Caliburn Capital Partners

Thriving at the frontiers of investment

Originally published in the June 2008 issue

Jeremy Rowlands and Chris Bouckley have been in the hedge fund business a long time. Along with Head of Fund Research Tony Morrongiello and COO Mike Ketley they now run Caliburn Capital Partners, a business founded in 2005. But their story in the hedge fund business goes back a lot further. In 1992, after 15 years in long only management and institutional broking, they founded Bayard Partners, a European equity hedge fund management company that was Morgan Stanley’s first non-US client in prime brokerage. The pair are clearly entrepreneurial businessmen as well as seasoned investment professionals.

“We’ve had three businesses that have formed our career,” explains Caliburn Capital CEO, Rowlands, “the Carnegie brokerage firm, Bayard Partners, the European growth stock hedge fund, and now Caliburn Capital, and in both the previous ones, one of the key issues for us had always been competition.”

According to Rowlands the reason why Carnegie was set up in 1983 by Bouckley and two other colleagues (Rowlands joined them 18 months later) was that at the time there were only 3 or 4 major brokerage houses that had genuine research coverage of Continental European equity markets. He says “they were the ‘emerging markets’ of the day, if you like. There was little competition so the commercial opportunity was big, and that’s why I joined them.” The subsequent development of that business was at least in part down to the nature of the competitive landscape in which they operated.

“In 1990 Chris and I led a management group that sold 49.9% of Carnegie to a Swedish bank, and one of the reasons we sold it was that by that stage we counted 80 or 90 brokerage operations that had research coverage of Continental Europe. Some of those brokerages were the big ones, the Goldman Sachs and Morgan Stanleys of this world, that were throwing huge amounts of capital at the business. We had grown beyond being genuinely boutique at Carnegie – wewere now middle market, and we were concerned that in future we would struggle to compete with people who had far greater resources than we did. We concluded that the nature of the competitive landscape had changed completely; and that was one of the reasons for the sale.

“When we started the hedge fund (The Bayard Fund) we had some money having sold our shares in Carnegie and we wanted to go back to where we had begun, which was in the money management industry. We thought we understood the industry locally, as we had built a client base of the traditional long only investors in London that included all of the big names (the likes of Mercury, Morgan Grenfell, and Henderson had all been clients). We thought we understood how they worked and what they did. In addition we also had a very small number of clients from the US; hedge funds that had begun during the 1980s. We had been struck not only by how they ran money but by how they conducted research, their degrees of focus, and how far they would go to legitimise the investment thesis that they were pursuing. It was a wholly different approach. We looked around the UK landscape and you couldn’t see any of these people. We thought we could see a competitive advantage that had real potential: if you equip yourself with hedge fund investment techniques and you’re competing in this same environment with much larger, slower moving, long only investors, then that could be a big opportunity.” And so it proved to be.

The Bayard strategy was European equities long/short, focusing on growth companies. Says Rowlands, “the way we set up Bayard was a precedent for the approach that we take in Caliburn Capital in the sense that you had a top down thematic overlay and then conviction built through bottom-up research. But the strategic allocation at the very top level was European growth stocks.” The peak assets of Bayard were US$900 million.

He continues, “obviously post 2000 was a much more challenging environment. We were down 28% in that year having been up 62% in 1999 and 86% in 1998. My view, which can’t be tested, is that (all else being equal) we would have recovered from that drawdown, as we actually did from a smaller drawdown in 1994. But all else wasn’t equal. Late in 2000 Chris had a serious car accident and early in 2001 my sister in law was killed in a plane crash. With the benefit of hindsight I can see that these events affected our motivation. So we agreed that we would write to shareholders and say that after 10 years we felt it was time to review our strategy – the environment had changed and we didn’t feel, at that point, capable of pursuing the strategy in which they had invested, so would they please take their money away. And, of course, people did.”

During the two years that followed the exit of external investors the fund was run in a low-key, very conservative manner. Bouckley and Rowlands typically met only once a month to discuss investments. But more importantly the period was one in which the two founders had the thinking time to take stock. Then things started changing gradually towards the end of the second year, 2004: “that Friday afternoon I had been talking to Chris,” recalls Rowlands, “and I put the phone down and I realised that I’d been talking to him for the previous 3 hours. And when I stepped back from it I realised that, actually I’d been talking to him every day that week, and talking about investments: I was engaged with the markets again.”

Compelling investment opportunities
In the course of these discussions four years ago between Bouckley and Rowlands a number of things became clear to the pair. One was that the asset class/style on which they had spent most of their time in the ‘90s, namely European developed market growth, was not compelling in the way it had been in 1992. However there were investment concepts and asset classesthat were really starting to look very interesting to the pair: in energy, commodities, Asia, and Eastern Europe, for example, they perceived there were lots of exciting things going on. Some of these areas were accessible through equities, an asset class investment with which they had a track-record and deep expertise. But they were also aware that many of the most compelling opportunities were somewhat removed from the area of specialist knowledge where they had been working previously.

The second thing that struck them was that the hedge fund industry had changed and developed. Rowlands and Bouckley were hedge fund pioneers in Europe in 1992. By 2005 there were a huge number of hedge funds globally, and more locally there had been a proliferation of funds pursuing the strategy of European equity long/short that had been their specialisation. The commercial landscape had changed to the extent that they saw a significant over-supply in some areas, particularly long/short in developed markets. However, more constructively, the hedge fund structure had appeared in almost all areas of commercial endeavour, in almost all asset classes and increasingly in all sorts of geographical locations.

Says the Caliburn Capital CEO “and when we looked at these asset classes there was a lot going on – commodities is a very good example where there is very early stage hedge fund involvement – a lot of the funds were not impressive. They did not have good processes, they lacked good structures, they were naive, and struggling for the right tools because they didn’t necessarily exist in that asset class at that time. Even now many funds are dressed up as hedge funds because everybody wants to have the 2 and 20 (fees) but they are often closet long only. But for us in many of these areas it was like ground hog day. We could see a new hedge fund community going through the same evolution that we’d gone through in Europe starting in 1991/1992.”

In this observation the two seasoned hedge fund managers saw real opportunity: they saw interesting things going on from an investment perspective and asked themselves if they should be thinking about creating a more appropriate vehicle for accessing those opportunities using the increasingly available hedge funds structures? The answer was yes, and the vehicle for exploiting those views is Caliburn Capital Partners.

Caliburn’s thematic approach
In examining the opportunity sets, Rowlands and Bouckley recognised that there were many and that they were spread around the world. This had significant implications for how they would have to be resourced. To get to the level of detail required, and to bring local knowledge to bear for the bottom-up parts of the process, they knew they would need analysts of the right sort and would need to make a commitment to research that was substantial for a start-up fund of funds. When they shared the vision for Caliburn Capital with an industry contact they had known for a long time, Sam Berwick of Mizuho International, he mentally bought into their approach. He was so convinced of the merits of their approach to the fund of funds sector that he persuaded Mizuho senior management to back the venture. The US$25 million of equity contributed by Mizuho enabled the former Bayard managers along with former colleague Morrongiello to bring in appropriate manpower, and, crucially, allowed time for the core of the research team to come on board well before the launch of any products.

A fund of hedge funds almost always discloses the world view of the founders or principals in how they categorise hedge funds. How they conceptually look at the universe, and build in the desired diversification by risk profile and source of alpha of the underlying single manager hedge funds into their funds of funds is implicit in the broad labels given to the strategies. For a typical example, the Man Group subsidiary Glenwood (see The Hedge Fund Journalof April 2008) uses four discrete buckets: relative value, event-driven, hedged and variable equity, and commodities and trading. Jersey-based Ermitage uses five broad categories: fixed income, event-driven, distressed, volatility strategies and multi-strategy. Up and coming Attalus Capital of Philadelphia looks at the hedge fund world through a prism of five faces: event-driven, relative value, long/short, tactical trading, and a catch-all ‘other’. The taxonomy is non-trivial because research and portfolio construction of funds of funds are nearly always aligned with the buckets. Look at the labels and you can see from where the fund of funds manager comes.

New frontiers: the competitive edge
It is readily apparent that the building blocks to give internal diversification are not the same as those used by other funds of funds. In fact the portfolio construction, research effort and investment philosophy of Caliburn Capital starts from some basic questions. “We ask ourselves questions such as what investments and asset classes are expensive, what is cheap, what is interesting?” says Rowlands. Other funds of funds ask the same questions but answer with a view on the relative attractiveness of hedge fund strategies looking out 12-18 months. The competitors wonder whether to have more event-driven or credit exposure. As investors with experience of the underlying exposures of hedge funds, the thought process of Caliburn Capital’s principals is more fundamental, longer term and more thematic. “We invest in themes not hedge fund styles,” explains the CEO. “We like our managers to work at frontiers where active management can add a lot of value.” In order for that to work the opportunities to which the managers apply their efforts have to be alpha-rich, areas where investment returns haven’t been competed away. “We think that investment professionals that are specialists in narrower or immature areas can really thrive,” adds Morrongiello. “So our preference is to allocate to early adopters in newer markets rather than ‘masters of the universe’ in a highly developed equity or bond market.”

Accordingly, the analysts at Caliburn Capital work in themes. It is usual for an analyst at a fund of hedge funds to work within a team dedicated to a hedge fund style. So within, say, ‘relative value’ there may be a fixed income arbitrage analyst, a statistical arbitrage analyst, and someone that covers quantitative equity market neutral funds. Not so at Caliburn Capital. Analysts work on themes. Rowlands explains, “If we like the risk/reward of investing in Russia, say in power distribution, we know we need help in investing there. We have to use local, niche managers, and to work with those you have to become part of the fabric of that local investing community. You have to be able to network properly and gather information, and monitor.”

So Caliburn Capital seeks specific language skills in its analysts. The research group currently boasts fluency in over 12 languages including Russian, Mandarin, Arabic, Portuguese and Spanish. “You have to be able to get over cultural barriers” says Rowlands expansively. “The IR [Investor Relations] guy from a Chinese hedge fund may have gone to Harvard and may speak great English, but we will insist on going beyond that and we always take references from local market practitioners on our potential managers. There is no reason why local market practitioners should speak English. Developments of hedge funds in China reflect this. Two or three years ago a typical hedge fund investing in China was Hong Kong-based, run by an ex-Goldman Sachs’ analyst who spoke Cantonese. Now the Chinese hedge fund manager is more likely to be Chinese-educated, based in mainland China, Mandarin-speaking and ex-Bank of China. He may have 20 analysts because they are cheap to employ, but some of them won’t speak English – so if you want to check out the quality of the research staff you have to speak Mandarin.”

However, there is no bias against Westernised Asian people running hedge funds. It is horses for courses in the view of Rowlands. For arbitrage-type (market trading focused) strategies, investors should be looking for experience running the strategy in a prop desk environment, which would mean seeking Asian managers that come with the typical background of those employed by American or European investment banks. But where a fund of funds is looking for managers to select companies on the basis of local knowledge then a different experience is more relevant, in the Caliburn Capital way of thinking. Further, expectations of the back office are not lowered for managers working in investment frontiers. “Operational standards of hedge funds in Asia are high in our experience,” says Rowlands, “though we have often been asked questions on this and have provided an internal paper on that topic to our clients for their comfort. Our experience of Asian back office staff is that they learn quickly and have good capacity for detail.”

Over the last six or seven years it has become routine for funds of funds providers to offer more specialist products – in the early days it was an equity hedge fund of funds, or a regionally-focused fund of funds. More recently there has been a proliferation of emerging market and commodity-dedicated funds of funds. The specialisation of the fund products typically reflect the team structures within the research departments of the funds of funds managers.The box above shows the specialist products of Caliburn Capital – the managers invest in atypical areas for funds of funds, but absolutely reflect what the Caliburn Capital management considers to be “interesting and cheap” on a long-term basis.

Funds of hedge funds – an evolving sector
Rowlands suggests that there has been an evolution of the funds of funds sector through time. He says “even as recently as the mid-1990s some funds of funds investors fulfilled their idea of due diligence by taking you out to dinner once or twice a year. Given that the original source of capital for the industry was high net worth individuals maybe that should not have been a surprise. In the course of my time at Bayard, I saw a large number of funds of hedge funds analysts, and the average quality of those analysts was low. Further, the typical due diligence process was poor.”

He continues, “it was disheartening (as a manager of a single manager hedge fund) to have so many meetings with box-ticking hedge fund analysts. They were there to understand your process, but they had never run portfolios. They had little understanding of what really makes a difference in running money. So we saw that we could do things a different way. It is very different meeting people who understand the investment thesis and the underlying investment strategy. The investment focus of our staff is really important in producing a different output – namely the returns our clients get from our funds. As an analyst you have to go to interview a hedge fund manager equipped to have a legitimate exchange. Otherwise the risk is that there is no challenge or real questioning. The fact that we are former hedge fund portfolio managers ourselves is absolutely key to how we have built our research effort and how we drive that research effort. If the fund of funds industry is going to maintain its share of the institutional flows into hedge funds then it is going to have to add value. We think that funds of funds are going to have to do that in ways that they haven’t before. To a significant degree it is the people that will make the difference. The human resources have to be as high a quality as those found at investment banks. The quality has to be the same and over time maybe the pay-scales have to be more similar too.”

The Caliburn Capital CEO points to when the fund of hedge funds industry first turned from looking like an offshoot of private banking. According to Rowlands, FRM was instrumental in changing the fund of funds industry. “Blaine Tomlinson changed the landscape of fund of hedge fund investing, at least in Europe. In the second half of the 1990s he brought a more systematic, quantitative approach to investing in hedge funds. He helped build the foundations that made possible the institutional flows into funds of hedge funds post 2000. However the unintended consequence was that there was a concentration on the risk diversification and risk management aspects of the proposition. So for big diversified funds of funds there then remained the big unanswered question of performance – when the answer did come it was a disappointment for a lot of institutional investors.” At Caliburn Capital there is clearly an emphasis on performance, reinforced by a culture of co-investment. To date the Caliburn Capital partners have made substantial seeding commitments to all of their funds, a further legacy of their hedge fund management background.

The quality of the universe of funds available to funds of funds managers has changed significantly through time according to Rowlands. He opines, “in the late 1980s when Arki Busson (of EIM) was trawling round New York looking for places to put money from his Geneva network he might have invested with 20 of the 30 or so hedge funds that existed at that time. It worked because a disproportionately large percentage of them were genuinely gifted investors in part because the barriers to entry to the hedge fund business were so high then. Now, the opposite is true. A lot of hedge funds in business today are mediocre fund managers with heavily worked presentation materials.”

He expands on his view. “The idea that there are ten thousand hedge funds in the world is nonsense. What defines a hedge fund is not the ability to go short, the fees, or being structured offshore. A hedge fund manager should be a gifted, entrepreneurial individual who is really able to exploit change. It is about active management: that is, it requires an active mindset as well as an active toolset. And of course they need the right kind of market opportunities to exploit. All the best investments contain an entrepreneurial element, and that includes hedge funds in our way of looking at things.”

It is deliberate that nearly 50% of Caliburn Capital’s capital is with managers who are between US$100 and US$500m in AUM, and 76% of the money invested is with managers that manage less than a billion dollars (see Fig.4).

“Aside from the capacity issue, in an environment of change we are focusing on people who can deal with change in an entrepreneurial manner,” states Rowlands with conviction. “The managers may then genuinely claim to have potential for super-normal returns for each unit of risk. They are almost all operating in niches and so are by definition capacity constrained. As we grow, that sensitivity to the manager’s AUM won’t change. In my mind this raises questions for the US$20 billion funds of funds that have unit sizes of US$150 million per manager. They have ambitions to generate idiosyncratic returns; it must be incredibly difficult at that size – I don’t think it works,” he states plainly. “A prolonged period of dull or poor performance is going to find them out.”

In the start-up phase Caliburn Capital’s partners brought in two PhDs and an aeronautical engineer with a risk management background to build quantitative models. They wanted their quantitative tools to be high-end, and they are: “our quant capabilities are shared only by a couple of the largest funds of funds businesses,” asserts Rowlands. They were using statistical tools that were more typical of the proprietary trading desk of an investment bank accordingto the Caliburn Capital CEO: “these tools were more sophisticated and more relevant to the assets to which we have exposure than others available and more widely used.” Continues Rowlands, “the head of quant will tell you that he spends a lot of his time trying to move the quantitative agenda on – twelve months ago they thought they were market-leaders in their use of quantitative tools. We have certainly moved a long way from the souvenirs of the long only industry such as the Sharpe ratio and Sortino ratio. Now people are catching up and we have to continue to work to move the quantitative agenda on. We want to stay at the leading edge of quantitative practice.”

One of the most important tasks of the quantitative team is risk factor analysis. Caliburn Capital works with around 2500 factors to determine what has had and what will have an impact on returns for both individual hedge funds and their own portfolios of hedge funds. Explains CIO Bouckley “for a given move in markets, or for moves in the set of markets in which the manager invests, our systems should tell me ahead of time what the fund performance will be. If the performance is widely different from predicted, either the manager is doing something that you don’t know about, or your model is wrong. We think this gives more understanding of what is going on in the underlying funds than just looking at returns. For example, I was on a conference industry panel last September when I heard a competitor say that their most conservative managers had lost them the most money (in the turmoil in the second half of last year). He then went on to categorise these managers as market neutral, as if the label was enough to capture the risk profile. You can’t just stop there: you have to drill down to the underlying exposures to understand fully the managers and their returns.”

“One of the issues that screamed out to us when we came back to the hedge fund industry was that the level of operational due diligence by funds of funds is dangerously low, “states Rowlands. For our part, we consider it a core competence and believe it should be done better than we experienced when we ran Bayard. There were many times at Bayard when an analyst from a fund of funds would spend an hour talking to us on our investment strategy, and the same analyst would then spend 20 minutes on operational due diligence. That is not the case with Caliburn Capital. Mike Ketley, our COO, after being our Finance Director at Carnegie and Bayard spent three years as COO of Wadhwani Asset Management, the macro hedge fund.”

Rowland argues that Ketley’s experience is longer and deeper on operational matters than most in the European hedge fund industry. Around him there is a team of operational specialists, each of whom brings a skill-set specific to operational due diligence. “We think that it is particularly important that we are thorough in our operational due diligence because as a firm we want to give ourselves as much freedom as possible in our investment choices. We knew from early on that we would be targeting frontiers. This does not just mean geographical frontiers: frontiers are the investible edge of your fund theme. You pursue a theme to the point at which you see a lot of change; that is the frontier, and that is where active management can add a lot of value. That is where you want to invest, and of course frontiers mature and the opportunity changes. So, as investors, you have to be able to move on when that happens.”

The themes are a roadmap which point to where capital can be successfully deployed conceptually for a decade or more. However such big picture hypotheses as peak oil, a commodities super-cycle and Chinese growth (all Caliburn Capital themes) are not of themselves investible. So it takes a lot of research (from the bottom up) at the frontier to work out from where the related return is going to come. So within the China theme, three years ago you could argue that index investing had frontier characteristics according to Rowlands.

However by the second half of 2007 valuations and flow analysis showed that was no longer true. The more interesting investible frontier within the long-term thematic story had shifted to lower beta areas with higher barriers to entry, such as the Chinese non-performing loan market. So frontiers change much more rapidly than themes, and the active allocation to frontiers within the theme is part of the added value of the Caliburn Capital approach.

Caliburn shows the way
Most funds of funds spend much of their time in presentations talking about process, and some time on the resources devoted to it. The leadership of Caliburn Capital spends a lot of time talking about their people and their own long-term investment ideas. Version 1.0 of funds of funds could be characterised as focusing on giving capital to the smartest managers around – it was all bottom up. Version 2.0 of funds of funds was what Morrongiello did at Banque Syz – giving diversification by strategy and manager, and seeking to add value by populating the strategy buckets with the best managers available, whilst trying to actively allocate to the strategy buckets on a timely basis. So in Version 2.0, more of the market insight and risk assumption was in the hands of the funds of funds manager when compared to Version 1.0. Arguably, in the time that Version 2.0 came to dominate, the super-normal returns of single managers were being pressurised by the weight of incoming capital. Another way of putting it is that most of the capital was committed to mainstream hedge fund strategies in developed markets with a medium term investment horizon (measured in quarters).

It is feasible to suggest that Caliburn Capital Partners are practising funds of hedge funds Version 3.0. In this latest version, still more of the market insight comes from the fund of funds through the allocation of capital to rich emerging investment opportunities. The time-frame is deliberately longer – thematically a decade, and implemented through multi-year ‘frontier’ strategies. In Version 3.0 mainstream hedge fund strategies are applied to new markets, and the fund of funds manager willingly (and knowledgeably) accepts more directional risk than apparent in Version 2.0. In this particular case, as with Bayard Partners, investors have to buy into the investment acumen of Rowlands and Bouckley, though in Caliburn Capital it is combined with the long hedge fund research experience of Morrongiello and the operational insight of Ketley.

The first phase of the hedge fund industry was an American phenomenon. In the second phase Europe had a much more significant part to play. Arguably the nexus of growth of the business may not be in New York, London or Geneva in future, but in the emerging centres of the hedge fund business in the Far East and emerging markets. If so, against this backdrop and that of the established fund of hedge funds industry, Caliburn Capital Partners looks well-placed to continue to deliver idiosyncratic returns in an industry where, historically, performance standouts have been hard to find.

Caliburn Specialist Products


The Caliburn Greater China Fund is a diversified portfolio of hedge funds, focused on capturing a significant portion of the upside in financial markets in Greater China whilst limiting downside by exploiting inefficiencies in the rapidly developing local capital markets and through hedge fund trading techniques.

AUM 1 May: US$58.41 million


The Caliburn Energy New Era Fund is a diversified portfolio of hedge funds, focused on capturing a substantial portion of the upside potential of a new era in energy, whilst limiting the downside of a volatile asset class through the use of diverse hedge fund trading techniques and rotation of thematic exposure.

AUM 1 May: US$26.62 million


The Caliburn Global Inefficiencies Fund is a diversified portfolio of hedge funds, targeting LIBOR +500-700bps per annum with low volatility, small drawdowns and low sensitivity to financial markets and hedge fund indices. Funds will pursue strategies in markets and sectors less penetrated by hedge funds, where inefficiencies are still abundant. Funds will possess the skill sets and informational advantages to create barriers to entry and to capture inefficiencies.

AUM 1 May: US$25.12 million