Henderson Global Investors

Playing to its strengths

Stuart Fieldhouse
Originally published in the November 2006 issue

The growth of Henderson's suite of hedge funds had been fuelled to a large extent by what O'Neill calls "the traditional hedge fund community." What she wants to see is more investment from Henderson clients that are active investors in long-only funds. This has involved the creation of a dedicated distribution team, and the launch of a series of hedge funds in the last couple of years, a program that has helped to raise hedge assets under management by 50%. It has been a quest not just to attract investment from seasoned hedge fund investors, but to be a potential first port of call for institutions visiting hedge funds for the first time.

O'Neill credits Andrew Formica and David Jacob amongst the key ingredients in the recipe of Henderson's recent hedge fund success: Formica is Head of Equities, with responsibility for overseeing the management of all Henderson's equity assets, including the firm's multi-manager and hedge fund assets. Formica joined Henderson in 1998 from AMP Asset Management as part of the merger between Henderson and AMP. Amongst his responsibilities has been the introduction of derivatives-based strategies, and the construction of the global multi-strategy team which O'Neill credits with much of Henderson's recent success in performance and asset gathering. David Jacob is a more recent arrival, coming aboard in January 2005 as Head of Fixed Income from a similar role at UBS Asset Management, where he oversaw European and UK bond investments.

An established player

It is not simply the way Henderson has structured its hedge funds business, or the money management talent at the top, that has caused its fortunes to improve. Firms like this, with the established asset management infrastructure that has been developed via decades of money management experience (Henderson has been managing pension fund assets since 1975 for example), are more appealing to the institutional client carrying out due diligence on hedge funds for the first time, than a small boutique. Although funds of hedge funds might be the established first port of call for many institutional clients in Europe seeking to diversify into the asset class (and indeed, Henderson has launched a fund of funds of its own, investing internally), it is the big money managers with established brands, back offices, and distribution relationships which look set to play a prominent role as managers of hedge funds in the next decade or so. In Henderson's case, add its strong showing in the real estate and private equity space to its cocktail of hedge funds, you can see how it has positioned itself to benefit from the move towards diversification into non-correlated assets by big investors.

"We're not tied to a bank or insurance company," O'Neill says. "We prefer to see Henderson out there in large letters. With increased institutional participation in this industry, so due diligence demands are also increasing. Risk is central to the hedge fund management process, it is something that should exercise the minds of managers of hedge funds. If we are really seeing convergence between the long-only and hedge funds worlds – and I think we are – then these institutional clients are the sorts of clients you are going to want to attract. Hedge fund investors know what they're after, and we're in a good place from an educational perspective, to show them that. Our proposition is making hedge funds fit in with what the end buyer wants. We're used to working with pension fund trustees and consultants."

O'Neill is a subscriber to the view that the worlds of hedge fund management and long-only asset management will meet at a point where the money management profession is adopting the best practices of both. She sees the emergence of the new investment powers as outlined in the UCITS III directive as a large step in this direction. "We were one of the first fund managers to use UCITS III powers, and although a lot of people now have UCITS III powers, if you don't have the operational infrastructure to support shorting, leveraging, credit default swaps, CFDs, you can have all the powers in the world, but you're not going to be able to use them. I think our experience from the hedge fund side has been being able to seed that product development from a more traditional wholesale client base, and having the tools at our disposal to actually make that happen."

Henderson is also a well-known retail brand, and it is in this area that O'Neill expects it may well reap future benefits as the UCITS 3 directive starts to make its presence felt. With more flexibility for retail fund managers on the European stage, and nascent demand for 'hedge-like' absolute return products from the investor on the street, it will be firms like Henderson that will likely produce the products that regulators will find acceptable for the investing public.

"We'd like to see how the listing issue plays out in the whole retailisation process," O'Neill says. "But the genie is well and truly out of the bottle. After all, why is it okay to put all your money into an OEIC that invests in Russian energy stocks, but not into a well diversified global hedge fund?"

Playing to its strengths

O'Neill's vision of Henderson's hedge funds business going forwards is certainly not to be all things to all investors: she sees the firm playing to its strengths, namely long/short equity directional, multi-strategy, and, with Jacob's arrival from UBS, fixed income

It already has four equity/long short funds up and running, of which two are now closed (European and Japan), as well as five multi-strategy funds. On the fixed income front, it is managing a global multi-strategy bond fund and a currency hedge fund, with a credit hedge fund due for launch soon. In addition to all this, it has launched an equity style rotational fund focusing on Europe [see Q&A page 30], and is planning a Japanese version.

"The style-rotational fund is a sector and theme-based quasi-quant fund," O'Neill says. "Where there is liquidity in a market and a large number of stocks to trade, we can launch one into it.."

But at the crux of all this is O'Neill's unwillingness to venture into waters that Henderson has not navigated as a long-only shop. All of its hedge fund managers are also responsible for long-only investments in the same markets. It draws on its long-only management teams for the investment talent it requires to launch new funds. Henderson is not in the habit of buying in investment brains to help Henderson launch strategies: it would rather capitalise on the ideas of its existing team of portfolio managers.

On the other hand, she is happy to partner with other institutions in providing products which competitors might not manufacture well, and she is a fan of managed accounts, which she thinks will play an increasingly important part in institutional portfolios going forwards. "We're happy to participate," she says. "It's really a question of getting the best price for your capacity. A lot of pricing is now being driven by new types of clients buying hedge funds."

Jacob's arrival in 2005 marked a new dawn for the way Henderson was going to manage fixed income assets. His remit was to take the firm from its position as a manager of balanced mandates to more of a dynamic, alpha-driven approach. He built 'pools of alpha' from the traditional fixed income sectors. The new structure would allow investors to potentially dip in and out of these pools of alpha, and it was then simply a case of somehow providing the right investment vehicles to facilitate this.

It has allowed Henderson to tailor its fixed income investment offering far more dynamically than previously, both in the hedge and non-hedge spaces, tailoring investment mandates to the very specific requirements of its institutional clients. "We can package that a number of different ways," O'Neill explains. "There's the emerging markets component, the interest rates component, the FX component. We look at it as a model for other desks to be run on."

Jacob saw the way Henderson was already managing equity money via its multi-strategy team, and introduced that template to the fixed income offering. "It was a natural progression for our business," O'Neill says. "In fixed income, where we have a long-standing track record with UK pension funds, it was a whole new way of thinking, and we have been able to take it to the next level."

The firm has already launched three absolute return funds out of its Luxembourg SICAV which have a lot of hedge fund qualities to them, for example using credit default swaps and interest rate swaps as part of a much more technical approach to the way they are traded.

New fund launches

Since last profiled by The Hedge Fund Journal (in the November/December 04 issue), Henderson has continued to add to its suite of products. On 3 May 2005 it launched Robert Villiers' North American Equity Multi-Strategy fund, following the same controlled volatility approach that it had proven via its UK, European and Asia Pacific versions. The funds use a top-down risk control methodology and combine a number of different strategies, for example fundamental, liquidity, event-driven, and relative value. The managers have the mandate to combine these in order to generate alpha. At the same time, they are ensuring low correlation between strategies. A manager might go in one year from a strong fundamental bias in his portfolio to more of a liquidity-driven approach, before changing again to a combination of fundamental and event-driven.

The launch of a US version in May 2005 was a natural fit with the existing funds. Villiers managed a 7.71% return in 2005, and was up 2.38% since launch by the end of August 2005. Henderson launched a global version of the multi-strategy approach in June 2006, which would add geographical diversification between Europe, North America, and Asia to its strategy mix. It also launched an Asia Pacific version in October.

The global fund is a good example of the investment approach used by the multi-strategy team. It is targeting 10% volatility with a Sharpe ration of 2.0. The fund's volatility will be driven by underlying regional volatility, alpha correlation, and global fund leverage. Henderson says it is expecting realised correlations to be low, but to trend higher in crisis periods. A 6% underlying fund volatility and 0.33 correlation, combined with 2.25 times leverage should provide 10% volatility overall.

In terms of structure, the global fund is being touted as equivalent to a multi-strategy fund of the regional funds, all of which target the 6% volatility mark. Leverage is between 1.5-3x, although typically 2.25x in order to generate 10% volatility. The fund is directly invested, mirroring the underlying securities in order to minimise the cost of leverage. The fund's derived performance history generated an annualised return of 14.4% with annualised risk of 7.9% and a Sharpe ration of 1.5, this based on 2.25x leverage.

Perhaps the most radical new initiative has involved the launch of a European style-rotational absolute return fund under the aegis of David Bint and Steve Danby, and the prospect of a possible Japanese version in the near future. Launching on 14 November 2005, the European fund has already closed to new investment with over $175m under management [see article on following page for interview with David Bint].

'Team-based approach' is still a mantra at Henderson. It is about sharing resources, sharing investment ideas, and ultimately sharing the profits. One of the advantages of this is that the firm still does not rely upon one or two star managers to inspire loyalty from investors. Taking the way it manages its equity resources as just one example, staff are split into regional silos, with Pan Asia, for example, employing 20 people, split between Japan (9), Asia ex-Japan (8), and pan-Asia research (3). All the equity teams are in turn supported by a 20-person multi-strategy team, as well as support teams in areas like trading, corporate governance, and derivatives. O'Neill is not a subscriber to the concept of the 'key man' or the risk that engenders.

Such a structure ensures that the firm is unaffected by the sudden loss in assets that can accompany the departure of a star manager. Henderson also sincerely continues to subscribe to the 'collegiate' process of ideas sharing within its investment management environment which, if managed properly, can contribute to superior performance from the funds themselves. And finally, when it comes time to experiment with new investment management approaches – and the recent style rotational fund is a case in point – Henderson can draw on a large pool of personnel across a range of disciplines, from trading to research to risk management – without having to make expensive external hires. It all contributes to the process of organic growth that has allowed O'Neill and her team to consistently grow the asset base over the last two years.

The future

Going forwards, O'Neill would like to see more product launches in both the style-rotational and fixed income segments, as well as whole new areas of fund management which perhaps the firm has not ventured into yet, but which still draw on the core areas of intellectual expertise at the firm."I want to be growing the revenues, because I do think this is a revenue story, and not just about asset gathering," she says. "I want to be talking to lots more people about having a view that we can come up with that idea or solution that will suit their needs." 

Kate Oneill

Kate O'Neill graduated from the University of Sydney with a BA Honours in Law and has extensive experience of the European Investment markets. She has been with the Group since 1996.
O'Neill transferred to the Henderson Head Office in London from Sydney in 2001 as Director of Offshore Products and Operations. Prior to this she was with the AMP Group, joining in 1996 as Compliance Manager for AMP Asset Management Australia Limited, before taking up the position of Global Head of Operations and Risk for the Private Capital Division.

She was subsequently appointed Director of Operations for AMP Henderson Global Investors following the business merger. Preceding this she was with Invesco Asset Management (Australia) as Legal Counsel and Compliance Manager. She is also Director of Pan-European Wholesale Distributionfor Henderson.The appointment of Kate O'Neill as head of Henderson's hedge funds business has been something of a watershed for the $3.1bn hedge fund manager. It marked the recognition of the firm's hedge funds as a significant part of the business, and it posed to O'Neill the question of where to take this franchise. For Henderson, which has already established itself as a manager of retail and long-only assets, the obvious answer was to bring the hedge fund option to investors who might not already have considered it, to put the firm on the sharp end of the educational initiative.