Jabre Capital

Building on 30 years of fundamental investing

HAMLIN LOVELL

For hedge funds, “equity-like returns with bond-like volatility” is a typical performance target. However, not only is the Sharpe ratio implicit in this aim unrealistic according to Philippe Jabre, he also wants to beat equity markets, and thinks that double-digit volatility is naturally concomitant with his target. In 2013 only a minority of hedge funds outperformed long-only equities to any degree, and Jabre’s flagship multi-strategy fund, up 43.03%, did so by a large margin. 2013 was one of Jabre’s banner years but he has had plenty before, including 2009, 2003, 2000, 1999 and 1998.

Boundlessly energetic, Jabre has been running money for nearly 30 years (including UCITS funds for 15 years). Yet his own stature should not obscure the team of 50 that he and his partners have spent seven years building in Geneva.

Some Jabre portfolio managers have considerable autonomy. For instance, Ziad Tabet’s event-driven strategy also had a good 2013 and sidestepped virtually all of 2008’s deal breaks. No less impressively against the headwind of declining markets, Carl Tohme’s emerging markets equities strategy made money in 2013 – and has hugely outperformed since it started life.

Feeding the information monster
Thoroughly thought-through fundamental analysis is the way of working for the investment team at Jabre, whom The Hedge Fund Journal met at Jabre’s central Geneva offices, Number One, Rue des Moulins. Philippe Jabre’s voracious appetite for information keeps the team busy, says Roberta Ventura, head of equity research, who has worked with him since inception. The need to store research information in a database almost seems superfluous in light of Jabre’s “amazing elephant-like memory for prices, charts, news and whatever was discussed at meetings years ago.” The team holds between 1,000 and 1,500 meetings per year, including company visits, analyst visits and conference slots. Jabre Capital are now into their seventh or eighth annual rendezvous with most firms. Less competition for company meetings is, Jabre finds, an advantage of being in Geneva says Ventura, “We always get a one-on-one and do not need to fight for it.”

Long-term vision
Having been on the sell side – where Jabre was her best client – Ventura knows how to best use bank research. She assembles a mosaic drawing on the strongest insights from each brokerage house. “Some analysts may have terrible models but great relationships, while others might have brilliant models with no relationships,” she explains. Jabre rarely build their own valuation models as they have ample access to the best on the street. Having studied economics, Jabre understands the macro angle and continues to read “everything on the planet”: sell-side research, newsletters, economic research and the specialist press.

This roving approach applies to internal analytics too. Jabre sees himself as a central core surrounded by satellite providers of information doing converts, credit, flows and analytics. “Different people feed me information on product, sector and geographic levels,” he says, to help “get new ideas and develop new strategies.” The developed equity team includes former sell-side analyst Philippe Ziegler and ex-equities trader Mona Elisa with erstwhile high-yield analyst Julien Dumas-Pilhou working on credit. As much as 25% of the multi-strategy fund can be independently managed by managers such as Carl Tohme and Ziad Tabet (profiled separately). The team has been stable and Jabre likes this continuity. Yet this does not mean Jabre is a “consensus-driven house”. Although Jabre is the ultimate decision maker, room remains for devil’s advocates. However, the duration of holding periods suggests that after a healthy internal debate, the team does develop shared confidence in core holdings.

Brokers have sometimes observed that Jabre sticks with stocks for longer than traditional long-only managers, with some of his biggest winners in the fund for years. This longevity may not be reflected in average holding period statistics, since Jabre trades around core holdings very actively to stay in the flow of information. For instance, trading later in the day can let Jabre feel the pulse of US investors’ activity in a stock.

Always opportunistic
Jabre does not sell stocks in order to rest on his laurels. Ventura explains: “Jabre trades like there is no tomorrow every day and is always going for maximum possible upside. When we are right we massively outperform and shoot the lights out. Throughout 2013 Jabre consistently resisted the temptation to take profits. Jabre would never think in terms of hit rates or win/loss rates. He is so focused that he ideally wants a 100% hit rate.” One of Jabre’s counterparts, Derek Bandeen, global head of equities at Citi, says, “Philippe is a natural trader, with a keen insight into market dynamics. His comprehensive understanding of the economic and political backdrop of the markets combined with his ability to be in tune with investor psychology have allowed him to deliver very impressive results.”

That said, Jabre will not sacrifice liquidity on the altar of return seeking. The portfolio is intended to be saleable within three days. Jabre meets small-cap management teams to get general colour on sectors but seldom invests in small caps.

Style and sector agnostic
Jabre’s unconstrained approach means the countries, sectors and styles driving returns in any period cannot be used to extrapolate what happens next; conventional ways of categorising managers would be a straitjacket for the mercurial Jabre. As Bandeen observes, “Having focused mainly on the Japanese market originally, he has successfully branched out to take advantage of value opportunities from a global perspective.”

Ventura recalls how in 2009 the fund became “a quasi-financials hedge fundwith more than half in banks.” Jabre’s conviction here was based on analysis of price to normalised book value and normalised earnings. The team’s research suggested that banks could easily make double-digit returns on their prevailing book values, and that they were therefore trading on single-digit earnings multiples. Whereas some other funds only made brief excursions into financials, Jabre stayed in the trade throughout 2009 and beyond. At the same time, Jabre’s Global Balanced strategy shows there is no hard-wired bias to being permanently long equities. This fund benefited from increasing its bond weightings in the second half of 2008, and managed a small profit that year.

Winning contrarian calls
Jabre recalls many instances where his contrarian calls paid off in a big way. He has always had a strong macro view, which can deviate from consensus at times. If Jabre sounds like a cheerleader today he has also been a Cassandra in the past. He was particularly prescient on housing. As early as 2007 he was on a US roadshow warning everyone about the risks to US housing due to excessive leverage in the system.

Another daring stance was taken in 2013 after Softbank announced a bid for Sprint of the USA, and traded limit down over borrowing fears. Jabre adroitly picked up Softbank stock down 20-30% and swiftly profited from the rebound. The huge position taken in US banks in the spring of 2009 was another case in point, where many investors shied away from the flood of new issuance and placements. Jabre was happy to actively participate in these re-capitalisations and hoovered up heaps of stock. His timely move into Japan was also contrarian, straight after Abe was elected in November 2012; Jabre says he bought much earlier than most others.

Yet Jabre, ever the chameleon, is not always contrarian. On Google Jabre has shared the consensus bullish view. Here his edge came in how he expressed the idea – and in timing. By using cheap options to get long of the stock, Jabre made a far greater return than he would have by simply buying it. After the stock got dragged down by a general panic over US government shutdowns, Jabre saw scope for Google to outpace consensus earnings estimates, partly due to its strong presence in mobile media where Facebook was doing well. Google’s earnings release saw the stock gap up 15% and Jabre ended up making 20 times his money on the call options he had bought. Jabre admits that such options often expire worthless, but he makes enough from successes to outweigh the costs.

Cheap equity options are Jabre’s main use of convertibles. While he does clip some coupons, he employs convertibles mainly to express directional views on underlying equities. Here Jabre admits that some of the “easy pickings” are now gone, but he can still extract cheap options from convertibles. Winners last year included Macau casinos and software companies. The converts team includes Peter Hale, former MD of J.P. Morgan’s Asia-Pacific convertibles business.

Conditionally bullish
Jabre made most of his 2013 returns from Japan and Europe. “They were both very over-sold markets where banks and industrials were particularly cheap,” he reflects, and “a lot of new money flowed in from a very low base.” Jabre also made money in the USA, but in this more efficient and widely owned equity market less alpha was generated.

Jabre remained bullish when we met in January and builds his case based on four key forces. First he says, “the momentum of money flow” is hard to stop with $300 billion going into stocks last year. Moreover, Jabre thinks that many asset allocators are still underweight of stocks. Secondly, Jabre foresees the US economy beating consensus growth forecasts, partly due to the diminishing effect of higher taxes, combined with the benign backdrop oflow interest rates and low credit spreads. The third fillip for equities Jabre has identified is accommodative monetary policy. “Japan is now exporting deflation, by selling at lower prices thanks to a weaker yen,” he says.

Meanwhile Europe is “the only continent that has not printed money” – but Jabre thinks the ECB will have to do so to stimulate the economy, which might grow as fast as 1.2% rather than the consensus 0.8%. Another positive for markets could be lower oil prices, where Jabre sees new supplies coming on stream from Libya, Iraq and Iran, interacting with greater US self-sufficiency as US imports are down by four million barrels a day. Instinctively Jabre argues “the market is now clean,” as “we got rid of anything that was not safe.” He sees “no market imbalances” at bank, individual or corporate levels and expects excess cash to be put to work.

This analysis is expected to sustain some of the highest equity weightings across several funds. Jabre still thinks equities are the best way to play a strengthening global economy, although he may also begin to deploy more capital in event-driven. However, the sanguine posture is tempered with a view that companies need to grow into their current valuations. Jabre admits that the past 20 months has been “driven mainly by multiple expansion,” and thinks earnings need to catch up with current valuations, rather like 2009. But he thinks this sequence of events is normal – valuations expand first and earnings come later.

Additionally, Jabre is not buying into every equity market. He likes the US, Europe and Japan but remains wary of many emerging markets, saying they are “a very scary environment” with six countries – Indonesia, South Africa, Brazil, Turkey, Russia and India – all suffering near-zero growth with high single-digit inflation. For Jabre this is the worst scenario. Yet he is prepared to take a counter-trend view in some emerging markets. Recently he has started accumulating some Hong Kong-listed China stocks, where sentiment is very negative. Jabre sees stable growth, low inflation and encouraging reforms making a constructive picture for China.

Formative influences
Jabre’s education by Jesuits in Lebanon was “an important influence, teaching me a rigorous way of approaching problems, studying and addressing case studies,” he says. Jabre was a precocious student, in the top 1% when he studied economics in Canada and then the youngest in his class when he attended New York’s Columbia business school aged 20. He was highly unusual in obtaining an MBA in May 1982 at the age of 21. Incidentally, Jabre co-founder and business development director Mark Cecil was also one of the youngest to qualify as a medical doctor aged 22. Jabre still supports all of his alma maters. But his greatest philanthropic activity revolves around his foundation, which has put more than 1,200 of the brightest Lebanese youngsters through expensive universities, often in the USA. Two of four of family man Jabre’s own children have just finished their studies at New Jersey’s Princeton university.

Jabre’s career began with an internship at J.P. Morgan. His first job in finance was in Paris, which he recalls then had only one market quote a day and foreign exchange controls! Starting out when “financial markets needed to be recreated” was invaluable, and Jabre made early contact with sovereign wealth funds in the middle east. At age 24 he was running money for one of the biggest SWFs, accumulating experience very early on. Jabre seems to have a Schumpeterian view of crashes. He thinks “crashes every five years eliminate excesses,” and reflects on the crashes he has lived through: 1987, 1994, 1998, 2001 and then 2008. “If we don’t get eliminated by these crashes we will have good years after them,” such as 2009 and 2003. “You bend but you don’t break,” he says. So is Jabre salivating for the next crisis? “No! No! The Nikkei down 500 last night kept me up all night,” says Jabre; although the others say that such nocturnal trading habits are not unusual.

Jabre’s funds have always had rocky phases. Range-bound markets have sometimes been challenging. Jabre recalls how in 2011 “for eight consecutive months markets were up or down by 8% and then ended flat.” This was his hardest year, when many options expired worthless. Reaching further back Jabre also remembers 1994 as a tough year when “short equities failed to offset the downdraft in convertibles arising from rising rates and widening credit spreads.”

In sum, 28 years of working together has taught Cecil that Jabre “has a huge work ethic with time for everyone and everything. He always takes a call at 3am and never becomes arrogant,” says Cecil, who finds this attitude “exudes through and filters down the whole firm as Jabre leads by example.”

Gung ho investor base
Cecil continues, “Jabre is a traditional hedge fund manager in the mould of George Soros, Julian Robertson and Michael Steinhardt.” These managers are opportunists who go where the action is, pursuing a very dynamic, aggressive investment style. Naturally there will be periods of volatility, but Cecil argues that investors should ride this out and focus on Jabre’s 30-year record, which he describes as “second to none.”

Around one-third of Jabre’s assets are “a cornerstone of investable money that never budged or went away,” dating back to Jabre’s BAII days in the 1980s; these assets populate the “discretionary” bucket where clients simply let Jabre decide how assets are split amongst Jabre’s five in-house funds. Jabre had outflows in 2008, because what he terms “peripheral clients” – private banks and funds of funds – ran into trouble. Cecil thinks that whereas family offices understand the volatility, institutions do not, and have been “seduced by the dream that they can make money without risk.” Jabre wants to broaden out the investor base but will not dilute the opinionated style of management to try and garner investors, because “you cannot have the returns without the volatility.” Nonetheless, he has always adapted strategies to fit the regulated mutual funds he has been running.

Independent risk management
Risk manager Jan De Spiegeleer reports directly to the board, which is independent. He can also escalate any concerns to chief risk officer Phillippe Riachi, who in turn can also report to the board. De Spiegeleer is constantly monitoring prospectus limits and UCITS limits. On top of the hard limits there are plenty of softer limits on which he intervenes – he terms these “risk guidelines”. Suspicious of spreadsheets to run the risk of a hedge fund, De Spiegeleer instead likes to use a real-time risk engine and position-keeping system. He has chosen Sophis because it can, for example, handle a broad range of asset classes, including CDS, inflation swaps, variance swaps and convertible bonds. As soon as a position is added to a portfolio, it contributes in real time to P&L and risk. All the risk and compliance reporting originates from Sophis as well as the trade and position reconciliations with the prime brokers. The impetus for using RiskMetrics came from the need of an independent risk report which can also be used for transparency reporting to investors. While De Spiegeleer is confident enough to assert that “all stocks are extremely liquid,” he adds the caveat that “liquidity is a peacetime statistic,” harking back to the days of 2008 when convertible bonds, for instance, fell far further than they theoretically “should” have done. De Spiegeleer has authored the Handbook of Convertible Bonds, but stresses that Jabre has never done “textbook” convertible arbitrage hedging out all the Greeks, something that De Spiegeleer is wary of. He explains how in 2008 such a strategy could have suffered a double whammy: shorting calls would have been very painful as the VIX hit 80, while the convertibles would have cheapened.

De Spiegeleer realises the limits of statistical measures such as Value at Risk. While Jabre is required to report this to the CSSF regulator for its UCITS funds, the view is that “if everyone was a slave to VAR we would all do the same thing.”

A lot of time has gone into the development of risk reporting tools. This enabled Jabre to slice and dice the risk in any particular way. When it comes to risk reporting, investors have always had potential to get full portfolio transparency – even real-time if they want to pay a visit. Jabre does offer Open Protocol reporting, but admits that many clients continue to request their own, bespoke, formats. Already doing CFTC reporting, Jabre Capital will be happy to add AIFMD reporting later this year.

Pyschoanalytical event investing
Event-driven PM Ziad Tabet takes some comfort in having lost less than equity indices in 2011, but admits that he was temporarily wrong-footed in 2012 by changing regulations in Canada. Both years’ limited losses served to enhance clients’ confidence in his risk management, he says. Returns of 14.32% last year were towards the top end of the peer group. In addition to running his dedicated event-driven fund, Tabet has been running a 20% sub-allocation from the multi-strategy fund. Tabet says that Jabre is is very good at giving the portfolio manager full remit over their portfolios.

Tabet’s background in private equity, including at Texas Pacific Group, taught him to “dissect companies down to the smallest division,” although he thinks bottom-up investors can sometimes ignore big-picture macro and momentum factors that are, he insists, important –especially in managing the strategy’s tail risk. Tabet is perhaps most proud of his resilience in 2008, which he reckons was the worst ever year for deal breaks, with 30% of mergers falling through. Although Tabet invested in around 100 deals he only had two or three breaks in ‘08. Tabet says “most of our ‘08 deals were strategic ones, where post-deal synergies were higher, creating potential for big fundamental re-ratings.” Consequently, Tabet’s hit ratio in ‘08 was even better than it was in either ‘07 or ‘09! The Anheuser-Busch/InBev deal was one example he recalls that was very unlikely to be derailed by markets or financing difficulties.

Tabet believes that in the current environment fundamental analysis or deal analysis alone is not enough to post consistent performance. What differentiates Tabet from some other event-driven investors is his exploration of the human dimension and the proprietary analysis of deal synergies. Tabet likes to home in on what motivates the captains of industry at various stages of their careers and what are the financial but also personal drivers of the transactions they undertake. Some of them, he finds, have become more interested in travel, trophy wives or philanthropy than in running the day to day of their operations, while others are consumed by hubris. Tabet contends that deals like ABN Amro could have and probably should have been pulled if it were not for the human element. Similarly he considers that Rupert Murdoch’s move on BSkyB was perfectly timed from a financial, operational but also personal perspective. It is also that human element that forbade Emmerson from bumping significantly their offer on Celesio. Tabet therefore values and places a big importance on the personal factors driving the decision-makers to act. He does so by understanding how they think and where they are in their professional but also personal life. He admits he cannot always get access directly to chiefs, and in fact would not always want direct access for fear of becoming wall-crossed and restricted from trading. As well as takeovers and mergers, Tabet invests in corporate events of transformational nature, such as restructurings and relative value trades, with special situations making a big contribution to 2013 returns.

Emerging markets – country selection key
Carl Tohme had a stellar 2009, up 66.72%, but he also “takes pride in protecting the downside.” In 2013 the MSCI Emerging Markets Equity index was down 8% while his fund was up 9.23%. Although the quantum of outperformance may sound extraordinary it has in fact been quite typical for Tohme. Since he launched the fund in 2008 the index has more or less gone sideways, whilst he is up 124% after fees, which must imply gross returns of at least 170% (before fees of two and 20 plus costs). The average annual gross outperformance works out close to 18%. Shrewd asset allocation decisions have made most of the returns: Tohme estimates that 80% of his performance comes from country and sector selection with only 20% from stock-picking, partly because correlations between EM stocks in the same market and sector are so high. So last year Tohme had hefty weightings in some “off index” markets such as the United Arab Emirates, Qatar, and Saudi Arabia. Tactical timing also helped; it would be wrong to assume that Tohme must have avoided markets such as Turkey, a market he has followed for many years. Tohme owned Turkey between January and May of 2013 partly because yields were compressing. As soon as Bernanke spooked markets with tapering fears, Tohme called time on Turkey. However, Tohme did not get short in a big way. He keeps a few shorts for hedging but makes most of his returns on the long side.

The EMEA fund also makes most of its money in emerging Europe, North Africa and the Middle East. Tohme admits that it is “hard to call the China market,” but he does have some clear views on its economy. “The world has to live with China at 6-7% rather than 9-10% growth,” he opines, but is less certain about the contents of balance sheets – particularly those of indebted provincial governments. Consequently, Tohme does not trade the Chinese market. He feels more comfortable with Korea as a beneficiary of US growth and technology, and also seems enthused by Mexico’s reform agenda. These two exporters illustrate a core theme for Tohme: emerging market corporates selling into developed markets should benefit from weaker currencies.

Tohme rarely hedges currency risk, as he generally only buys a market when he can stomach the currency. This is not a worry in his favourite Middle Eastern markets, which are pegged to the US dollar. The team visit key markets like Turkey and Russia at least once a year. Tohme runs $300 million in his own fund and has another $80 million sub-allocated from other funds. He makes his own decisions, but a 5% drawdown would prompt a team discussion.

Embracing regulation
To access EU investors Jabre relies on private placement regimes, reverse solicitation and its UCITS platform. Jabre Capital awaits clarity before deciding whether to go for an AIFMD passport. November 2013 saw Jabre completing their first form CPO-PQR CFTC report, using internal automated processes. Currently Jabre is exempt from the SEC Form PF, but they think that they would find it similar to the CFTC reports. Jabre is anxious for Cayman to enter into more co-operation with Switzerland and EU states, so they can base a distribution office in Cayman. General counsel Leila Khazaneh, who once headed up European legal for J.P. Morgan Asset Management, thinks it is “good for Switzerland to come clean on tax, as it enhances Switzerland’s reputation, and so paves the way for smooth co-operation with EU countries.” She expects that the Swiss relationship with other countries should get easier over time.

Straight after arriving in Geneva, Jabre volunteered to be regulated in Switzerland – many years before this became compulsory in April 2013. Jabre also chooses to follow the Swiss regulator’s principles-based remuneration guidelines even though these are only obligatory for banks. Elsewhere, however, Jabre defers to US and UK standards, which they find are currently more well developed than those in Switzerland. Compliance consultants have, for instance, drawn up strict industry-standard personal account trading policies, require pre-approval of trades, and set minimum holding periods. Other standard policies apply to inside information “wall crosses”, and trade allocation amongst funds and accounts, according to Khazaneh. Co-founder and managing partner Phillippe Riachi insists he was intent on “institutionalising the business from day one, and since we launched with substantial assets, we were not budget constrained.” There are now 45 people, five funds and two UCITS. Jabre trades around the world so “we have to make sure we have compliance everywhere,” and everything is “checked and double-checked,” says Riachi.

Whither an institutionalised industry?
So, Jabre’s operational infrastructure is institutionally palatable: as a Swiss-regulated firm, also reporting to the CFTC, and running regulated UCITS reporting to Luxembourg’s CSSF, with segregation of duties and independent reporting lines to an independent board. Why, then, are assets in the low single-digit billions? Jabre thinks that investment consultants are the culprit. Cecil makes no attempt to hide his perception that investment consultants are “playing it safe” by recommending low-volatility hedge funds that often produce mediocre returns. Cecil cites recent research from Oxford University’s Saïd Business School as supporting his view. The title of the research paper appears to begin with the rhetorical question Picking Winners? but the content of the paper may suggest that consultants are doing anything but that. The 53-page paper, by Tim Jenkinson, Howard Jones and Jose Vincent Martinez, says, “We find no evidence that these recommendations add value to plan sponsors.” Page 28 of the paper compares products recommended by consultants with those not recommended. On an equal-weighted basis, the former underperformed the latter by a statistically significant 1% a year in absolute terms, and by 0.86% a year in risk-adjusted terms; on a value-weighted basis the recommended products still underperformed, albeit the order of magnitude was not statistically significant. On page 36 the academics argue that the main reason for underperformance is the “consultants’ tendency to recommend relatively large products”, yet even when adjusting for product size, or for backfill bias, it seems the consultants’ recommendations still underperform. The paper concludes by expressing surprise at the extent to which plan sponsors follow consultants’ recommendations! Jabre hopes this area of research may galvanise institutional investors into acting independently of consultants. Clearly Jabre Capital is quite willing to invest in building institutional-quality infrastructure, but they do not see why the institutionalisation of the hedge fund business has to imply lower risk and return targets.

Jabre argues that hedge funds have lagged long-only equities since 2008 because post-crisis hedge funds cut volatility and sacrificed returns in response to theagenda dictated by the near-omnipotent consultants. Anyway, Jabre do not see volatility as an adequate measure of risk. Jabre Capital’s risk manager and author of Contingent Convertible (CoCo) Notes: Structure & Pricing, Jan De Spiegeleer provides CoCos as an example of an instrument that might only have single-digit volatility, but which clearly entails hidden blow-up risks akin to selling a put option. In any case, Jabre points out that mid-teens volatility only works out at about 1% per day.

Jabre sees a rich opportunity set for hedge funds, partly because the banks’ withdrawal from proprietary trading removes what were once the biggest competitors. In today’s less crowded markets Jabre expects to flourish. Jabre sees huge scalability for its liquid hedge fund strategies; JabCap has run peak assets around $6 billion with Jabre himself running over $7 billion at GLG. Cecil sees Jabre, aged in his early 50s, as being at “peak mental fitness and not bored at all.” Cecil points to luminaries such as Julian Robertson and Michael Hintze starting hedge funds around this age. “If you have good health and have fun you never need to retire,” says Jabre, who feels fund management is a cerebral, not a physical occupation. Says Cecil, “This is just the beginning – the next 10 years will be the big run.”