Spin-outs of star managers from established hedge funds have to be doing something different to pique our interest sufficiently to warrant a feature. Lee Robinson’s Altana Wealth cut the mustard back in September 2011, when we last profiled the group, and his team’s world views today remain as refreshingly straight-talking as ever. Altana has so far added three strategies to complement Robinson’s own fund, with at least two more in the pipeline. Volatility targets range from single-digit to definitely double-digit, but investors can always be confident that their interests are aligned with Robinson as he has seeded all of the strategies – and also keeps a vigilant grip on operational risks to match his own exacting requirements. Altana funds always target real absolute returns and are inspired by different recent threats to real returns, including concern about currency debasement, which is one motive for the possible launch of a fund offering accredited investors secure and insured access to Bitcoins. Fiat currency frailty, palpable inflation, and the sovereign debt crisis are all intertwined worries for Altana, without forgetting the good old-fashioned event, credit and equity analysis that made Robinson’s name at Trafalgar before and during the global credit crisis.
Regulated and cost-conscious
Although Altana has offices in Monaco, the firm is perfectly comfortable with onshore regulation, being FCA-authorised and regulated in the UK, and will next year launch a UCITS version of the newest Altana product, a credit fund. The Altana Corporate Bonds Fund was rooted in Lee Robinson’s frustration at not being able to find a corporate bond fund that eschewed illiquid, risky bank and peripheral Europe exposure, avoided benchmark-hugging, and also kept costs under control. Evincing Altana’s rigorous approach to analytics, instead of focusing on headline levels of fees, Altana’s Corporate Bonds Fund commits to keep its Total Expense Ratio (TER) below 0.75% – and the UCITS is bound to keep its TER under 1.25%. Altana thinks that their pricing of these vehicles will be seen as “aggressive” whereas the investment strategy is anything but.
This is a conservative strategy, targeting single-digit volatility just as manager, Swiss-educated Stevan Bajic, did with his Lipper award-winning $1.5 billion funds at Swiss Bank, Sarasin. For Bajic the sweet spot of the credit spectrum tends to be “crossover” names rated just below investment-grade and this segment is where Altana think their “core competency” lies. “Some 80% of the fund is in the boring part of high yield – and the rest is in investment-grade,” he says. Bajic expects to make 4-5% from carry, with up to another 3% or 4% from price appreciation – arising from spread tightening, roll down, and pull to par. Although Robinson is CIO for the Corporate Bond fund, its holdings rarely overlap with credits in his own fund, which takes a more event-driven approach such as Eastman Kodak and Thomas Cook, both of which generated 80-100% returns.
Credit strategy outperforming
In its first 12 months Bajic’s fund has made +9.5% gross, almost double the performance of the iBoxx liquid high-yield for 2013. Both industry and security selection have made positive contributions for Altana. Sector themes included recapitalisation of banks, and future flotations of German industrials. Single-name winners included Alcatel Lucent buoyed by restructuring, and British Airways bolstered by an upturn in business travel. On the short side, Bajic’s short Treasury positions profited from Bernanke’s tapering bombshell, and Bajic accurately anticipated the downgrade of Telecom Italia. This is not the first time that Bajic has found credit ratings agencies “behind the curve”; the Altana fund could even opportunistically buy unrated or distressed bonds if their credit metrics stack up.
Yet in startling contrast to some possibly hubristic investment soothsayers, Bajic does not claim to have any edge at long-term forecasting of corporate cashflows. On the contrary, his cautious approach is more informed by pragmatically acknowledging the limitations of forecasting. Bajic argues that visibility in terms of predicting corporate profits gets foggier beyond one year. Instead of looking at the average yield maturity over the lifetime of a bond, Altana uses forward rate analytics to split the curve into more and less predictable phases. Discounting yields at the appropriate, contemporaneous swap rates may reveal that bonds with near-identical yields to maturity display widely divergent forward credit rates over Altana’s intended holding period. Altana not only sets more store on earnings during the higher visibility phase, but also needs a bigger risk premium to cover more distant and murkier cashflows.
Addressing corporate bond risks
Interest rate exposure can be hedged and is anyway minimised by the predominant focus on short-dated credits. Altana also argues that carefully selected higher-yielding bonds offer a better cushion against rising rates than do lower-yielding names where a larger part of the yield is comprised of the risk-free rate. This view is vindicated by the negative performance from investment-grade indices in 2013.
As well as scope for interest rate hedges, Altana can use broad credit hedges and will sometimes slice and dice credit indices to target hedges at particular industries. The Cyprus bank bail-in of March 2013 inspired Altana to put on a short credit (long CDS) position using the iTraxx subordinated financials index, which did indeed widen out in the second quarter of this year. What might have started as a portfolio hedge turned into a profit centre. Currency exposure is always hedged out.
Despite the cautious risk profile, the objective is not in fact to just target retail money. The UCITS is being created to cater for a range of institutions. Soft pre-launch roadshows in several continental countries have already been greeted with an encouraging reception, given the strong outperformance, low volatility and interest rate hedging properties of the strategy. Investor types to have shown an interest range from institutional investors and family offices to private banks. Geographically the interest has been equally diverse, with potential investors coming from Germany, Italy, Netherlands, UK, Portugal, Singapore and Japan.
Genuine inflationary threats
Bank of England governor, Mark Carney, recently suggested that he had more confidence in Canadian, than in UK, official statistics. The Altana team seems to have a healthy degree of scepticism about historical inflation statistics in numerous countries – and they have graver fears about future inflationary tail risks for investors. Even in Europe, where official figures imply decelerating inflation, Robinson thinks it is alive and kicking, with oil, food, energy, education and healthcare all racing ahead at 5-7% per year. Meanwhile, oil sits at all-time highs in some currencies such as yen. Robinson proffers John Williams’s website “Shadow Stats” as an alternative measure of past inflation, and he has fundamental concerns about the philosophical basis for defining inflation. The practice of “hedonic pricing” results in a seemingly perverse situation whereby a more expensive appliance is deemed to be cheaper because it has more bells and whistles than the previous model.
Robinson also has reasons to think inflation may up its ante in future. “The late 1990s saw a coalescence of deflationary forces from the internet making pricing transparent, the euro harmonising pricing, and a globalised labour force,” he explains. Now “the easy gains from the internet are gone – and the labour force is repricing.” For Altana three strong tailwinds have turned into two, maybe three strong headwinds for stable prices. Why has the explosion of central bank balance sheets not yet caused severe inflation? It is only because the velocity of money has not yet picked up, Robinson fears.
Debt mountains increase the odds of inflation, adds portfolio manager, Alex Krainer: “History shows there have been 30 cases of high or hyper inflation when there was a debt overhang – and only two instances of debt deflation which were Japan in the 1990s and UK in 1930s.” For Krainer, whose formative years in 1980s former Yugoslavia gave him first-hand experience of runaway inflation, “the risk of inflation seems overwhelming”.
All Altana funds, therefore, are designed to deliver real returns, but two funds in particular are motivated by inflation. The Altana Hard Currency Fund, run by former head of FX strategy at Mellon Financial, Ian Gunner, avoids currencies that may become debased by governments seeking to alleviate debt burdens. As such this fund might sound more like a capital preservation vehicle than one which will actively profit from inflation. However, if an exodus of capital from depreciating currencies floods into safer havens, they could soar; witness strong performance from the Singapore dollar.
Before Gunner goes long a currency, he has to get comfortable with the country that issues it. So he crunches fundamental macro numbers on public debt, balance of payments, monetary policy and financial stability, and is often attracted towards currencies issued by countries with surpluses and reserves. As well as analysing the status quo of the country’s balance sheet, Gunner is equally focused on the sustainability of public finances, with future unfunded pension liabilities one of his pet hates. To avoid these bankrupting governments, Gunner thinks that many western nations would have to pull in their fiscal belts by politically impossible amounts – hence inflation is likely the only solution. Strong fundamentals, however, are necessary but not sufficient for Gunner – his distaste for intervention has led him to spurn the Swiss franc and the Brazilian real since their central banks started trying to cap appreciation through ceilings and taxes.
Gunner constructs trades with asymmetric pay-off profiles. For instance, the October newsletter suggests that a 10% decline in the US dollar (combined with a 10% gold move in either direction) would produce profits of more than 15%, while a 10% appreciation of the US dollar (and the same gold scenarios) would only cost the fund around 1%. Similarly, Gunner has been using low-cost options to ride the uptrend in China’s renminbi (RMB), which recently overtook the euro to become the world’s second most widely used trade finance currency. Robinson is also using options for what he views as a hugely asymmetric trade – betting on appreciation of the Hong Kong dollar (HK$), which looks like the yuan’s Cinderella sister despite growing renminbi usage in Hong Kong. The potential pay-off from HK$ convergence towards RMB valuations could be many multiples of the option cost.
Turbocharged inflation insurance
Altana’s CTA, the Altana Inflation Trends Fund, aims to own assets that are inherently geared to inflation, irrespective of investor behaviour. The strategy mainly trades commodities that are expected to get the biggest fillip from any upsurge of inflation – and that meet the manager’s liquidity criteria. Krainer argues that as the purchasing power of currencies gets eroded, real assets including energy, metals and agriculturals must increase in price. Krainer also thinks some commodities are in danger of supply constraints. Last year the last ore-to-lead smelter in the US, in Missouri, shut down. Meanwhile in China, Krainer sees capacity in steel and aluminium being mothballed. And if demand for some commodities has lately been sluggish, paradoxically this could be the precursor to inflation – because weaker demand can retard investment in new capacity. Robinson’s third-quarter 2013 newsletter, shared with The Hedge Fund Journal, says, “capitulation [in commodities] is occurring with funds closing, Barrick Gold struggling to get a rights issue away, and as OGX approaches bankruptcy.” Often such signs of revulsion mark a market trough.
Why, then, does the CTA not invest purely in commodities? Krainer explains that inflation is also likely to increase interest rates, generating big downtrends for fixed income, whilst Zimbabwe and Venezuela bear witness to how equities can produce persistent uptrends under high inflation. Krainer admits that “whether equities outpace or lag inflation depends on the episode,” but he still thinks that it makes sense to have some allocation here. The other reason for not being a pure commodity fund is volatility. “We want to target a maximum drawdown no larger than 20%,” says Krainer, who cautions that the very high volatility and inter-market correlations between commodities since 2006 could jeopordise this risk constraint. Other risk controls include sticking to “large, liquid commodity markets that trade on big recognised exchanges” – these contracts, Krainer says, have tight bid/offer spreads.
Altana’s research suggests that industrial, rather than precious, metals have had the highest inflation beta, although precious metals, agriculturals, grains and softs such as coffee, cocoa, soybeans and meats all “have the potential to go up by multiples, as we last saw in the 1970s.” Yet a return to such levels of inflation is not in fact needed for the fund to perform strongly. Simulations suggest that even smaller commodity pricerises, of the order of magnitude seen in 2007 and 2008, could translate into triple-digit returns for the fund. This assertion is easily justified: Krainer’s previous fund, a more diversified and diluted version of the current strategy, managed a run-up of 54% net of fees that would have been much higher for the more concentrated book he now runs. Krainer, whose career began in physical oil trading, did not just leave his former employer for Lee Robinson’s “big name” factor. Krainer also wanted to “go beyond friends and family money and be part of a proper hedge fund structure.” In this respect he says “Altana ticks the due diligence boxes in terms of institutional infrastructure in a post-2008 and post-Madoff world.”
Possible Bitcoin fund launch
Bitcoin is a currency that has already appreciated by many multiples – and has potential to continue its parabolic price rise, according to some plausible scenarios mapped out by Altana. Bitcoin would only need to account for 10% of global e-commerce, or 5% of global gold values, to multiply many times in value from its current levels, around $1,000 at the time of writing. Robinson’s presentation, shared with The Hedge Fund Journal and sent out to a select group of accredited investors, also dispels an impressive number of myths surrounding crypto-currencies. For instance, Altana points out that, unlike fiat currencies, Bitcoins are in finite supply; yet at the same time the ability to sub-divide them – combined with the launch of new crypto-currencies – means there should be enough to meet transactions demand. Bitcoin is one of a growing number of crypto-currencies that could form part of a possible Altana Digital Currency Fund launch. The plan is to weight currencies according to their market capitalisation, so presently Bitcoin would make up the majority of the fund, although emerging crypto-currencies including Peercoin, Litecoin, Namecoin and others are also investable. Given the practical challenges for individuals trying to access Bitcoins, Robinson has identified two experienced Bitcoin traders who are available. Additionally, Altana’s fund will aim to minimise risks of theft and data-loss by only storing access to Bitcoins offline – and insuring them.
Eighteen years in prime brokerage roles, most recently as prime services managing diector and head of European equity finance at UBS, have given Altana’s CEO, Antony Lingard, a 360-degree view of best practices. The Altana COO, Stella Dang, formerly headed operations for $1.9 billion Amiya Capital. Lingard points out that Trafalgar had no credit or counterparty losses throughout the 10 years Robinson was there, which included 2008. Altana’s funds keep assets in bankruptcy-remote vehicles where available, and sweep assets back and forth overnight to minimise exposures. Although new regulations such as AIFMD are only just starting to compel asset managers to trace the location of re-hypothecated assets, Altana has always insisted on having complete visibility. Meanwhile a bankruptcy grid maps out what happens if any counterparty does fail. So Altana takes pride in “being paranoid about counterparty risk” and even offers a risk advisory service, including counterparty monitoring with real-time alerts, for investors including family offices.
Cautious on equities
Last but not least, Lee Robinson’s own fund has been renamed Altana Opportunities Fund because he pursues a wider canvas than might be implied by the former fund name, Altana Distressed Assets. Robinson has been cautious on the outlook for companies’ top and bottom lines for some time, and has particular concerns about Europe’s sclerotic economies where he feels banking systems have not been repaired. Profit margin compression, and interest rate rises, could reverse the expansion of earnings multiples that has driven the European equity bull market, Robinson fears. And although sales and earnings growth have been mediocre anyway, Robinson argues things could get worse in that “taxes, interest rates, currencies and labour costs have all gone from tailwinds to headwinds”. His newsletter elaborates how much declining interest and tax expenses have boosted corporate profits; the eventual unwind of QE combined with governments’ urgent need for revenues seem set to raise both interest and tax expenses.
But this is not the only reason why Robinson always likes to have some put option protection, which he admits has eaten into returns as volatility has ground lower. Robinson is critical of “closet long-biased” hedge funds and is clear that true hedge funds should exhibit an equity market correlation near zero – as his have consistently done, both over the past two years at Altana and for the prior 12 years at Trafalgar. Robinson’s Trafalgar track record delivered investors an IRR of 10% with a worst drawdown of only 7%. Robinson uses a variety of option structures for protection but insists that insurance has to incur some costs. Despite these hedging costs, his fund was up +6.64% net in 2013 to November.
Robinson has also had long positions, including a rare excursion into Asia via dollarised Nikkei futures. Even within Europe, Robinson is open-minded about finding value through selected holdings in European companies, such as those in the telecoms sector like KPN, which are benefiting from corporate activity. The KPN position harks back to Robinson’s expertise in merger arbitrage, which is pursued very selectively in his fund.
Altana started out as Lee Robinson’s family office and it still fulfills that function. The firm is also now developing a distinctive suite of strategies reaching out to other family offices and institutional investors that share its philosophy and world views. Investors should watch this space for further fund launches in 2014.