Mark Jurish, Fiera Capital Inc.’s Executive Vice President, Head of Hedge Fund Investing and Seeding Strategies is developing a more constructive outlook on the opportunity set for hedge funds. Clients have invested via three products: a customised, commingled fund of hedge funds product with a 25-year track record; US ’40 Act liquid alternatives (Fiera Capital Diversified Alternatives Fund); and hedge fund seeding, with a dedicated team that has seeded 26 funds through three prior vehicles.
Jurish argues that, “hedge funds have been out of favour, for good reason, as it has been tough for them to compete with equity markets, and investors are looking to purchase things that are out of favour”. Jurish believes that multiple factors could power a resurgence in hedge funds’ absolute and relative performance: “a recession and bear market have to happen eventually. Higher volatility and dispersion should be good for hedge funds, but it takes time. After a very long period with growth and FANG-type stocks leading the markets, equity value investing should come back into favour at some stage. Whether this is tomorrow, next quarter, or next year, I am not sure, but we do like select value-oriented long/short equity funds,” he says.
In the early years of my career it was realistic to start a hedge fund with $10 million. Now, managers need over $100 million. to really compete.
Mark Jurish, Fiera Capital Inc.
Jurish’s career was baptised by the 1987 stock-market crash, and for 25 years the firm he founded, Larch Lane Advisors LLC, focused on hedge fund strategies with little or no equity beta, because plenty of long-only offerings exist to provide beta. Jurish finds that, “a variety of hedge fund strategies, in addition to equity market neutral, can provide uncorrelated return streams: well hedged event-driven or merger arbitrage strategies, fixed income arbitrage and credit market neutral, for instance”. He could also contemplate investing in relative value macro, in contrast to traditional global macro strategies that are more directional. Jurish recognises the potential for CTAs to provide portfolio diversification benefits, and capture a long-term bear market, but their typically low standalone Sharpe ratios fall short of Fiera’s general target for Sharpes around or above one as a stand-alone investment.
In systematic and quantitative strategies, Jurish contends that only a handful of larger firms with 10-20 year track records have a distinctive edge, and have been able to incorporate artificial intelligence and machine learning successfully into their process. Therefore, Fiera’s seeding is more likely to focus on traditional, discretionary fundamental hedge fund strategies, and those not competing with established hedge funds that run tens of billions. Jurish has some appetite for smaller funds investing in small and mid-cap stocks where there can be more alpha-generating edge.
Fiera allocates to hedge funds mainly in the US and other developed markets in Europe, which are visited as and when required. Emerging markets are generally avoided as most managers are long-only or long-biased. For the same reason, activist managers are not likely to become a big part of portfolios, though they could add diversification benefits. The objective of market neutrality at the fund of funds portfolio level can be consistent with individual managers having a mix of positive, neutral and negative equity beta.
Fiera’s seeding sleeve can also invest in longer duration strategies. Multi-year time frames – with capital generally locked up for 3-4 years – open up the possibility of investing in less liquid strategies. These would not fit into the daily liquidity profile of Fiera’s liquid alternatives sleeve, or the relatively liquid nature of its fund of funds.
“A typical seed investment will involve a team of people who have worked together normally at the portfolio manager level, in a multi-billion dollar hedge fund. Where they have managed parts of a portfolio and not an entire portfolio, they may not have portable track records, in which case we may need to piece together a jigsaw to isolate their individual performance,” he says. Fiera expects managers to “eat their own cooking” – by investing substantial amounts into their funds.
As well as day one seeding, Fiera looks at acceleration capital deals that are likely to involve firms with one to three-year track records, running less than $100 million. If Fiera can boost assets above $100 million, such firms will appear on more investors’ radar screens. Jurish finds that, “costs and barriers to entry continue to rise, in stark contrast to the early years of my career when it was realistic to start a hedge fund with $10 million. Now, managers need over $100 million to really compete. A strategic partner can help not only with assets, but also bolster credibility, providing third party service providers, infrastructure and back office, as well as operational support, business development, marketing, risk management, and governance”.
Fiera could get involved in syndicated seed or acceleration deals, investing alongside pension funds or endowments. Jurish sees only a handful of players currently active in seeding, but is aware that some new entrants are examining the market, and points out that some of the biggest investors – such as multi-family offices and large pension funds – like to do their own seeding under the radar.
“The 2 and 20 fee model is almost dead today for new entrants. Though there is no market norm, on early stage hedge funds, we see something like 1.5 and 15, with some charging more, and some less. We have also seen various fee structures with fees dependent on assets,” he says.
“The usual seeding model is to seed an investment vehicle. The fee income from the vehicle indirectly provides working capital for the manager, as the seeder is paying full fees. For instance, $100 million of capital paying management fees of 1% or 1.5%, generates a revenue stream of $1 to $1.5 million,” he explains.
“Deal structures typically involve a gross revenue share, along with future seeding and capacity rights for investors. This can strengthen long-term relationships. Investors in Larch Lane’s seeding vehicles often co-invested in seeded funds, and seeded subsequent funds launched by the same managers,” recalls Jurish.
Fiera’s due diligence process takes around three months as a rough average. The firm may sometimes expedite due diligence for an early stage fund that has limited capacity in a founder’s share class offering discounted fees. All due diligence is conducted in house, and proprietary analytics developed over many years are used. Investment vehicles can be funds or managed accounts.
Fiera sources managers though its own network, and via prime broker capital introduction teams. When Fiera has capital available to deploy in seeding, Jurish anticipates receiving hundreds of applications per year.
Larch Lane’s entire team and its investment strategies joined Fiera in September 2016. Jurish felt comfortable with the deal partly because: “my unit retains full autonomy over the investment process, while benefiting from broad and deep support: a regulatory umbrella, legal, compliance, a board of directors, operational, back office, and distribution that spans three client segments – institutional, high net worth and retail – and many geographies, including Fiera’s home market of Canada; the US; UK; and Europe”.
The acquisition of Larch Lane is part of a broader push by Fiera Capital Corporation (FCC) (Fiera Capital Inc.’s indirect parent company) to expand its alternatives offering, which began in 2005 and now encompasses hedge funds, real estate, private equity, agriculture, infrastructure, and direct lending – an area in which FCC has been active in Canada since 2016. This March FCC also acquired Hong Kong-based Clearwater Partners for $21 million, which adds Asian private credit to the repertoire.
Until 2013, FCC acquired and merged with various traditional and alternative asset managers in Canada, but since 2014 has spread its wings into acquisitions in the US, UK and Asia. Fiera runs USD 111 billion as of September 30, 2018, of which USD 27 billion is managed by Fiera Capital Inc. in the US or for US clients. FCC has been listed on the Toronto Stock exchange since 2010, under the ticker FSZ. FCC does not offer investment services in the US or to US persons. Investment services in the US are provided by Fiera Capital Inc.