HFJ: You’ve been working with Sabre for over a decade now. Have you found your role has changed over that time?
Absolutely! Sabre was an established business when I joined, it having been founded in 1982 as a CTA. Part of having amature business is that the company may develop a different focus to its original mandate and people are at different career stages too- some are developing with the company and moving into other roles that open up. Some are looking to exit to do other things, or simply retire. The period of change for Sabre really began in 1997 when it entered the quantitative equity space but this accelerated in 2003 with the first of a series of capital structure reorganisations. Over the last three years the business control has transitioned from non-executive majority owners to the new generation executive management team headed by myself and Dan Jelicic.
So to answer your question and sum up, over the last three years particularly my role has developed to manage and accommodate these events with greater emphasis on business strategy, development, management and employing strategic relationships. This is really a new business from December 2005, albeit one with an experienced management team, established support team and a successful fund with a four and half year track record.
HFJ: Does it help to have that old name, to be able to say there has been a Sabre since 1982?
It does. Some of the people we were close to knew that we were trying to effect a management buy-out and asked why we didn’t just go out on our own instead. A few even said they’d be happy to consider backing us. We discussed this at length, but we found that there was a lot of goodwill attached to the Sabre name. Over the years we had generous exposure in the industry and a lot of people still ask themselves, “I wonder what Sabre’s doing?” and pick the phone up and call us. Both Dan and I are well known in the industry. People like to just check in to see what’s going on, what we’re up to. A lot of our direct contacts like this mayhave been lost if we’d set up under a new unfamiliar name. To make absolutely sure, we employed a consultant to research the investor market for us and the feedback was conclusive – “don’t change the name”.
Actually, some of our contacts were incredibly supportive and hugely encouraging – they were genuinely pleased for us and, of course, pleased to see their interests aligned with ours – to see us investing in the business and gaining control of it. We’ve spent this year communicating the changes to our contacts – we’ve effected a re-branding – moved offices and built the asset base up. Alongside this, Dan and the team has been hard at work strengthening the core investment process. 2007 should be an exciting year 2 for the new Sabre.
HFJ: What is the big difference culturally between traditional asset gathering and the development of distribution deals?
With the institutionalisation of the hedge fund business, traditional asset gathering is becoming more difficult unless one has a strong internal sales team. I feel that the days of what I call database marketing are over. When people are receiving several hundred emails a day the only way to get attention is face to face or on the phone. And it’s hard for one individual to cover the ground. Distribution deals can make sense for the smaller single strategy operators. Fee payment is contingent and it’s an effective way to leverage the opportunity set. External asset raisers will be talking to their contacts about a variety of products and so will have greater regular contact with some investors.
But it takes time to develop strategic relationships. You don’t have the control you would have in a direct relationship. You may also have to set aside an initial chunk of time to educate the external sales force. There are a lot of checks you need to go through to make sure that the people who will be responsible for representing you will do so in such a way that it won’t damage your image in the investment industry. You have to be really sure that they can raise you the assets they will tell you they can. And you have to find a deal which is mutually rewarding and flexible.
Also as a consequenceof the institutionalisation of the business, the sales function has become more technical. To meet this demand, we’ve recently hired an individual with strong academic and practical quant skills as part of the portfolio advisory team, but who will have some part of his responsibilities dedicated to technical marketing in the instances where we have in-depth second or third due diligence meetings.
HFJ: Does this mean that the sorts of questions investors are asking are of a more technical nature as well?
Absolutely. The business has moved away from the model where a general investor analyst covered many strategies to highly qualified specialists in individual strategies. Quite often we will find ourselves in front of a PhD or ex-prop desk trader before we get to see the CIO or even make it to the investment committee. These analysts have to understand the essence of our models and the robustness of the methodology employed so that it can be articulated to colleagues on the investment team. They can see the return profile, they can see something different is happening, but they need to be able to understand why. They also need to be able to understand the performance month-by-month; the more insight that you can give them on the actual underlying modelling and optimisation process the more comfortable they will be, and ultimately will lead to less supervision, less calls in the event of a drawdown, or also in the event of an unusually strong up-month, as we’ve experienced in the past! It is a far more difficult task these days to impart enough information so that your “edge” can be articulated whilst protecting IP.
HFJ: Are we seeing a change now from the traditional model of distinct marketing and portfolio management functions to one where a hybrid role will emerge within hedge funds, someone who can sit with the portfolio managers and perform a useful role there, but can also be spared to go out on the road to meet investors?
I believe so. It is very rare that investors don’t want to meet the fund manager himself, more so for boutique managers than the large asset managers. Some very large tickets are written these days and investors need to check all their boxes – particularly with regard to trust and integrity. In order to meet this increasing requirement and the day to day demands of portfolio management it is useful to have people on the team with crossover skills.
HFJ: They’re not simply happy with the performance numbers?
At some point they are. When funds reach a certain asset size, having generated excellent returns year after year and are “closed” then the expectation is different. We do more and more meetings these days where prospects ask to go into the portfolio room and meet the whole team. Analysts want to look at a snapshot of the portfolio on screen and spend five or ten minutes being walked through the portfolio manager’s typical day. And they want to look at the risk systems to see if, say, position sizes in the live systems are as limited as you have stated in the prior meeting. Some of these prospects may have been the victim of past hedge fund fraud or poor risk management practices.
Ten years ago the industry was really a cottage one, built on personal relationships and intuition. Big investors chose managers based on great gut instinct, while now we live in an age of liability, legal and career risk; investors have to check boxes, prove to large investment committees that they’ve done their job properly. It is completely different, much more institutional. It is exactly what I expected would happen: there was no reason to suppose that the hedge fund industry wouldn’t mature along the lines of the mutual fund industry.
HFJ: What’s your view on managed accounts? Not everyone in the hedge fund community seems enthusiastic about them.
We’re happy to run managed accounts, and do so for meaningful assets. I can see why some firms choose not to offer them. If you’re not fully systematicand quantitative, it can provide a burden of administration, and bring another level of risk into the business. Then there are the issues where you find the money that would be really helpful coming into the fund – which would attract bigger tickets and bigger investors – doesn’t happen because it is coming in via managed accounts. In some strategies you have issues of prior liquidity preference: you can find that a managed account can exit at the end of the week, while your other investors are on quarterly liquidity. In our respect it’s very simple, as we’ve built a fairly sophisticated portfolio management system in-house over a number of years which enables us to split trades across accounts pro rata, so that everybody is treated exactly the same, and managed accounts can, if necessary, track the fund within basis points.
HFJ: Do you foresee a situation one day where a large proportion of industry assets will be managed via managed account platforms?
I don’t believe it’s that way in the mutual fund industry. I suspect the bulk will continue to be fund assets. The large investment banks are going to want to run platforms in order to provide products to their client bases. And portable alpha overlay programmes and the structured product market are growing as institutions look for alternative alternatives.
HFJ: Are conferences a useful forum for raising money?
It’s always difficult to track money to specific conference attendances but I am sure that every conference has paid for itself in due course.Sometimes in indirect ways. The new GAIM format works well, utilising the new technology available to enable maximum networking opportunities. It is also helpful to allow gratis or reduced cost investor participation. My impression was that the last GAIM conference saw an unusually high investor participation, particularly on the family office side. And Global ARC in Boston is a very well run event. It was attended by mainly institutional investors – pension funds, foundations and endowments together with the consultants and fund of funds that are currently servicing them. Direct investments are beginning to be made by institutions and conferences are good for forming early days relationships.
HFJ: Does your role still involve a large amount of travelling abroad?
Next year, I think I will be travelling more in order to get us on more radar screens and establish new relationships. New regions are beginning to have greater importance – Asia for example where we have fewer local connections. It’s important to combine desk time and networking, business development time. One stays fresh if one is exposed to current thinking, trends and ideas on a first hand basis – it helps in planning for the growth of the business and meeting the increasing challenges of competition. And with the right personal contacts regionally you can sometimes source non mainstream investors – those that are not on cap intro lists, have their names on the electronic wires or can be Googled.
HFJ: With that market, isn’t it easier to retain someone on the ground in that part of the world who has the valuable long-term relationships and connections you can capitalise on?
I believe so. One of the things I’ll be doing next year is looking to hire someone who can help us on the ground in Japan and the other Asian countries. Japan is an unusual market in that, according to a recent survey, 65% of institutional assets are being invested directly with single manager funds. There is also a good appetite for market neutral funds and they have been early investors into quantitative funds. The desired investment profile matches our delivered target returns – low volatility and cash + 6-8% p.a. You’ve also got Australia, which is a great growth market on the institutional side.
But to answer your question directly, I believe that is why quite a few London and US firms are setting up Asian offices. You need to be in front of people on a regular basis inorder to stand a chance of being near the top of their watch list, because so many managers are competing for assets. But performance is, of course, the big decider: people won’t even take the meeting if your performance is not on par with their stated objectives. That is a key change over the years – as is the fact that investors tend not to take meetings with managers of strategies not fitting their current top down view. No one wants to waste time these days, everyone is too busy.
HFJ: This must make life very difficult now for start-ups.
Which is why it’s so important to have a decent launch. It may be some time before further assets are raised. But having said that, on the plus side, access to help is readily available and the actual start up process is facilitated by a number of good firms. Ten years ago it was highly entrepreneurial to set up your own hedge fund. It took guts, a lot of confidence and conviction and 24-7 commitment. The business had to be built from scratch with no “templates” being available. But as the industry has matured, a number of support firms have developed. Suddenly it became easier to leave the asset manager or prop desk and set up on one’s own – the barriers to entry dropped. What has happened now is that, because there is so much competition, and institutional assets have flowed so strongly to funds of funds, the tickets often written as the initial ticket are so large that it takes some conviction to write a $25-50m ticket for a new firm. So start-ups are looking at a much smaller universe to get a selection of ones, twos and three million to start building the fund until attaining the first critical milestone – $100m. Unless you’ve got some good friends, or you strike some form of seeding/ fee-sharing deal, it is much harder.
HFJ: Do you think that today’s start-ups will have to embrace the fact that they will have to give up a substantial slice of equity in return for seed capital?
You need a combination of a compelling alpha proposition, a strong pedigree/investment background and a good support team. Investors will have to be convinced that the team will deliver on the investment process and have the manpower and ability to manage the business to today’s institutional standards.
To that end, not every start up will make the grade – most probably not for the investment part of the equation but more likely due to the capital constraints of running an institutional standard business. This should lead to greater consideration of seed capital deals and/or working under a branded management company with established start up facilities. If a manager still maintains 50%- 75% of fees with few operational distractions that is a fair deal.