Millennium Global Investments

Leveraging the talent without diluting the process

Simon Kerr
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The managers of hedge fund management companies fall into two camps: they either think of themselves as freewheeling boutiques , or they like to come across as smaller versions of investment banks. Each camp dress themselves and their offices accordingly. Millennium Global Investments Limited is in the latter camp: it was not because the Hedge Fund Journal was visiting that they were wearing ties and crisply starched shirts; it is just the personal style of the management cadre.

The nexus of the management is founder Michael Huttman. He left Goldman Sachs Asset Management to found Millennium in the early 1990s. He launched the Millennium Global Currency Fund on March 1, 1995 with $25 million, so he has been around alternatives in Europe nearly as long as the Fathers of the Hedge Fund Industry in Europe, the alumni of International Fund Management (1984-1995), Roddy Campbell (now at RAB Capital), Peter dePutron (of his eponymous firm), Albert Saporta (who recently joined ABN AMRO), and Richard Atkinson (RMB MultiManagers).

Millennium's currency business now consists of Currency Alpha products with $600m under management, and active currency overlay programs that advise on $7.3bn of exposures for institutional investors. When looking at the AUM mix it should be borne in mind that currency overlay for institutions is carried out for a management fee calculated in basis points not percentages: the profitability pie chart has a different distribution.

"From the beginning I had in mind a firm that was to be a hub for like-minded investment professionals, " says the Swiss/British Huttman. The core activity of the firm has always been active currency management, but through its 12-year history there have been various strategies and funds active under the Millennium name. There has been a strategy that traded the Swiss equity index SMI, a relative-value fund, and a macro fund.

However the current shape of Millennium is predicated on two key individuals, Alan Eisner and Joseph Strubel. These two have been the major positive surprises for Huttman since he started the business: "I didn't know at the outset that I would find real partners that would share the philosophy of being long-term greedy rather than short-term greedy," he says.

Alan Eisner arrived at Millennium from Eisner's firm Trinity Asset Management. Eisner himself was an 11-year veteran of Salomon Brothers International, and his own firm specialised in managing emerging market currencies and was on the point of moving into high yield and distressed debt from emerging market issuers when the liaison with Millennium came about. Alan Eisner is now the Managing Director in charge of currency trading for Millennium and sits next to Lisa Scott-Smith, a 15 year veteran of the currency markets, who sits opposite Michael Huttman in the centre of the open-plan Millennium office suite in London's St.James's. The currency business also taps into the macro smarts of Mark Astley, and the media-friendly economist Roger Nightingale.

The Second Leg

The second leg of the business after the currency core is that run by Joseph Strubel. He is Managing Director in charge of Credit, Equity, High Yield and Distressed Strategies. The emphasis given by Strubel within this credit spectrum varies with opportunity through the cycle, all the time maintaining a bias to value. He has played this cycle better than most market participants based in Europe, as his Global High Yield Fund has the unique distinction of winning the EuroHedge Award for his category (High Yield & Distressed ) in the last two years running. The Sharpe Ratio is used to select the nominees for these awards. The best performer amongst the nominees then wins each award, providing the fund's Sharpe Ratio is within 25% of the best Sharpe Ratio in the category. This means that the winners show a good balance of reward to risk, and that absolute return is the determining factor.

The second leg of the business after the currency core is that run by Joseph Strubel. He is Managing Director in charge of Credit, Equity, High Yield and Distressed Strategies. The emphasis given by Strubel within this credit spectrum varies with opportunity through the cycle, all the time maintaining a bias to value. He has played this cycle better than most market participants based in Europe, as his Global High Yield Fund has the unique distinction of winning the EuroHedge Award for his category (High Yield & Distressed ) in the last two years running. The Sharpe Ratio is used to select the nominees for these awards. The best performer amongst the nominees then wins each award, providing the fund's Sharpe Ratio is within 25% of the best Sharpe Ratio in the category. This means that the winners show a good balance of reward to risk, and that absolute return is the determining factor.

The feedstock into the pipeline is "the worst corporate stories" – those that are in default or yield over 12%. "These are the kind of situations that take two to three years to bottom out," according to Strubel. "In the rear-view mirror they look like they have picked themselves, but we apply a quantitative screen to identify the top ideas, and there is a lot of basic research to do to get to an understanding of a situation," he says.

There are roughly 250 companies on the focus list – they have already been through their two to three year trough. The high potential candidates are those where there is change evident within the company and its operating environment. The portfolio consists of 25 core positions of 3% of NAV each. There are also five to 10 positions that are being built or disposed of – there are no trading (short-term) positions.

Given the current size of the fund ($564m) the position sizes can be significant stakes in companies. An example of the kind of situations this fund gets involved with is SeaDrill – Norway's largest offshore drilling company with a current market cap of over $4bn. Millennium first invested in the company at the concept stage at $2 per share in May 2005, having been acquainted with John Fredriksen through their joint investment in the restructuring of Northern Offshore. SeaDrill subsequently acquired several of Millennium's other oil service investments, including Odfjell Invest and Mosvold Drilling, making Millennium for a time SeaDrill's second largest shareholder after Fredriksen. SeaDrill's shares recently traded above $12 per share.

The High Yield Fund in its current style is not scalable much beyond current size, and indeed is closed to new investors. But the sort of investments carried out by the fund, specifically in oil and gas and in South America, have led to some brand extensions.

South American Special Sits and Natural Resources

"Our style, apart from carrying the strap-line of value-with-a-catalyst is partly based on going where people have not been," states Strubel. "We want value to be the bedrock of what we do, and we have been able to find very good value insome South American distressed situations." The firm clearly thinks that there is a lot of long-term value to add south of Mexico. Not long ago Millennium opened a Miami office that houses a six-strong research team that came from Salomon Brothers. "They are very much an integral part of our investment process," Strubel is at pains to explain. "I speak to one of the six every day, and over the last year they have contributed a lot." The Miami office staff vet the American ideas that are considered for investment, but the focus is to feed into a new product, the Millennium Global Special Situations Fund (MGSS), a closed-ended fund that was launched in September last year.

MGSS is invested in special situations and recovery stories (90% of which are in South America), and as such is not a scalable strategy, and may not always have a fertile field to operate in. For these reasons the fund is limited life (five year plus one) and is capped at $100m. "There is little competition for this fund," says portfolio manager Strubel, which squares with the idea of going where others aren't. The flipside of the coin is that liquidity is very limited in the underlying investments, and understandably it has taken a while to get fully invested. "The fund will be fully invested shortly, and we consider the fund strategy as something like private equity, and that is how we market it." When the investments mature the companies could perhaps sell equity privately or publicly, and Millennium could realise the gains, but that is expected to be another market cycle onwards.

Just like private equity funds come in tranches of commitment that is how Millennium views its South American franchise. "We intend to launch another South American Fund with the same (limited life) structure when the first fund is closed," states Michael Huttman. "This second fund can be as much as $300m as we are able to co-invest with others and take stakes in larger deals and companies."

The other speciality that has emerged from work carried out for the High Yield Fund is in energy. This is a natural consequence of the hiring of Jim Guiang. He has a great background in the oil industry (see biographies) that first benefited the High Yield Fund and is now being applied in combination with Strubel's value-with-a-catalyst style to the Millennium Global Natural Resources Fund. Whilst much of the capital in the fund is expected to be applied to the oils service sector, there will also be E&P company plays long and short. "Jim Guiang is able to say from a company's record in drilling and the acreage they are working whether the market is under or over-estimating the company's ability to produce oil and gas," states a confident Strubel. When the market is pricing the production expectation close to perfection given the geological conditions (Guiang can read seismic survey information), then they are ripe to short, and vice versa for longs. The emphasis is expected to be on understanding production profiles rather than second-guessing exploratory drilling.

A Fund of Hedge Funds Business

Two years ago Millennium management had met some managers in some interesting strategies like volatility arbitrage, insurance-related, and weather strategies, and were considering investing some of the principals' cash into them. The selections that Huttman and senior analyst Hamlin Lovell made were of interest to others, but the reality is that there are many bottom-up funds of hedge funds out there. To make a commercial proposition of a fund of hedge funds given the maturity of that industry requires either branding and distribution, or a differentiation in approach.

"We didn't want to set up yet another fund of hedge funds," claims the Millennium Chief Investment Officer. "The FoFs already out there sell themselves on no correlation with other assets. That was not our thinking. We have a different utility function fromthat: we are indifferent to upside correlation, and we seek to contain the downside. When we asked visiting funds of funds staff, do they actively allocate to strategies, they said yes, even though they admitted that they had to cope with quarterly liquidity and up to 90-days notice, so up to a six month delay from decision to implementation. That is not tactical allocation like I understand it in the GTAA (global tactical asset allocation) sense."

The Millennium fund of hedge funds product is different from the competition in a couple of key regards, firstly in the overlay applied and secondly in transparency offered to clients. The overlay is called TACO – Tactical Asset & Currency Overlay. According to Huttman much of the competition claims to offer portable alpha in alternatives, but delivers portable beta. In a neat inversion, the Millennium TACO overlay will seek to deliver portable beta on a tactical basis on its FoHF. The estimated market exposures of the underlying managers are aggregated and analysed to determine what the residual market exposures are at the FoF level. Millennium then tactically allocates to markets with an overlay process. The track record of the firm in TACO suggests that they can add between 1 and 1.5% per annum with a low level of risk assumption. The Cogent Hedge Dynamic Average for Funds of Funds was 4.298% year to date to the end of September, after 7.167% last year. This suggests that the potential added-value from the Millennium overlay may make a significant difference to the relative performance of its fund of funds when compared to the fund of funds sector generally. The overlay will also give a USP to the marketing message in what is after all a competitive, bifurcating and concentrating part of the hedge fund industry.

The second differentiator, according to Millennium's Head of Business Development Jean Thouvenin, is transparency for clients. "We think we offer a better transparency to the investors in our fund of funds than they can obtain elsewhere," suggests Thouvenin, "and it is all available on-line on a dynamic basis." Website access and the data architecture used by Millennium allow their clients to drill down in many different ways in the fund of funds portfolio. Clients can see how much capacity is left in the sub-funds and the whole fund of funds portfolio. The on-line client information available includes breakdowns of fee structures and lock-ins, so that the extent of liquidity of the underlying portfolio is clear. The breakdown of the underlying assets allows the exposures to the various markets by asset class and geography to be shown.

Cross-Selling Potential

It is clear that Millennium has been run with an opportunistic element to the launch of funds. However there is some coherence beyond the fact that Chief Investment Officer Huttman gives input to each product. The firm has an investment philosophy. There is a value bias within each strategy, and most of the funds are run implementing a value-with-a-catalyst approach. Dependent on the concentration of the underlying portfolios, from this approach one can infer a pattern of return. This makes it easier for potential and existing investors to understand the outcomes of the investment process – the returns.

The whole firm is very fundamentally based. Although the currency side takes due account of market positioning and technical factors in assessing a currency pair, the views embedded in the overlays are founded in perspectives on fundamentals such as trade flows, capital account flows and productivity trends. Indeed Bloomberg have told Millennium that the firm has written more macros on their system than any other client of theirs. This also facilitates working out of the office via Bloomberg Anywhere when applicable.

The founding in fundamentals applies in the High Yield Fund, Special Situations and the Natural Resources Fund. "There is a value approach to everything we do," states Huttman. "This commonality of framework allows a synergy across the teams. So when I have considered expanding and adding staff I look at the investment style of the candidate, but I really reflect hard on whether they can share our culture."

The second commercial benefit of having a core investment philosophy is that having a house style facilitates that most difficult of business strategies, cross-selling. Millennium Global Investments has an unusual footprint of clients for a firm with a significant alternatives business. The core business of currency management is carried out on behalf of corporate clients and pension schemes. Indeed the firm has had some notable successes recently in its core business.

UK pension schemes have been notoriously conservative in their investment approach, and used to adopt a herd mentality to most of their activities. That is no longer true. The investment consultant gatekeepers to the pension schemes have changed their recommendations and now talk about alpha, beta, indexing and active management instead of peer group benchmarking.

As part of this paradigm-shift consultants and their UK pension scheme clients will model the effects of including portable alpha strategies and absolute return strategies in the asset mix. Millennium has won currency overlay mandates from Leicestershire County Council and Strathclyde Pension Fund. Whilst part of this success is down to acceptance of the principle of the need for a currency overlay manager, it may also be attributed to a ratcheting up of the marketing effort when Jean Thouvenin, and then Louise Harris joined the firm on the business development side.

Millennium is now on the radar for all the consultants when it comes to currency mandates. A hope for the future is that the Millennium name (and house style) may now be worth something to the gatekeepers of institution investors' capital across the various areas of the business. If the name is trusted in currency overlay for institutions, will those institutions be more ready listeners to a presentation on funds of hedge funds, or specialised hedge fund mandates? The management thinking at Millennium is that they hope to develop deep relationships with a few key clients. This is thought to require staff that face the clients that can understand the whole range of products and that know how to build relationships rather than make one-off sales.

The emphasis on sound fundamentals has been applied to the latest venture according to Huttman. Soon Millennium is to launch a fund called Millennium Spire that will invest in Indian property. It will be the first investment company incorporated in Singapore investing in the category, and will maintain offices in Singapore and Delhi. This will fulfil a corporate objective of Huttman's to build out an exposure to non-Japan Asia. "I saw that they were the quality of people we need to work for us on the project. I would apply that test again to other areas we want to move into. We want quality people in global equity long/short, and in domestically denominated emerging market debt."

The firm is about to launch a new fund in this sector called the Millennium Global Emerging Credit Fund and also thought to be considering incubating funds in some of the edge strategies of the hedge fund business.

The management of Millennium Global Investments has clearly done a great job in building the core currency overlay business over a long period of time. The increase in internal resource outside of the investment staff has reduced the corporate drag on the principals of the firm, and has had a pay-off in new business. Now they want to build new revenue streams for the business, but keep the culture. Michael Huttman describes the balancing act: "I'm keen that we leverage the talent that we have here, but I don't want to dilute the investment process."

Millennium Global Investments Biographies

Michael Huttman CHIEF INVESTMENT OFFICER

Huttman has overall responsibility for invest-ment strategy and risk management of Millennium's investment activities. Former executive director and chief portfolio manager with overall responsibility for currency products and strategies in Goldman Sachs' asset manage-ment division. He also headed the International Asset Allocation Committee. Huttman was hired by Goldman to help start up the international asset management office in London. When he left (August 1994), he had discretion to manage over US$ 3 billion. Before he joined Goldman Sachs, late in 1990, he spent over seven years with J.P. Morgan in New York, London and Zurich, where he managed global fixed income portfolios and specialized in currency overlay programmes and active currency management. From 1980 to 2001, he was involved with the activities of the World Economic Forum in Switzerland. Huttman graduated from the University of Geneva with an MA in Economics (Sc. Com.) and gained a certificate from the London Business School in Investment Management. He has been registered with the FSA and CFTC for numerous years.

Alan Eisner MANAGING DIRECTOR

In charge of currency trading. Eisner has responsibility for overseeing Millennium's business as well as co- managing its currency activities. Formerly Managing Director and Chief Investment Officer of Trinity Asset Management, which he joined in 1997 to establish and expand the Trinity Emerging Currency Fund, a fund with a specific focus on local currencies. Previously he was a Vice President at Salomon Brothers International Limited, having worked on the foreign exchange sales and trading desks in New York, London and Singapore. During his 11 years at Salomon Brothers he gained extensive experience in trading both G-10 and emerging market currencies, as well as playing a key role in establishing the firm's foreign exchange operations in Singapore, and later in developing its sales and trading capability in global emerging market currencies. Eisner is registered with the FSA and the CFTC. Eisner graduated from the University of Edinburgh with a Master of Arts degree in Economic History.

Mark Astley MANAGING DIRECTOR

In charge of macro strategy. Astley spent 15 years at Schroders undertaking research and managing portfolios in debt, equity and foreign exchange markets in New York, Hong Kong and London. Initially, he worked in Asia as part of a team managing the Japanese equity portion of global balanced pension fund portfolios; he was also a member of the global asset allocation committee.Astley has extensive fixed income experience and was awarded 'Global Fixed Income Fund Manager of the Year' in 2001 by International Money Marketing magazine. Finanzen also awarded him 'Global Bond Fund Manager of the Year' in 2000 (2nd place) and he was the only fixed income manager featured by Bilanz among top performing managers of 1999.Astley has also been responsible for managing derivatives exposure in several equity and global debt portfolios. He was awarded a sponsorship to the Banking & Finance degree course at Loughborough University and is a member of the Institute for Investment Management & Research.

Lisa Scott-Smith EXECUTIVE DIRECTOR

Scott-Smith was formerly Director at Credit Suisse First Boston in the Global foreign exchange group, running the London team responsible for Hedge Funds (2001-2005). Previously, she was a Vice President within the Global Foreign Exchange group at JP Morgan in London. During her 10 years at JP Morgan, she advised a global mix of institutional, corporate and hedge fund clients in foreign exchange markets, derivatives and strategies. In her final four years at JP Morgan, she managed the Global Options team, which advised on FX options and structures for global institutional investors.

Roger Nightingale GLOBAL ECONOMIST

Nightingale has responsibility for medium-term economics analysis. For the previous 20 years, he has run an economics consultancy serving investment clients in five continents. He advises pension funds and insurance companies, banks, consulting actuaries and brokers. Additionally, he serves on the boards of a number of trusts and companies. Formerly, he had worked for the investment bank, Hoare Govett. Starting as research economist, he later led the economics and strategy division.

Joseph Strubel MANAGING DIRECTOR IN CHARGE OF CREDIT, HIGH YIELD AND DISTRESSED STRATEGIES

Strubel is responsible for debt and high yield strategies, managing the Millennium Global High Yield Fund. He has over 14 years' experi-ence in portfolio management, trading and research of high yield, distressed and special situation investments, on a global basis. From 1997 – 1999 he was Head of Fixed Income Investments for Renaissance Capital Asset Management, where he managed portfolios of corporate debt instruments in Emerging Europe. From 1996-97, he was a Director, Credit Fixed Income Trading, with SBC Warburg Inc. Addition-ally, he worked from 1991-95 in distressed debt portfolio management with the HSBC Group, and began his postgraduate career from 1987-90 as a Senior Economist with Merrill Lynch & Co. Strubel graduated from the University of Rochester with a Masters of Business Administra-tion degree in Finance and Applied Economics and a Bachelor of Arts degree in Economics. He is registered with the FSA and the CFTC.

Jim Guiang PORTFOLIO MANAGER

Natural Resources specialist. Guiang trained in the USA as a petroleum geophysicist and geologist and began his career in the energy industry in 1979 as a geophysicist with Exxon, and subsequently Amerada Hess and Conoco International. Since 1988 he has advised and co-managed oil and gas investments in emerging energy companies, working closely with Lion Resource Management, a specialist resource investment management company where he has been registered with the FSA since 1999. He graduated from Boston College with a Bachelor of Science degree in Geology and Geophysics, and from Boston University's Metropolitan College programme with a Master of Science degree in Business Administration.