I joined Odey Asset Management in 1992, so I have had time to find out what was necessary to run a successful hedge fund business. We knew well the infrastructure requirements we had to cover at Eclectica, and so we have built a platform here that could handle up to $4bn of assets under management.
From a strategic perspective I saw that there is a tremendous strength in having a long-only business run in tandem with a hedge fund business. I think it gives your overall business better balance to run capital in both styles, and for our way of money management it also is a strength for the investment process. The capital is always committed to markets in the running of the long-only portfolios, whereas there can be times when capital commitments have been reduced on the hedge fund side. So running the long-only money allows Hugh to stay in the flow of markets even when, for example, stop loss limits have taken us out of the markets on the hedge fund side. He gets rehabilitated quicker and I think this explains why he tends to come back quickly from draw-downs.
Have you had any positive surprises from running your own business?
I'd say that just doing our own thing has been a very positive experience. In our case lifestyle choices have been a factor. So yes, we [Hendry and Batten] had to mortgage our houses to buy out the management contracts from Odey Asset Management, but on the plus side I live 10 minutes away from where we work and Hugh lives five minutes away. We can put in place routines for Hugh and I that allow the business to get the most of our abilities.
The fact that we had people in each position with previous relevant experience has been a big plus for us. So our business was approved to operate by the FSA six and a half weeks after application. That kind of thing does not happen too often.
Why do you have subscriptions and redemptions as frequently as twice a month?
We used to have weekly dealing at Odey [Asset Management], so this is cutting back [laughs]. It really is a hang-over from that time. Conceptually we do not have a problem if investors are not comfortable with what we are doing on their behalf and they want to exit. We don't want to keep unhappy investors. It can mean that we have some variation in the asset base, but one of the lessons from our previous employers was that we had to work with investors that really understood and believed in what we are doing. Thankfully, we have that for the most part. We have a tremendous investor base and we try hard to communicate clearly and openly with them. Despite the upheavals in 2005, our investor base increased by 10% (and we have 300 investors).
Whose returns do you look for in the trade press or websites?
We don't track other funds, and there isn't really a peer group for what we do. The hedge fund that other people say is similar in approach to our fund is Clarium run by Peter Thiel.
Where do you want the business to be in the medium term?
We have our priorities, and what we will be doing is "climbing the nearest mountain". In our terms that nearest peak is the $1.0bn of assets that Hugh managed in long only accounts in February of last year. What we want to do is to get back to that figure first.
We have some work to do on fund launches in the meantime: we intend to launch two long-only funds next month. Hugh has a great track record running long-only funds, and we want to capitalise on his reputation there. We will have two UK-domiciled UCITS – the Eclectica European Fund (EEF) will cover pan-European equities, whilst the Eclectica Continental European Fund (ECF) will be Europe ex-UK. After that we have some thoughts about what other sort of fund would work well in our framework. As I've mentioned I see the running of long-only funds as complementary to out hedge fund process. It makes a lot of sense to us to have a global long-only fund, as well as our planned European products. We also think that it wouldmake a lot of sense to have a Japanese fund run from here, given our (constructive) view on Japan.
What do you observe going on in the hedge fund industry as a whole?
There has clearly been too much capital allocated to the industry, so it is unsurprising that there has been a compression of returns. A consequence of those flows is the industrialisation of the hedge fund business, by which I mean several things. There has been a focus on asset gathering by some; the entry of long-only firms to the business with all their huge non-investment infrastructures has an impact on how everyone is viewed; and then what were originally small nimble innovators in the business have become multi-manager platforms themselves. The industrial scale is not for us – we're still very much focussed on the returns, and in that we have some expectations. I believe that our skill-sets at Eclectica are still improving, and in particular we are getting better at bonds, FX and commodities, so I see a lot of scope for improvement in what we deliver to investors. Our aim is to continue to generate similar returns going forward, but it will be from these asset classes if equity markets (e.g. Nasdaq/Dax) don't double over the next three years as they have over the last three.