Q&A: Dixon Boardman

Founder, CEO and CIO, Optima Fund Management

Originally published in the September/October 2012 issue

Dixon Boardman established Optima Fund Management in 1988. With the benefit of hindsight it turned out to be a propitious time to set up a business to select and invest in single manager hedge funds. From a standing start, Boardman’s firm began guiding investors to who would become some of the hedge fund industry’s most celebrated managers. Early on this elite group included Paul Tudor Jones and Bruce Kovner, the founder of Caxton Associates. Another early commitment was made to Louis Bacon’s Moore Capital. Later, Optima invested with Alan Howard when the Credit Suisse prop trader in 2003 opened the Brevan Howard Master Fund, now the world’s biggest macro offering.

Boardman is still running the firm, which now manages $3.6 billion. Optima remains independent and privately held with a strategic institutional partner in BNY Mellon. The firm is dedicated to funds of hedge funds, bespoke separate account portfolios of hedge funds, and specialist single manager funds. The commingled and customized programmes extend across a variety of strategies. Long/short equity marked the firm’s founding in 1988, while global macro got added in 1991. Multi-strategy solutions, meanwhile, made their appearance in 1999. Boardman has acted to ensure that asset growth is driven by investment opportunities. On the business level, Optima has been profitable every month since inception. In a recent interview Boardman spoke with Editor Bill McIntosh. The following is an edited account of their conversation.

The Hedge Fund Journal: Dixon, tell us about the thinking behind the founding of Optima in 1988. What were your goals?

Dixon Boardman: It was a revolutionary idea at the time. We wanted to offer people the opportunity to invest in hedge funds. I had been a broker for many years at Kidder Peabody and later on at Paine Webber. I dealt with a lot of hedge funds and saw that there were various firms that consistently made money in good markets and in bad markets. In those days, hedge funds were considered at the high end of the risk spectrum. So I decided to start a firm to invest in 10 or 12 of the best hedge funds, ones that had been in business for a while and that had a good track record. This was defined as compounding at better than 10% a year, or more likely, 12-15% for a period of years, while never having a down year of more than 10%. As well, the manager needed to have a substantial portion of his own net worth co-invested. I thought that would give high net worth investors an opportunity to participate in hedge funds in a safe way. I had no idea that we were at the beginning of something which would grow so large. When we started, I think there were 600 hedge funds and only 100 had more than $100 million. It was a very different time. But there’s been a real evolution of the business. We started out in the multi-manager business and subsequently got into the single manager business. Now we also offer bespoke separate accounts.

THFJ: Much of your senior team has been in place for many years, some up to 20 years. How have you been able to achieve this continuity?

We were early entrants into the industry and we tried to be innovative. That has appealed to the people who we’ve attracted. The business has evolved and we’ve changed along with it. At one time, investors were happy to invest in a fund or funds. Now, however, investors with more than $50 million want a bespoke product and we’re creating that for them.

THFJ: What are some of the biggest changes you have seen in the fund of hedge funds business over the years?

There have been massive changes. One of the biggest changes has been the migration of institutions into the business. When we started about 80% of the money was HNWI and 20% institutional. Those numbers have reversed now. Institutional asset allocation has tended to favour hedge funds with stable risk profiles, well established with large AUM. Also, the institutional due diligence process has led to a preference for hedge funds or a fund of funds with deeper organisational resources, greater transparency and a higher degree of reporting.

THFJ: Why has the strategic institutional partnership with BNY Melon been valuable to Optima?

It’s a relationship that started 11 years ago. BNY Mellon have been absolutely wonderful partners. They own 15% of Optima and we are the sole provider of funds of funds for their private banking business. We’ve built products for them, giving their high net worth client base access to something new. We were looking for an institutional partner at the time and they were looking for someone who could provide quality hedge fund investing to their clients.

THFJ: What is the investment case for allocating to hedge funds in the fourth quarter of 2012?

Simply put, it is that the market is up 100% from its bottom. I think you could make the case that it is better to be in a hedge fund than in a long-only product at this time. The long-term record of hedge funds has been excellent, but for the last three years since the crash hedge funds have tended to underperform.

THFJ: Do you think there’s a period of outperformance to come?

I do. The long term has certainly shown outperformance. I know that with the market up 100% I’d rather be in a hedge fund than in a long-only product. I think it’s just common sense.

THFJ: How have the ways investors use funds of hedge funds changed over the years?

For HNWI a fund of funds has always made sense because it provides a degree of safety by diversifying their allocation across a number of  managers that have been carefully selected by a professional investor. Now many of the very sophisticated HNWI feel that they can go directly to the hedge funds themselves. But for a large number of people with, say, $5-20 million dollars – the typical BNY Mellon client – a fund of funds is really very useful.

THFJ: When HNWI go direct tohedge fund managers they’re just copying what they see other people doing; they don’t have the wherewithal to do proper due diligence in the way that a fund of funds or a private bank would….

No, they don’t. We kick the tires unbelievably hard. There was a wonderful quote in the Wall Street Journal from Professor Steven Brown of New York University’s Stern School of Business; he said: ‘If you were investing in a hedge fund, you should hire a professional to make sure your fund is squeaky clean… If you were buying a million-dollar house, you would have an engineer come and check it out. It’s the same with a hedge fund.” and that’s what we do. That’s what we spend our life doing. Just because a lot of people tell you something’s good, because their best friend said it and their doctor said it, does not mean it is good. Remember Mr Madoff.

THFJ: What do you believe the key factors are to successful hedge fund investing?

With more than two and one-half decades of experience we have relationships with seasoned hedge fund managers that newcomers cannot possibly replicate. We continue to develop our extensive network and build intellectual capital. We are adding to our deep and broad proprietary database of hedge fund talent all of the time. Our hard work and experience, and most importantly our relationships, have enabled us to discover and fund outstanding managers early on. Often we’ve had access to the best of breed of managers that might otherwise be closed to other investors. So the relationship with the managers is incredibly important. Take Chase Coleman. We’ve had money with him for many years. When one of his people left to go off and start a fund of his own, we’ve known the person while he worked for Chase and we had had confidence in him. So we funded him. It gives us an extraordinary edge and that’s just one example of it. Relationships say it all. We are just launching a new single manager hedge fund with David Chan of Jennison Associates. It is a $160 billion long-only shop. Ex-Tiger cub Pasco Alfaro, who runs Miura Global Management, told me of his efforts to hire David Chan for his expertise in the health care space. Pasco couldn’t get David, but he advised me to offer to start a hedge fund for him. And that’s precisely what we’re doing.

THFJ: What commingled products does Optima run in long/short equity?

The original long/short equity fund was made up primarily of US-based managers and focused on US-centric investing. Seven years ago we started a fund of funds investing in global markets. We have also started a focus fund where we ask the managers to give us their 10 best ideas. Essentially, these are their highest conviction ideas on the long/short side. The returns are good because the highest conviction ideas of a manager are that for a very good reason. We launched it five years ago, which wasn’t a particularly good time, but it’s done reasonably well. I think it makes immense sense. I was given the idea from reading an interview with Michael Steinhart in the WSJ. He argued that hedge fund investing has become so institutionalised that the performances had turned to mush. I thought if you could get the 10 best ideas, from say 10 managers, that shouldn’t give you a mushy performance!

THFJ: What factors do you take into account when designing a multi-manager discretionary macro portfolio?

We’ve been in macro for about 20 years. Our bedrock idea is always to use the true and trusted, the best and the brightest in the space. Be it the Kovners, the Bacons, the Tudors, the Howards. We have 70-80% of our macro fund of funds in those blue chip names. The remainder of the fund has managers who have very strong pedigrees, but are not quite as well known. That’s always been our model with discretionary macro. It’s worked very well. We tend to have fewer managers (in discretionary macro) than we have in our long/short equity funds. I feel more comfortable doing it in a conservative way. I am by definition, a huge risk hypochondriac!

THFJ: How do you see Optima adding value for investors?

The manager selection is the key. Top quartile hedge fund managers have materially outperformed hedge fund averages and often with less risk. Superior manager selection is costly and time consuming. There are very few people qualified to do it. We’ve been doing this for 25 years and I’ll say we’re experts at it, because that’s all we do! If anybody does something full time, they’re going to do better than somebody trying to do it on a part time basis.

THFJ: What do you think investors need to keep in mind with respect to the fees funds of funds charge?

It’s a question that comes up. There is a horrible American expression: you get what you pay for. We have avoided literally just about all of the funerals in the hedge fund business: whether it’s been Madoff, Bayou or Amaranth. Now that’s not a fluke. We’re really careful, we do deep due diligence both before we invest and on an ongoing basis. I go back to the phrase, which I don’t particularly like: you get what you pay for.

THFJ: Since 2008, investors have wanted more liquidity. What are your thoughts on liquidity with funds of funds?

Well a fund of funds can only give liquidity on the basis that they have liquidity from the funds that they invest in. Not everyone has adhered to that rule over the years, though we always have. There is particularly out of Europe a demand for more liquidity. The crash of 2008 and the gating that took place had a more profound effect in Europe than it did in America.

The old AW Jones theory of a hedge fund was you can get in and out of it once a year. It makes sense as he didn’t want money going in at the wrong time and coming out at the wrong time. Having said that, the industry is evolving and changing, and there’s been a big move to UCITS in Europe. It offers advantages and disadvantages. The UCITS funds offering great liquidity have tended to underperform hedge funds, which don’t offer as much liquidity. But this is a debate that is going to go on for a while. Some of the best funds in America require investors to sign up for three years. By and large, the American institutional investors are not nearly as anti-illiquid investments as their European counterparts.

THFJ: Optima obviously didn’t invest in Madoff; what were some of the red flags that you spotted over the years that kept you away from it?

One does not ever wish to sound smug. But anything that’s too good to be true usually is. The fact that Madoff’s accountant was not one of the ‘big four’ and was located in a strip mall outside of New York City – that would put up a red flag for us. Even if you couldn’t put your finger on it, common sense might have told you there was something that didn’t feel quite right.