CEO of Sagil, told Opalesque in an interview. The fund is also geared for the high volatility that is expected in LatAm, by hedging currency exposures.

“The greater constraint about investing in the region is liquidity.”
it is possible for just about anyone to set-up an account in these markets, he says, although there are restrictions in Colombia, and lengthy checks in Brazil. Landgrebe also cites the need to understand local tax systems. “The greater constraint about investing in the region is liquidity… this is particularly a concern for some of the Andean countries. for instance, 20

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Focus
if you are looking at a country like peru, there are not really more than ten companies that one can invest in with a decent amount of liquidity, and their fund sizes are very high. it almost renders these markets’ uninvestable for people who require liquidity in terms of their investment mandates.”

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The fund also features in Opalesque Solutions’ Emerging Managers database. it is up 15.93% YTd (to end-April) and manages BrL 55.8m (uS$27.9m). Since its december 2010 inception, it has returned 17% - faring better than the ibovespa at -10.8%, but with the same level of volatility (23%). The ibovespa, Brazil’s stocks index, is currently at around 55,887, but lost 3.36% YTd (as at May 16th) – no doubt on worries about the European debt crisis. But in the longer term, the index gained around 291% in the last 12 years. Bernardo werther Araujo, the founder of Marlin, told Opalesque in an interview that the long-biased fund is highly concentrated, with around 1013 investments.

Opportunities in specific industries
founded in September 2010, Marlin investimentos is an asset management company based in rio that manages the Blue Marlin fiC fiA, an investment fund incorporated in Brazil. relying on proprietary fundamental research, the fund seeks to outperform the ibovespa index by investing in equity instruments issued by companies listed on the Bovespa. it does not invest, however, in large caps such as petrobas and itaú.

“The technology industry, the service industry and companies that are restructuring will be in the spotlight in the next ten years.”
Araujo is currently looking at projects involving mining, iron ore and infrastructure. he also believes the technology industry, the service industry and companies that are restructuring will be in the spotlight in Brazil in the next ten years. “we like to get involved with the technology industry in Brazil. we have a large investment in the fund in a company called ideiasnet, of which i am part of the board. we believe that technology in Brazil, with projects such as MMXM11, will lead to creation of wealth in the next 10 to 15 years; especially because technology’s penetration in Brazil has been too low when you compare it to the rest of the Latin world.”

Blue Marlin fiC fiA, performance since dec-10 inception

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Focus
All in all, Marlin’s managers believe that there is a lot of hidden value to be shown in the market in the next 12 to18 months. piMCO, the world’s largest bond managers, itself sees Brazil as a long term proposition. The group believes several key corporate sectors – oil, gas, utilities, infrastructure and major banks – will dominate the outlook for Brazil over a secular horizon thanks to stronger pricing power and improved profitability. Though Brazil faces potentially rising inflation and a strengthening currency, piMCO thinks its robust corporate sector continues to offer attractive opportunities over the longer term. The Brazilian economy, one of the fastest-growing major economies in the world (now 6th), has been predicted by some to become one of the five largest in the world in the decades to come – which is something Marlin’s managers, piMCO’s and others seem to bet on. So here we have a land that really fits long-term investors. This is probably why they are not coming in droves.

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- Benedicte gravrand

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Focus Part II – LatAm statistics
According to Eurekahedge, the Singapore-based hedge fund data provider, most of the 283 LatAm onshore funds are run from Brazil (265). There are five funds that are managed from Argentina, four in Mexico, four in uruguay, three in Columbia, and two in Chile. Brazil is the top head office location for LatAm firms with more than 250 firms managing total assets of over $25 billion from Brazil - primarily Sao paulo and rio de Janeiro. in 2010, highbridge Capital purchased a large stake in gavea investimentos and Brevan howard also set up an office in the city.

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London is the offshore destination of choice for LatAm hedge funds. Of the 257 funds that are managed from offshore locations on Eurekahedge’s database, most are managed from the u.K. (83) and then from the u.S. (66). This is followed by france (11), Luxembourg (10), Bermuda (6), Bahamas (4), Caymans (4), Canada (2), Curacao (2), norway (2) and others (7). More recently the LatAm hedge fund industry went through a downturn in the wake of the global financial crisis but managed to avoid losses on the scale of other regions and swiftly recovered, says Eurekahedge’s recent report on key trends in Latin American hedge funds. while the average hedge fund lost 10.34% in 2008, LatAm hedge funds were down only 5.28% during the year. The Eurekahedge Latin American Onshore hedge fund index has annualised 18.30% (est.) since January 2000, and the Eurekahedge Latin American Offshore hedge fund index almost 10% (est.) – as of May 16th, 2012. The overall Eurekahedge Latin American hedge fund index is up 6% (est.) YTd (annualising 16% since 2000). And the Eurekahedge Emerging Markets hedge fund index is up 5.6% (est.) YTd (annualising 14% since 2000). Comparatively, the dow Jones Latin America TSM index is up 10% YTd (as at 30th April, 2012), and up almost 22% in the last ten years. The dow Jones Emerging Markets TSM index did better with 12.6% YTd (but less in the last ten years with 17%).

Source: Eurekahedge

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Focus
“The Eurekahedge Latin American hedge fund index is up around 6% YTd (annualising 16% since 2000)”
Strategy Multi-Strategy Long Short Equities Fixed Income Macro Arbitrage Event Driven Others Number of funds Annualised returns since 2000* 180 131 54 48 20 15 30 16.86% 14.93% 13.83% 15.35% 14.30% 11.60% 17.20%

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hundred in 2000 to 480 as at end-March 2012, while AuM increased from uS$2.7 billion to $58.9 billion in the same time period, says Eurekahedge. And although assets declined to $39.3 billion by March 2009, the total size of the industry recovered quickly to reach their historical peak of $64.2 billion by April 2011.

*Based on 78.53% of funds which have reported Apr-2012 returns

79 new funds were launched in 2007, and 57 in 2008. The numbers dwindled somewhat after that; 39 in 2009, 38 in 2010, 13 in 2011 and one so far this year.

As can be seen from the table below, the favourite strategies for LatAm hedge funds are Multi-Strategy and Long/short Equity, followed by fixed income and Macro. The best performers since 2000 are Multi-Strategy (16.8% annualised) and Macro (15.3% annualised). All other strategies are not far behind, having annualised between 11% and almost 15%. Source: Eurekahedge Over the last 12 years the number of managers increased from just over a

Source: Eurekahedge

- Benedicte gravrand

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47N Series Younger managers need a certain type of director
47 degrees north Capital Management is a specialist alternative investment firm, and a pioneer in early-stage hedge fund investing. it was selected as one of three successful candidates out of 97 applicants to manage the emerging hedge fund managers program at CalpErS. 47n is a leading proponent of corporate governance in the hedge fund industry; so the objective of this series of articles is to discuss and inform on current corporate governance issues.

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corporate governance principles get such little attention as the second of these – control of assets – or at least not until it’s too late. in the midst of the credit crunch in 2008 a lot of lessons were learned (again) – one of these is the importance for investors to have control over their investments when push comes to shove. Many managers seem to take a proprietary view of their fund’s assets but they should be under no illusion as to who ultimately controls them. The primary lever shareholders can use to retain such control is, of course, the board of directors. when you specialize in early-stage managers as we do at 47n, one significant task is to install and maintain effective oversight. This is more important for early-stage than for established managers who, by definition, have more developed processes and organizational experience. Younger managers therefore need a certain type of director; knowledgeable about the fund’s investments, well versed in legal and corporate governance issues but also flexible and cost efficient. Add to these, strongmindedness and independence and you have the essential attributes to represent shareholders and provide for proper control over assets when necessary. The two attributes, investment knowledge and independence, are inextricably linked; if a director doesn’t have sufficient strategy knowledge then the manager will lead him around by the nose and a pattern of uninformed deference emerges – no matter how independent he may appear. The problem arises that when a manager is first starting out, their priority is to keep costs low and go for the cheapest option when it comes to selecting directors. however, looking at the headline cost of a director 25

The old joke about the consultant who goes to heaven complaining there must be some mistake – he is far too young to be there – only to be met by the response that, according to the hours he’s billed his clients, he is 104 years old. Change “consultant” to “professional fund director” and “hours billed” to “number of boards sat on” and you capture the current controversy surrounding firms in the business of supplying Fraser McKenzie directors to hedge funds. The difficulty of diligently carrying out corporate governance duties while sitting on so many boards (some individuals sit on hundreds of boards) is not hard to imagine – especially when complicated strategies are involved or when difficult issues arise. 47n considers three “pillars” of corporate governance before investing; alignment of interest, control of assets and transparency. few important
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47N Series
can be misleading when it emerges that, just like with budget airlines, all “extras” are charged for. Bills can add up fast and make the “cheap” option look more like the deluxe option. in terms of director ability, the cheap option is often “jack-of-all-trades-master-of-none” and when issues become too hairy, shareholders are placed in the hands of expensive lawyers. insult is added to injury when the low-cost, low-quality directors’ incompetence is covered up by high-cost lawyers paid for out of shareholders’ money. while there are certainly professional fund directors who provide good value-for-money, the cheap option can be the wrong option. Look for a director who understands the strategy and can therefore remain an independent thinker, is flexible and prepared to communicate reasonably with shareholders (will he answer questions from potential investors doing due diligence?) and will not nail you with expensive extras. finally, of course, make sure he is not 104 years old. - Fraser McKenzie, Managing partner, 47 degrees north, pfäffikon, Switzerland www.47n.com

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26

Q&A

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Topwater: A risk-based managed account platform can remove a lot of the business risk
Bryan d. Borgia, principal, at Topwater Capital partners LLC, an investment manager based in South norwalk, CT, contracts managers to run capital on managed accounts. Those managed accounts, which are “risk-based,” go on a platform, while Topwater takes care of the setting up and the paperwork. As the environment for new fund managers is harsher, Bryan D. Borgia many are happy to find a home in a platform, and so Topwater benefits from that. furthermore, some of the portfolio managers are simply not as good managing a business as they are at running money, Borgia said in an Opalesque Tv interview last year. Even if most of them are seasoned individuals, they usually are specialized in the money management side. Topwater is not a traditional seeder. “we are lumped into the seeding bucket because we can be a fist mover,” he explained. Besides, he added, Topwater’s model is very clean, as the firm only makes money when the managers make money. Borgia said in a more recent interview for new Managers that it is not necessarily the case that smaller and newer managers outperform the large ones (even initially), and that managed accounts are a luxury. read all about it here: Opalesque: please remind us what a risk-based managed account
New Managers | Opalesque’s Emerging Manager Monitor - May 2012

platform consists of. Bryan Borgia: it is a fund that is set-up very much like multi-strat hedge fund, whereby you are allocating to a series of managers with different strategies. in our program, allocations are made via a separately managed account. These managed accounts have unique economics, whereby the portfolio manager participates in the account by investing a percentage of risk capital in return for a higher than normal industry pay-off. Q: You are not a typical seeder: you do not take a revenue share or an equity share, and you do not bet on the underlying fund manager becoming big. Bryan Borgia: we do not take a revenue share or an equity stake in the managers’ business. from our standpoint, we do not have any direct economic benefit if a manager grows his business. with that said, i am incentivized to help my managers grow and we will help them on that front and at times, make direct allocations to their hedge fund. The reason i like to help them is you inherently have some business risk with some of the smaller managers, and it is important that they reach some level of critical mass to keep their business sustainable. with respect to our revenues though, they come simply from the p&L produced by our managers. Q: now, what about your selection criteria? 27

Q&A
Bryan Borgia: This is not easy. we have been running this program for over ten years now and a lot of it comes from experience; i think you are constantly learning from good experiences and bad. Travis and i, who founded the firm in 2002, do all the decision-making with respect to who gets into the portfolio. we have a research staff, but we ultimately are the ones who choose the managers.

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Others already have a very established business and run well over $1 billion. As such, our ticket size is very varied as well. Q: That is your trend at the moment? Bryan Borgia: right. Q: have you actually invested in managers who have nothing to start, no assets? Bryan Borgia: we will allocate to managers that have nothing under management. Q: Are you seeing inefficiencies within the new-and-small-manager universe that are created by those investors who focus on established hedge funds? Bryan Borgia: There is some inefficiency.

“The hedge fund space has shifted to an environment that requires you to have a great portfolio manager (pM) as well as a great business team, i.e. a CfO, a CCO, infrastructure, etc. i do not think you can boot-strap it any more strictly on the heels of a great pM.”
however, what is unique about our program is we focus solely on the pM side of the business, as our structure has effectively removed a lot of the business risk. with that respect, i think our program does benefit certain pMs, the ones that still may want to operate as the proverbial “two men and a Bloomberg” set-up. Q: do you have such pMs in your platform? Bryan Borgia: we do. Q: when you allocate, how much do fund managers typically already run and what is your typical ticket size? Bryan Borgia: There is a massive variance here. with some of the managers we may be day-one capital or all of the money that they run.

“i still think there are some great portfolio managers out there who have niche capacityconstrained strategies, who are being overlooked by the large allocators.”
The nature of having a capacity-constrained strategy inherently means you are likely not going to have the gross management fees that allow you to build an infrastructure like the very large established managers. And rightfully so, the very large allocators require that infrastructure. That said, as a blanket statement, small managers outperform large 28

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Q&A
managers; i am not convinced. Just because you are small does not mean you are good. There are plenty of very large funds with unbelievable longterm performance and vice versa. i think the largest beneficiaries of this current dynamic, large investing in large funds, are the multi-strategy firms that continue to scoop up a lot of new pM talent. Q: Such as yours. from several investors?

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Bryan Borgia: it is from our fund and our fund is comprised of several investors. Q: So your fund is not to be confused with the platform. Bryan Borgia: right. This is not set-up like a Lyxor or Alpha Matrix.

Bryan Borgia: Such as ours, yes. Q: it is quite fashionable nowadays to say that new managers initially outperform their more established peers and you do not agree with that? Bryan Borgia: i am not saying that i disagree with it. The larger managers amount probably to less than 100, and there are over 6,000 smaller managers. So, you are talking about two distinctly different groups even as it relates to numbers. ultimately, there are some great small managers, but they are just great managers and they happen to be small and they are a lot harder to find. Q: Your managed accounts on your platform, are they comingled or are they accounts of one? Bryan Borgia: we have a pool of investors that invest in one entity, our main entity and then we create specific separately managed accounts for every pM that we add to the portfolio. So, we have a series of accounts across a number of brokers on the street. Then as it relates to our business, the bulk of our infrastructure is centered on the operational setup of these accounts as well as the 24x6 real-time risk monitoring. Q: The money that will come into each separate account will be money
New Managers | Opalesque’s Emerging Manager Monitor - May 2012

Q: in the last issue of New Managers, our feature on managed accounts said that managed accounts are gaining in popularity especially among large and experienced institutional investors. what have you observed? Bryan Borgia: i think that is the case. it is less than some people would have expected post 2008. Managed accounts are the right set-up for the right investor; investors need to dedicate a serious amount of resource and energy to putting in place the infrastructure that makes investing in managed accounts valuable. The large experienced institutional investors typically have that infrastructure. what the managed account really does is it allows those allocators to bypass the whole series of due diligence. it removes a lot of issues from allocating directly in a fund, even simple things like cash control, style drift, fraud, transparency all the main ones.

“The large allocators, they can write the big tickets; the managed account is a luxury.”
- Benedicte gravrand
29

Seeders’ Corner
newAlpha Asset Management was established in 2003 to provide institutional investors access to emerging alternative investment managers through dedicated funds of funds. newAlpha is a subsidiary of Ofi Asset Management, which manages around €48bn. Since inception, paris-based newAlpha has concluded 17 strategic partnerships and invested a combined total of over $720m with early stage managers located throughout the world. The latest “generation” of managers seeded by newAlpha since 2008 currently manages more than $2.4bn after receiving $250m in seed capital. The award-winning firm has been pretty busy over the past year. it invested in Blue rice investment Management (BriM)’s Asian Credit fund in May 2011. it made its 16th strategic investment with pAMLi Capital Management LLC, a new York-based hedge fund management firm focused on global credit investments in June 2011. That same month, newAlpha and Singapore-based alternative Antoine Rolland investment manager woori Absolute partners together said they would launch an Asia-based investment vehicle which would seed emerging hedge fund managers and be marketed to qualified investors in Asia and Europe. in november 2011, newAlpha made its 17th strategic investment with heieck Siebrecht Capital Advisors (hSCA) Ag, a Zürich-based hedge fund management firm focused on german equities.

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NewAlpha: Emerging manager ‘asset class’ is gaining traction
in July 2011, finance innovation, a paris-based research group dedicated to financial services, said it would launch the first seed money fund, called EMErgEnCE, to focus on young asset management companies in france. The first investment tranche focusing on absolute return managers was assigned to newAlpha. EMErgEnCE launched in early 2012 with the backing of seven major french institutional investors. newAlpha’s CEO Antoine rolland told Opalesque in an interview in April that he was seeing more and more people who are interested in new managers. “it is clearly a trend,” he added. “More investors are staring to include allocations to new managers, either through emerging managers programs or through seeding programs. This ‘asset class’, for lack of a better term, is gaining more traction.” rolland said he expects there will be three or four new seeding deals done in the next few months. “i am surprised at the sheer number of proposals coming our way,” he noted. “we analysed around 75 projects in the last six months, and will start allocating at the end of April to between four and six managers between $35m and $50m each. not all funds are hedge funds; rather they are funds that produce uncorrelated returns, and include uCiTS compliant funds as well as Sifs.” newAlpha’s Asia project is still going on; the firm is finalising the prospectus of its new fund of funds, which will launch in h2-2012. The

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Seeders’ Corner
partnership with woori bank is in place and newAlpha is starting to look at potential candidates now. “we will only invest in Asia-based fund managers. we think that more and more money will be managed out of Asia in the future,” he explained. newAlpha currently manages four seeding funds of funds. he divulged that Emergence had just closed its first deal of $160m and would soon make a second close of $200m. EMErgEnCE announced its first seeding partnership with Eiffel investment group, through its compartment Emergence performance Absolue, on May 3rd. The fund will invest approximately $40m in the Eiffel Credit Opportunities fund, a discretionary long short European credit fund that has returned 17% since its december 2011 inception. “Emergence is a fund that seeks to find future talents in the french hedge fund industry,” rolland told Opalesque this month. “There is a lot of talent in Eiffel’s team; we think they will be able to outperform due to their superior knowledge of the credit markets and their ability to deal with different market environments. They already manage €35m ($44.3m) so our input will help them reach $100m in AuM; a critical size that will allow accelerated growth. we think there are many opportunities on the European credit market; the banking sector’s withdrawal from the credit market has naturally created opportunities.” next investment is due next month, he added. This company is not resting.

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• Name: newAlpha Asset Management • Headquarters: paris, france • Other offices: • Established in: 2003 • Type: seeding partnerships and investment funds • Core offering: 4 funds of funds • Other offerings: Manager selection advisory services • Total AuM: $720 million in cumulative seeding investments • How many funds seeded so far: 17 • How many more (expected): three or four new seeding deals in the next few months • Strategies / geographies: All, with focus on france and Asia • Terms / length of investments: variable • Contact: www.newalpha.net/contacter_newalpha_uk.php • Website: www.newalpha.net

(note: Opalesque Tv did a video interview of Mr. rolland last summer.)

- Benedicte gravrand
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Servicers’ Spot

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Citco: Administrators can help hedge funds face today’s rapid evolution
According to Citco’s latest industry Spotlight, a new quarterly newsletter from the financial services firm, administrators can in fact “facilitate the rapid evolution” of the alternatives sector - as indeed investors and regulators are driving that rapid evolution by demanding access to more data, among other things. So how can administrators help hedge funds? here are some of the points listed by william Keunen, global prepare for fATCA compliance. Citco has set up a dedicated regulatory reporting team to address the increasing demand from regulators. 4. good corporate governance is now de rigueur. Service providers, including Citco, can help implement it.

An evolving relationship between administrators and funds
According to Oliver Scully, Managing director of Citco fund Services in London, the fundamental relationship between the administrator and the funds has not necessarily changed over the last few years. however, those funds that were traditionally self-administered had to appoint a third-party independent administrator after the financial collapses of 2008 and the Madoff scandal. A lot of them start by asking the minimum that one can ask of an administrator: the production of an independent nAv. But many are now starting to see that administrators can add value and are thinking about moving “from internal operations to a third party outsourced relationship.” This is becoming more apparent with “the additional regulatory reporting and transparency reporting, as well as reporting demands from investors,” Scully told Opalesque in an interview. “A lot of managers come to the likes of Citco and look at what additional aspects of their daily operation they can outsource to a third party,” he explains. “in other words, to make use of our scalability; and the benefits 32

Oliver Scully director, at Citco fund Services:

1. As investors want independently generated data, they will rely on administrators to provide transparency. The OpErA initiative, which Citco is part of, is a step towards creating reliable data that can be aggregated meaningfully. 2. As new regulatory and tax compliance requirements will be expensive, fund managers will look for creative ways to reduce or deflect costs, exploring technology and operations outsourcing opportunities, even staff ‘lift-outs’. This is where service providers come in. 3. As the hedge fund industry is gearing itself for more regulations, Citco can help managers deliver form pf to the SEC, form SLT, offer valuation and depositary services for compliance with the AifMd and help to
New Managers | Opalesque’s Emerging Manager Monitor - May 2012

Servicers’ Spot
of scale are to essentially retain the same level of control by outsourcing some of the functions to reduce cost.” But for those funds which were already working with independent administrators, the relationship, he says, evolved as the operational bar was set higher.

ISSUE 05 • May 2012

and for different fund structures. new fund managers, for example, should be ready to start off with managed accounts, alongside their fully-fledge funds. “we are also seeing pressure on fees,” he concludes. “if they are going to take anchor, investors or indeed seed investors, new fund managers will probably have to accept that there will be different fee agreements, and potentially different share classes that they will have to agree to at the outset.”

A word for the start-ups
Since the standard of operations has risen dramatically, “start-ups need to be prepared even before they start having conversations with investors,” Scully notes. “They need to be prepared to put in place a very high level of operational infrastructure. They need to have invested in the right people as well. Even if they outsource some processes to third parties such as Citco, they are not outsourcing responsibility.”

- Benedicte gravrand
• Name: Citco fund Services • Headquarters: 20 strategic centers globally, including own processing centers in halifax and Singapore. • Established in: 1969

“Start-ups need to be prepared even before they start having conversations with investors.”
investors now expect new funds to include some high-pedigree managers, but also back office and support staff. And administrators, according to Scully, also look for “first class experienced COOs, CfOs and operational staff in the funds as well.” “we can take on a lot of the operational burden for our clients, but fundamentally we want to see clients that are going to grow in assets,” he adds. As indeed, a badly operated fund will attract little capital and may even close down. whereas, a well-staffed fund will more likely attract capital, and also understand the functions of administrators better. which makes administrators’ lives a lot easier. Scully is also seeing a trend that he believes start-ups should take into account: there will be more requirements for different ways of investing
New Managers | Opalesque’s Emerging Manager Monitor - May 2012

• Core service offering: fund accounting, net asset value calculations, middle office and collateral services, investor relations services, antimoney laundering compliance, corporate and legal services, transparency and risk reporting, and various other ad-hoc services such as investor nAv disclosure letter, forms pf and SLT reporting, OpErA reporting, tax reporting and financial statement preparation. • Supporting: 600+ clients and 2,000+ funds • AUA (assets under administration): $660bn • Contact: www.citco.com/contact • Website: www.citco.com 33

Launches
Launch activity has remained strong in 2012 with more than 150 funds launched worldwide as at the end of April 2012, data provider Eurekahedge said.

ISSUE 05 • May 2012

Business School graduate, plans to launch his first hedge fund, a long/ short equity offering, in July with $50m. 7. Kevin Mcgoey and Yi Cen, two former QvT financial principals, who were founder members when the activist hedge fund span out of deutsche Bank’s prop desk in 2004, will launch a new event driven fund in Q3, called Lees hill Capital Management.

We recently heard of the following ex-hedge funders striking out on their own:
1. Kelvin woo and Joe Zhang are leaving gLg partners inc., the Londonbased hedge fund bought by Man group plc in 2010, to set up their own Asia-focused macro hedge fund. 2. Steve pei, a former executive at $17.4bn Canyon Capital Advisors, secured a $25m seed deal from Q investments to launch a multi strategy hedge fund firm, gratia Capital, in Los Angeles. 3. As the Centaurus Energy Master fund is unwinding positions and returning money to investors, former Trader Bill perkins may be starting an energy focused fund specializing in trading natural gas, called Skylar Capital Management: the launch would be on July 1 in houston. 4. Three experienced hedge fund executives who used to work at Eos and Alden Capital launched a new hedge fund firm that will focus on investing in global credit opportunities, with an emphasis on Europe: Eli Combs, Matt Meehan and Jim plohg formed MeehanCombs Lp. global placement agent park hill group later said they would represent MeehanCombs. 5. Alp Ercil, the former Asia head of perry Capital, raised $440m for a private-equity style hedge fund that will focus on distressed investment opportunities in credit and equities in the Asia-pacific. 6. nate Singer, the former farallon Capital analyst and recent harvard

Former bankers starting new funds:
8. william Lee, who led JpMorgan Chase & Co.’s Asia-pacific equity derivatives business, plans to start his own hedge fund this year that will exploit mispricing in the region’s derivative markets and broad economic trends. 9. ryo ishiyama, a former deutsche Securities banker, will start a hedge fund with 300 million yen ($3.8 million), investing in global commodities futures as early as July after a 20-fold gain in his own investments. ishiyama set up Tokyo-based Steinberg Capital Co. in October 2011. 10. Arthur roulac, formerly of nomura Securities international, is preparing to launch new York-based investment manager Three Court this quarter, with $20m for a distressed debt hedge fund. dublin hill Capital, the investment firm co-founded by richard ruzika, former chief of goldman Sachs group inc.’s special situations group, suspended plans to start a hedge fund after ruzika suffered a stroke. it was meant to launch in Q2.

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Launches
New seeding ventures and platforms:
11. Larch Lane Advisors launched a fund of funds that will invest in the “founders shares” of early stage hedge fund managers with track records of less than three years and managing less than $400m in assets, Mark Jurish, the firm’s CEO and CiO, said in an interview with pionline.com.

ISSUE 05 • May 2012

- Benedicte gravrand

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Perspectives
Not Alfred Winslow Jones?
new managers take note. The history of the industry is being revised. “Ben[jamin] graham managed a hedge fund in the mid-1920s,” warren Buffett wrote in a letter to the Museum of American finance, according to Bloomberg. “it involved a partnership structure, a percentage-of-profits compensation arrangement for Ben as a general partner, a number of limited partners and a variety of long and short positions.” So it may not be Alfred winslow Jones who launched the first hedge fund in 1949 after all.

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$5bn is the magic number for hedge fund success
According to some, $100m, let alone $20m, is far from enough. Capital inflows continue to go to bigger brand name funds, despite data showing that emerging managers tend to outperform larger, more risk averse funds according to participants speaking on hedge fund allocations at the recent SALT Conference in Las vegas. “This type of allocation shows a lack of conviction among investors,” said Kenneth heinz, president of hedge fund research of the trend. he notes that investors are more focused on potential losses than potential returns in spite of some shorter term losses. “$5bn is really the magic number for a fund to attract strong capital inflows. it improves investor confidence to see those numbers,” said ingrid pierce, partner at walkers, head of Cayman investment funds group. (See Opalesque Exclusive here)

New managers may be facing a perfect storm of obstacles
here are some cheerful views to share along. A volatile global economy, political uncertainty in the uS and abroad, and an ever expanding list of regulations is creating a ‘perfect storm’ of obstacles for new managers looking to launch funds, according to richard heller, partner at uS law firm Thompson hine and director of the hedge fund Association. The size of new launches is shrinking and new managers are finding a very difficult capital raising environment regardless of their pedigree, conditions which are having a chilling effect on new fund launches and the industry at large. This trend is likely to affect the industry for the foreseeable future despite new allowances like those passed with the JOBS Act. “is it too much regulation? i would say yes. it’s about politics,” heller said. (See Opalesque Exclusive here).

Smaller to medium sized hedge funds have an advantage
On the other hand, Christopher fawcett, senior partner at fauchier partners, told attendees of the guernsey fund forum in London that demand for funds under $10bn was driven by investors pursuing funds with a high ratio of skilled people to capital, while acknowledging that smaller funds have the ability to take advantage of opportunities that are too minor for the larger ones, reports hfMweek.com.

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Perspectives
Strong flows into recent high-profile start-ups
hedge funds starting up during Q1-2012 may have had more success raising day one assets than those launching last year, according to data compiled by revere Capital Advisors, a London and new York-based emerging manager specialist. Big-name launches including Stone Milliner and Encompass Capital for example had strong investor backing, reports hfMweek.com.

ISSUE 05 • May 2012

and are not viable candidates for a new manager or fund. And failing to verify that a name is “free to use” for trademark purposes can be a surprising and expensive mistake. Schulte roth & Zabel dispense advice.

Proliferation of seeders and separate accounts
According to rothstein Kass’ sixth annual survey of the hedge fund industry, one issue that is striking is that separate accounts are gaining ground and now nearly equal the number of offshore products. furthermore, more than half of the funds polled would consider creating a separate account for investors who’d put in $50m or more. The survey, out in April, was conducted in January 2012 among 400 hedge fund firms, representing more than 770 vehicles, and based primarily in the u.S. The survey also noted, among other things, that there are still less emerging hedge funds than there were prior to 2008; pre-2008 was a boom period for a young and carefree industry. no longer. At the same tine, almost 80% of respondents believe seeding is critical to a successful launch this year. rothstein Kass has seen a proliferation of seeders and early-stage allocators within the last 12 to 18 months. Meredith Jones, director at rothstein Kass expects this to continue, as emerging managers are a good source of alpha, which investors seek, and are more dependent on seed capital. “in fact, we expect the industry to find more ways to get institutional capital to emerging funds, perhaps through separate account platforms or through dedicated funds of hedge funds vehicles,” she writes in the report. nearly half of those surveyed think 2012 will be a struggle but also believe that this year will see more fund launches than last year. (full article).

A second wave of outsourcing has begun
And don’t forget your outsourcing options. According to State Street’s latest vision report, breath and quality of product is only half the battle. fund Managers must also have efficient operating models and lean cost structures, otherwise administrative and reporting tasks may become overwhelming, and the cost of production too great in a world where pressure on fees is relentless. As asset managers reassess their current approaches, a second wave of outsourcing has begun that may establish a new paradigm for the sector.

What’s in a name?
Are you trying to choose a name for your brand new hedge fund firm? here is some advice. According to international law firm Schulte roth & Zabel, selecting a name for a new management company or fund which has not been previously claimed is increasingly difficult. Many of the obvious names (e.g., of trees, birds, constellations and mythological entities) are already taken. Other seemingly promising names, although no longer in use, have been tarnished by their past use (whether due to scandal or poor performance)
New Managers | Opalesque’s Emerging Manager Monitor - May 2012

- Benedicte gravrand
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Profiles Author of “Jackass Investing” employs the multi-strategy systematic model he preaches
Mike dever has been a trader and an investor for more than 30 years. Last year, he published a book on investing, which professional title is “Exploiting the myths: profiting from wall Street’s misguided beliefs”, and popular title is “Jackass investing: don’t do it. profit from it” (an Amazon Kindle #1 best-seller in the mutual fund and futures categories.) According to Amazon, Mr. dever was driven to write “Jackass investing” after seeing the fever instilled in people at the peak of Michael Dever the last great u.S. stock market bubble, in 1999. But writing the book took a back seat until the financial crisis of 2008 demanded its completion. “The book exposes 20 common investment myths,” he told Opalesque in an interview, “which i go through and explain why people believe them to be true, but why they are actually a myth. Then we give them specific actions they can take to exploit each myth.”

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rate, stock index, metals, energy and agricultural cash, futures and options markets. Brandywine’s investment philosophy is based on the belief that the most consistent and persistent investment returns across a variety of market environments are best achieved by combining multiple uncorrelated trading strategies (each designed to profit from a logical, distinct “return driver”) into a truly diversified investment portfolio.

Brandywine’s Symphony program – performance since July-11 inception
Today, Mr. dever, who lives near philadelphia, pA, is a “re-emerging” fund manager. he devotes his time to running his new asset management company, Brandywine Asset Management, which follows his return driver-based methodology to trade broadly diversified portfolios in the global currency, interest he launched his new fund, a CTA called Brandywine Symphony program, in July 2011. The fund is featured in Opalesque Solutions’ Emerging Managers database. it has returned around 7% since inception, is flat YTd and manages $16.85m. The

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Profiles
name “Symphony” comes from the multitude of strategies used in the fund to form “one cohesive program.” The name Brandywine comes from the area dever lives in (Thornton, pA), where the Brandywine river goes through. “Although we are full systematic in how we trade – because we want everything to be quantitative and be able to be back-tested properly – we employ dozens of different trading strategies that are each looking at different return drivers,” he explains. “i wrote about this in the book i published last year: return drivers are that core underlying reason that a market is going to move up or down; there are a lot of different reasons, but you can isolate the individual one, and at different points in time they may dominate.” Brandywine, for example, has dozens of different return drivers that he created and back–tested, and then combined into trading strategies. The manager systematically trades each of those strategies individually on a day-to-day basis and the aggregate of their performance rolls up into the overall program performance.

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years. You still have, i believe, and will continue to have this coming out of equities and people will still be having a negative feel for the rest of this decade as the market meanders, even though we might have earnings growth.” he thinks that people need to start looking at individual return drivers and taking “more of a rifle approach” to selecting what they need to invest in to make money – an area where CTAs excel.

- Benedicte gravrand

The fund can be found in Opalesque Solutions’ Emerging Managers database, which is available to Opalesque’ subscribers (you can subscribe here: Source). if you want your fund to be in the Emerging Managers database, please send your fund details to Opalesque’s database team: db@opalesque.com.

“You still have, i believe, and will continue to have this coming out of equities and people will still be having a negative feel for the rest of this decade as the market meanders, even though we might have earnings growth.”
dever believes the environment will be conducive for CTAs to shine during the reminder of the decade. Money will not be coming from fixed income. So stock markets will be a single return driver. “The stock markets are driven by investor enthusiasm, primarily in periods of less than 20 years,” he says. “it is really the changes in the pE ratio that drives stock prices, far more than even earnings growth in the short-term, which is up to 20 39

New Managers | Opalesque’s Emerging Manager Monitor - May 2012

Profiles

ISSUE 05 • May 2012

Back to performance days, MR Capital’s Global Consumer Loyalty Fund differentiates its GARP ‘growth at reasonable price’ strategy
Mr Capital Management’s global Consumer Loyalty fund exceeded market expectations by gaining and retaining a double-digit YTd return during Q1 at a time of great market volatility. incepted in June 2011, the equity long-biased fund returned almost -5% that year and is up more than 26% YTd (to end-April). it is currently featured in Opalesque Solutions’ Emerging Managers database. Opalesque: how do you define your strategy? ALRashoudi: we see our strategy as a true Eclectic global strategy. Our approach is highly balanced, tilted towards fundamental value investing. we seek momentum after a gArp or “growth at reasonable price” situation of an underestimated issue is discovered and fulfilled, usually in smaller caps. This could be effective in short-term performance although it was designed for longer term results. Q: To what extent does small cap investing support your strategy in generating higher returns? ALRashoudi: we focus on business activity rather than market cap segmentation, although most of our opportunities are found in relatively smaller market capitalizations. indeed, small cap investing could present greater opportunities, but you don’t want to invest in a company that has been classified as small cap for a very long time or in a newly listed company where sustainability hasn’t been tested, even if the company is large enough. Allocation of capital to various market caps is done after assessment and ranking of the best opportunities, given that investment capacity is present.

Mr Capital’s global Consumer Loyalty fund – performance since June 2011 inception
Opalesque interviewed Mr Capital’s Executive Manager Mohannad ALrashoudi to explore Mr Capital’s strategy that allowed its fund to leapfrog this year and leave others trailing.
New Managers | Opalesque’s Emerging Manager Monitor - May 2012

Q: how do you generate your ideas? ALRashoudi: we usually generate ideas for portfolio allocations with our bottom40

Profiles
up fundamental research where we focus on quality companies with tested and already successful business models that are capable of generating long term free cash flow, sales and EpS growth given all our quantitative metrics are satisfied. Our initial process further includes market research to determine possible rise in market share and the allocation of saturation levels. Q: Can such process that utilizes quant and momentum become fully automated and implemented across the whole asset class? ALRashoudi: probably it can. At certain strategies, good trades and good businesses could look alike but there are so many unquantifiable qualitative variables that couldn’t be ignored. we see most of the qualities we like being in our sector of focus. Q: what do you consider to be your qualitative variables? ALRashoudi: we are guided by fisher’s Scuttlebutt qualitative questionnaire even if we believe the investment will be exited soon. we like to add that the investment should be a global non-commodity business or have the potential to be global, but do not place great bets on the later. Selected businesses do not rely on a concentrated customer or a supplier base that eventually could increase the potential of surprise. we also look into the nature of capital expenditure and make sure it is not related to high degrees of maintenance rather than expenditure for growth.

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ALRashoudi: we believe that as long as value is its core component, our strategy should survive. The strategy hasn’t been adopted but rather suits our mindset in both psychological and the implementation aspect. An aligned manager philosophy towards the investment strategy is always needed. Q: which component of the strategy helped in delivering the current YTd results? does value currently outperforms growth? ALRashoudi: Each component had and has its major contribution. in all our holdings, EpS growth has been further buffered with p/E expansion. To allocate such situations, there will be no room for compromises. You need to have everything aligned, the trend, the fundamentals and the pricing. You also should not hesitate to be overloaded with cash when opportunities are absent. in longer time slots, you won’t miss anything. Q: Although returns were high, volatility hasn’t exceeded market averages. how can you explain this, what is your hedging technique, how much did you rely on market timing? ALRashoudi: unfortunately we are unable to time the market, but we do price it. This is obviously done by pricing its components. while being part of specific positive momentums and having a high liquidity component, this would ultimately result in better volatility outcomes. Q: what exactly are your views on risk management? how do you manage risks? ALRashoudi: Our risk management approach is designed to minimize the element of surprise; our main focus is towards company specific surprise. we adhere to our market risk strategy and limitations but believe investment risk, at each holding level, to be the most important risk exposure to be minimized. 41

Q: why did you adopt this strategy in the current market environment? do you believe your strategy will still be suitable for the longer term?

New Managers | Opalesque’s Emerging Manager Monitor - May 2012

Profiles
Moreover, we always make sure that we haven’t departed from our initial value base. Successful value investing has a self-correcting mechanism towards unpredicted market swings; growth acts as a supporting element towards faster positive price correction. Q: But you report your portfolio as concentrated value? how do you justify that towards your risk management? ALRashoudi: Although we can automatically decrease risk by excessive diversification, we prefer not to do so or rely on excessive ignorance. Our fundamental research and due diligence followed by continuous revision and monitoring should be of a better solution. Q: it seems that you heavily relay on cash? would that helped in similar situations of the 2009 crisis? ALRashoudi: Cash is superior to mere diversification and is always a superior tool towards risk management, but maybe not exotic enough. we would always work hard to be heavily invested. But we would choose not to invest when the only solution to do so is to compromise. when we don’t compromise, we should be having value positions that hedge us from the panic. Some companies rebound after a crisis and some never get back to the pre-crises level. if we weren’t able to allocate companies that we believe could ultimately pass this test, we would for sure prefer cash. By having a good cash component, we will decrease the overall volatility effect and take advantage of the new opportunities. ultimately, in a crisis, any long only fund will be affected, but how long such an effect would stay is the most important question. Q: Talking about crises, how far would you go in macro related measures and practices?

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ALRashoudi: not much. Macro is rather a part of our overall qualitative assessment. we have a preference of investing in countries with non-inflated assets, low leverage, positive current account balances and higher growth rates. Although global markets are highly correlated these days, such qualities of a specific economy usually decreases the probability of a country specific crisis, thus further decreasing a long lasting effect of a negative surprise. furthermore, we usually seek momentum from the holding up to the market level, given all other fundamental elements are satisfied. Q: what would you consider to be your industry of focus within your investment sector? ALRashoudi: we are better in analyzing business that revolves around a product, especially fMCg. As long as inventories are part of the equation, we can step in; my previous office was actually located in an fMCg warehouse. Moreover, current asset analysis in trade and manufacturing businesses is an excellent tool towards quarterly revision of holdings; a simple yet excellent tool in supporting upcoming sales projections. Thus, negative surprise can be further decreased. Q: what is your take on retail investing? ALRashoudi: we do invest in retail but it is not our main focus. Conventional retail models have different characteristics towards marketing, business capacity and expansion planning. we prefer the distribution models of branded consumable goods over its retailing. Thus, we usually stick with the final goods manufacturer. This is our preferred location within the total supply chain. Q: Lastly, do you expect to make changes in your views or strategy? And what should be expected from this consumer fund?

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Profiles
ALRashoudi: we think our strategy is open to development rather than change given that such development is within the context of an unchanged philosophy. with the current manager, the fund’s objective is growth given that capital preservation is satisfied; a careful growth strategy should ultimately preserve capital, while liquidity and current income still have a share of the overall objective. Although consumer labeled funds aren’t filling the market, global Consumer Loyalty fund hasn’t been established to fill a gap of an underserved mandates. we are heavily invested in the fund and continuously plan and work to meet all objectives as if all the investor capital is allocated to us for management.

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- - Komfie Manalo, Opalesque Asia The fund can be found in Opalesque Solutions’ Emerging Managers database, which is available to Opalesque’ subscribers (you can subscribe here: Source). if you want your fund to be in the Emerging Managers database, please send your fund details to Opalesque’s database team: db@opalesque.com.

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Profiles

ISSUE 05 • May 2012

Abydos: discrepancy between commodity prices and equities may translate in a lot of M&A activity
(This article was published in Opalesque’s Alternative Market Briefing on May 8, 2012)
Some commodity hedge funds might be suffering (Bluegold, Centaurus) but that does not deter others (such as william Blair, frere hall Capital, Man group, higgs Capital) to launch into that space. Jean-Louis Le Mee As opportunities are there for the taking, if you know how to navigate those very choppy waters. Abydos Capital Management, a new asset management firm, is expected to launch its maiden hedge fund on July 1st. The commodity hedge fund will trade in equities with a focus on oil, metal and mining companies. it will follow an event driven strategy and look for opportunities worldwide, especially in Englishspeaking countries. The Caymans-domiciled fund aims to return 25% p.a. with a 15-20% volatility level and can manage up to $500m. Jean-Louis Le Mee, 38, is the founder and CiO of the new London-based boutique. After eight years in the industry, first at goldman Sachs, then at York Capital and at Bluegold – of which he was a founding partner – he is ready to go it alone. he is investing 60% of his net worth, around $10m, in Abydos’ fund. Bluegold, as a reminder, is a commodities hedge fund house that recently liquidated its entire portfolio (see Opalesque coverage). Le Mee, who was running the commodities equities business at Bluegold, left last year in June just as
New Managers | Opalesque’s Emerging Manager Monitor - May 2012

the fund was starting to struggle; indeed it had its worst month in May 2011 and was down 12% YTd then – and continued its dire trend between August and december 2011. Commodity equities was a small portion of Bluegold’s investments, as most of which was in derivatives. hedge fund research’s hfrX Energy/Basic Materials index, which is down -0.42% YTd (to end-March), just like Bluegold, lost in 2011 (-8.40%), but it was up 8% in 2010 and up 25% in 2009. And the dow Jones-uBS Commodity index is up 0.46% YTd (to end-April), after losing 13.3% in 2011 – with its Energy subindex being down 6% YTd (almost -16% in 2011). paul Brunsden, 42, is the COO and a partner of Abydos. Brunsden was the founding partner of ratio Asset Management, and before that he was CfO at Eriswell Capital. Another partner is Matthieu raimbault, who will focus on mining research. Abydos Capital has already gone through a couple of months of marketing, hence the company featuring in the press quite a bit lately. Current AuM – from founder, friends and family commitments – amount to around $25m. There is an incentive for investors of the first $100m; they will be able to enjoy lower fees, i.e. 1.5% for management and 15% for performance (instead of the usual two-and-twenty set), Le Mee told Opalesque last week in a telephone interview.

Catalyst-driven strategy
“we really focus on the commodities where there is a ‘supply challenge’ – a situation where typically supply is struggling to keep up with demand,” Le Mee 44

Profiles
explains. “There are a number of commodities for which that is the case.” Abydos aims to own the tail risk of supply disappointments. in these typically concentrated supply markets (oligopolies), many companies still achieve good returns at bottom of the cycle (oil, iron ore…). They usually require long periods of time for projects and supplies to come to the market.

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“we think it’s a pretty scary number – but we don’t know whether that’s going to happen or not,” Le Mee notes. “we are saying that we agree with the oil markets, which are putting a pretty high probability of something bad happening in iran. But the equity markets are quite relaxed about it. So we think there is a dichotomy there.” This is a situation that will feature in Abydos’ portfolio. Because on a political stand-point in the u.S., it would be very disrupting to have spikes in oil prices in the run-up to the election, all views point to pressure coming from the u.S. – if israel is actually planning on attacking iran – to postpone the attack until after the u.S. election. The next u.S. presidential election is to be held on november 6, 2012.

“we really focus on the commodities where there is a ‘supply challenge’ – a situation where typically supply is struggling to keep up with demand. There are a number of commodities for which that is the case.”
“Those are commodities where we usually have very good visibility and very good understanding of what the supply will look like for the next four to five years,” he adds. he believes that it is only in those commodities that have good visibility that the prices will remain high because supply is constrained. And that is where Abydos invests. within that universe, the managers look for the more exciting companies; those with a lot of embedded optionality, and a series of catalysts. These catalysts include exploration, resource or reserve upgrades, production ramp up, infrastructure solutions, farm ins / farm outs, capital management, M&A; and they usually create a liquidity event for smaller companies and facilitate exit. Le Mee sums up the fund’s investment strategy as a “catalyst-driven strategy within a universe of supply-challenged commodities.”

“we are saying that we agree with the oil markets, which are a pretty high probability of something bad happening in iran. But the equity markets are quite relaxed about it. So we think there is a dichotomy there.”
Some indeed think that israel may launch a pre-emptive strike against iran this fall in order to eradicate the latter’s nuclear weapon program. Or even sooner, as israel will now hold its elections a year earlier than originally scheduled, i.e. this very September. in the recent weeks, israel’s prime Minister Benjamin netanyahu suggested that military action against iran had to be taken within months or the country would face a second holocaust, reports the washington Times. According to the Boston herald, analysts say netanyahu would prefer to face re-election before the u.S. vote in november, as indeed relations between netanyahu and u.S. president Barack Obama are sour, and the prime minister may fear Obama would try to defeat him, if re-elected. The Abydos team was marketing in the u.S. a few weeks ago and was surprised to see that the republicans’ primary election campaign, Mitt romney’s team, was

Israel, Iran
Abydos’ managers think that the likelihood of a strike by israel on iran “is not a small number.”

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Profiles
highly focused on gasoline prices – always a big concern for the American voter. The fund manager will not be betting on whether or not an attack will happen, but is concerned about its likelihood and is trying to find a way to hedge the portfolio against that risk. Mining equities and oil equities would not react very well to high-level spikes, according to Le Mee. And that would not be a good time for it to happen, as the world economy is very fragile. hedging might come in the form of binary options - a type of option where the payoff is either some fixed amount of some asset or nothing at all. it will be “to bet on de-correlation between the oil price and the equity market for example,” Le Mee explains. “That’s a good way to hedge your portfolio, because these are options with a very high payout. You don’t need to spend a lot of premium, and if an extreme event happens, you will get very good insurance coverage.” in the u.S. in the next few months as well.”

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Le Mee points to current discrepancies between commodities’ prices and where the commodity equities – whether oil or mining - are trading. The latter, he says, are trading cheap in the context of where the underlying prices are. So equities are a “pretty interesting space.” furthermore, usually, when there is a discrepancy between prices and equities for an extended period of time (it has been the case for most of the year), there tends to be a lot of M&A activity, usually coming from those companies or countries that are worried about their supply. we are seeing this with China investing heavily in mining infrastructure in Africa for example.

- Benedicte gravrand

Bullish long term view; cautious short term view
Abydos’ long term view on commodities in general is quite bullish. Le Mee explains that it is because, on the one hand, many of the commodities’ prices are quite high “in the context of history but also in the context of cost of production,” and this is taking place just when global economic growth is lukewarm. As world growth starts to improve, there will be potentially a lot of upsides for many of the commodities. On the other hand, the sheer amount of money printing that took place over the last four years means that inflation is a very credible outcome. Commodities would benefit (as commodities prices usually rise when inflation is accelerating, they offer protection from the effects of inflation.

“Equities are a pretty interesting space.”
The firm’s short term view is a lot more cautious, as it sees “a lot of downside risk in Europe, in China and there could be some disappointments in terms of numbers
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ISSUE 05 • May 2012

Execs leave SocGen to launch multi-commodity discretionary hedge fund
(This article was published in Opalesque’s Alternative Market Briefing on May 22, 2012)
Two managing directors have just left Société générale (Sg), the french investment bank, to launch a new commodity hedge fund house in paris called Belaco Capital. The official launch date of their first fund is expected in Q4 this year. One of them is dr. frédéric Lasserre; he built and headed the Sg commodity research and strategy team, which constantly ranked among the top threes by the industry. he worked closely with Christophe Cordonnier for 15 years, now his partner in the venture. Cordonnier set up and headed the Sg sales and structuring commodity investor business. A third ex-Socgen exec joins them, namely francois Beuzelin, who spent 12 years at Sg, first heading metals trading, then managing a commodity fund in the last two years. “The three of us have been working in the commodities markets for the past 15 years, so we’ve seen a lot going on” Cordonnier told Opalesque in an interview. while Beuzelin’s focus is in metals and sectors, Lasserre’s area is fundamentals in each sector and Cordonnier has designed many investment banking-type solutions for different investors. The three men are going to build a product that they believe is not currently available in the market. The key driver of the strategy is and will remain the fundamentals of the market, Cordonnier explains. “That’s all we’ve been looking at for the past years and that is what we believe will be driving the commodity prices. So that will be the heart of our strategy.”

Francois Beuzelin

Dr. Frédéric Lasserre

The fund will deal mostly with commodity futures, with long and short positions across all commodity sectors. it will be a discretionary fund, not a CTA or an otherwise systematic fund.

“The key driver of the strategy is and will remain the fundamentals of the market.”
“But of course, we will rely on signals and models that we like but we will not automatically or systematically follow them,” he notes. “we will look at commodities’ forward curves, their volatility levels… the balance between offer and demand, and also at your usual suspects such as the global macro factors. we will strive to give access to the asset class in a way which is not especially available today, and try to take into account macro factors.”

Christophe Cordonnier

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Profiles
The managers have observed tendencies, in recent years, of a disconnection between the fundamental situation of the commodities and their prices. They will try to exploit this and “identify when the fundamental factors for each commodity should be taken into account at maximum and when they should not.” Cordonnier and Lasserre left Socgen on 2nd May and will start their fund-raising tour next month. They will not tap institutional investors at first – as their current small asset level will deter them – but talk to private bankers and high net worth individuals instead. The target AuM is $100m before launch. while commodity prices have been flat lately, with the dow Jones-uBS Commodity index down 0.442% in April and up 0.46% YTd (and down 13% in 2011), we have seen quite a few commodity fund launches of late, the latest from Man group and william Blair & Co. And commodities seem an attractive terrain to invest in for new entrants as brand-new firms such as Abydos Capital Management, Skylar Capital Management; and higgs Capital are all preparing to launch.

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- Benedicte gravrand

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ISSUE 05 • May 2012

ThE uSE Of LEvErAgE CAn LEAd TO LArgE LOSSES AS wELL AS gAinS. YOu COuLd LOOSE ALL Of YOur invESTMEnT Or MOrE ThAn YOu iniTiALLY invEST. in SOME CASES, MAnAgEd COMMOdiTY ACCOunTS ArE SuBJECT TO SuBSTAnTiAL ChArgES fOr MAnAgEMEnT And AdviSOrY fEES. iT MAY BE nECESSArY fOr ThOSE ACCOunTS ThAT ArE SuBJECT TO ThESE ChArgES TO MAKE SuBSTAnTiAL TrAding prOfiTS TO AvOid dEpLETiOn Or EXhAuSTiOn Of ThEir ASSETS. ThE diSCLOSurE dOCuMEnT COnTAinS A COMpLETE dESCripTiOn Of ThE prinCipAL riSK fACTOrS And EACh fEE TO BE ChArgEd TO YOur ACCOunT BY ThE COMMOdiTY TrAding AdviSOr (“CTA”). ThE rEguLATiOnS Of ThE COMMOdiTY fuTurES TrAding COMMiSSiOn (“CfTC”) rEQuirE ThAT prOSpECTivE CuSTOMErS Of A CTA rECEivE A diSCLOSurE dOCuMEnT whEn ThEY ArE SOLiCiTEd TO EnTEr inTO An AgrEEMEnT whErEBY ThE CTA wiLL dirECT Or guidE ThE CLiEnT’S COMMOdiTY inTErEST TrAding And ThAT CErTAin riSK fACTOrS BE highLighTEd. ThiS dOCuMEnT iS rEAdiLY ACCESSiBLE AT ThiS SiTE. ThiS BriEf STATEMEnT CAnnOT diSCLOSE ALL Of ThE riSKS And OThEr SignifiCAnT ASpECTS Of ThE COMMOdiTY MArKETS. ThErEfOrE, YOu ShOuLd prOCEEd dirECTLY TO ThE diSCLOSurE dOCuMEnT And STudY iT CArEfuLLY TO dETErMinE whEThEr SuCh TrAding iS ApprOpriATE fOr YOu in LighT Of YOur finAnCiAL COndiTiOn. YOu ArE EnCOurAgEd TO ACCESS ThE diSCLOSurE dOCuMEnT. YOu wiLL nOT inCur AnY AddiTiOnAL ChArgES BY ACCESSing ThE diSCLOSurE dOCuMEnT. YOu MAY ALSO rEQuEST dELivErY Of A hArd COpY Of ThE diSCLOSurE dOCuMEnT, whiCh wiLL ALSO BE prOvidEd TO YOu AT nO AddiTiOnAL COST. MuCh Of ThE dATA COnTAinEd in ThiS rEpOrT iS TAKEn frOM SOurCES whiCh COuLd dEpEnd On ThE CTA TO SELf rEpOrT ThEir infOrMATiOn And Or pErfOrMAnCE. AS SuCh, whiLE ThE infOrMATiOn in ThiS rEpOrT And rEgArding ALL CTA COMMuniCATiOn iS BELiEvEd TO BE rELiABLE And ACCurATE, pfg BEST CAn MAKE nO guArAnTEE rELATivE TO SAME. ThE AuThOr iS A rEgiSTErEd ASSOCiATEd pErSOn wiTh ThE nATiOnAL fuTurES ASSOCiATiOn. no part of this publication or website may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 united States Copyright Act, without either the prior written permission of the publisher.

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ISSUE 05 • May 2012

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