My own background is that of a macroeconomist. I started working for the Dutch Central Bank and was responsible for foreign currency trading. Of course, at the time there was an exchange rate mechanism, all kinds of currencies coming in. I was also responsible for the foreign currency reserves of the Bank, and by extension, of the country. Iliked that, I liked the portfolio management element of it all, and wanted to move to somewhere where portfolio management was the main show, as opposed to the sideshow it represented at the Central Bank.
I moved to Robeco in 1989 and became the portfolio manager on the fixed income side for European portfolios. I became head of the fixed income department in the early 1990s, and stayed there until 2000, when we established a new business unit within Robeco, called Robeco Alternative Investments.
THFJ: Robeco Alternative Investments covers a wide range of different activities, including private equity. But what exactly are you up to in the hedge fund area?
We have a fund of hedge funds business run out of two locations, in New York and Rotterdam. The New York presence is the result of an acquisition in 2002, when we bought Sage Capital Management, which is now Robeco-Sage. The track record of this fund of hedge fund operation goes back to 1994, which is quite long in this area.
Another part of the operation is single strategy hedge funds. We have to make a distinction here between the single strategy hedge funds which are developed from the long-only platforms at Robeco, be it in New York or Rotterdam – they're not under my aegis, they're the responsibility of the people who manage the equity or fixed income departments, where they develop the long/short techniques they employ. Instead, I'm responsible for the acquisitions we make in this area. Our first acquisition was in 2002, when we acquired Transtrend, a managed futures trader. Their track record goes back to 1992. When we acquired them in 2002, we bought 49%, and we will acquire the remaining 51% in March.
THFJ: What are Transtrend's assets under management?
When we acquired them, it was slightly above €200m. Today assets stand at €3bn, which makes them one of the larger managed futures traders in the world. Another acquisition we made was only a few weeks ago, when we took a minority stake of 40% in AEM, a currency trader. Its trading program is based on high frequency data. Transtrend is an extremely well-diversified managed futures trader: what they trade ranges from the S&P 500 to unrefined sugar and orange juice. Anything which has a future on, they trade. Normally they have between 60 to 80 different contracts in the portfolio, and they are a medium term trend-follower, which means a losing trade is on average three weeks in the portfolio, and a winning trade five weeks. AEM only focuses on currencies. They only trade currency futures, in the most liquid markets, for example dollar, Swiss franc, euros, sterling. They do that on an intra-day basis, which is why they need high frequency data. The average trade is in the portfolio for only two to three hours, a completely different timeframe from what Transtrend is doing. At the time of acquisition, AEM was managing $200m.
THFJ: What is the rationale behind these acquisitions?
The answer to that is another product offering we have, namely structured products. These fall into two categories: collateralised debt obligations (CDOs) or securitisations, and capital protected products. The securitisations have mainly been CDOs, and we have done eight or nine CDOs or collateral portfolios, worth a combined ClObn. They range from high yield cash flow CDOs to synthetic investment grade CDOs. What makes us different from a lot of the other parties that do CDOs is that we're both the asset manager and the structurer: we are part of an investment bank that can do the structuring. We have been extremely successful in repackaging the equity tranches of the CDOs, and selling them to both retail and institutional investors. The other activity within structured products is principal protected products. For example, take the investment program of Transtrend. It is relatively volatile, for a lot of people it's too volatile, and doesn't fit their risk/return profile, but they are interested in the fact that there is an extremely low level of correlation between this investment program and other parts of their portfolio. So, our solution is to have our parent Rabobank issue a bond, of which 70% of the proceeds go into zero coupon securities, and 30% into the managed futures trader. We've been extremely successful in selling these products, with maturities ranging from four to 20 years, and currency denominations in euros, dollars, Japanese yen, and others.
THFJ: Rabobank acts as the guarantor of all these products, does it?
Most of them, yes. We sometimes use other banks as well. But Rabobank's AAA name helps with the distribution. We're different from a lot of other asset managers and the investment banks that offer these sorts of products, because at the end of the day, we're an asset manager, we're only concerned with the assets under management in our active investment management capabilities, where we can earn a management fee or a performance fee. When we do these structured products, we view them as another way of selling our active asset management offering. We can sell our asset management skills in a straightforward manner, in the form of a mutual fund or an individual mandate for a large institutional client, but we also open up markets by putting these principal protected structures around our active asset management capabilities. Instead of going to an investment bank to make, so to speak, these structures, we do this in-house, because we want to control the whole product offering to the client. This sets us apart from a lot of other asset managers who don't have those structuring capabilities in-house. Those structuring capabilities are different from an investment bank, because an investment bank will apply its structuring processes to whatever asset manager [it makes a deal with], because they want to make a living out of the structuring itself. That's not our purpose. Our purpose is to broaden the market for our active asset management offering.
We broaden the market by repackaging Transtrend, or our hedge fund of funds, or our private equity fund of funds; we open up markets in the sense that we can go to clients with different risk-return profiles, because we have that guarantee; we can go to clients with different liquidity requirements.
Let's take private equity as an example. Once you make a commitment to a private equity fund of funds, or an individual private equity fund, you're locked up. You can't get out. It's illiquid. When we repackage this investment as a certificate, we can list this certificate on the stock exchange. We help to maintain an orderly market for this certificate, and we have some liquidity. Not a lot, we have to be honest there, but we have some liquidity: you can sell your certificate, on an exchange, to another investor, which makes it far more liquid than investing in a private equity fund.
We don't just do this with our private equity certificate, we also do this with our principal protected product based on Transtrend. It is also listed on the stock exchange. Look closely at the Man products: they're not listed. They are less liquid. These liquidity products open up the high end of the retail market for us especially.
THFJ: So how does this all translate into selling products at the end of the day?
You can change the risk/return profile by adding a guarantee. You can have liquidity in what is essentially an illiquid asset class, or you can overcome regulatory hurdles. In a lot of continental European countries it is still very difficult to sell straightforward hedge funds. But if you repackage them in the form of a note or a certificate, then all of a sudden you're under the EC Prospectus Directive, and you can sell them almost anywhere. There's a big difference between legislation on the funds side and legislation on the securities side.
THFJ: What's the response been like from your client base for this sort of security? Has it been well-received?
It's been extremely well-received. If you look, for instance, at our principal protected product based on Transtrend, we've sold notes with maturities ranging from four to over 20 years, currencies ranging from dollars to Japanese yen. We've sold over €2 billion worth of these products in the space of two years. We sell them through third party distributors, much like the Man model, where you have distribution partners, to the high end of the retail client base and high net worth individuals.
THFJ: Do you find that it tends to be the high net worth market as opposed to the institutional market that has an appetite for these kinds of products?
That's only logical, I would say. Because the things we try to overcome with these structures, like the length of the commitment for example, are less of an issue for institutional investors. A 10-year investment horizon is a long period, but it is still within the normal investment horizon for an institutional investor. Ten years should be within the investment horizon for a lot of retail investors too, but it isn't. Also, if you look at the liquidity needs of an institutional investor, you will find they are much less, or they have a dedicated allocation within their portfolio to illiquid structures, like private equity. For individuals, it is of course a different story: they need more liquidity. These structures are especially tailored to reach the high end of the retail market.
THFJ: Do you think you will be making any more acquisitions in the hedge fund area going forwards? Is this part of a program where you've sat down and decided to increase the range of strategies you can make available by buying high quality managers?
The reason for doing these acquisitions was that we wanted to secure access to these managers. We wanted to profit from the economics when we made products based on them, and their assets under management went up. We think that we are entitled as a result to part of the profit related to their managing more assets. The easiest way to participate in that, and to get a fully-aligned interest, is to buy a stake in them. If we come across high quality managers who are still interesting from the point of view that they can grow significantly, and we feel that there is the scope there to make a structured product based on them, for which we would need some liquidity in the investment strategy, then yes, we would make further acquisitions. There is not a forced program here that says each quarter we have to make an acquisition of some form or another.
THFJ: If someone was managing a fund, and estimated that they had only another €20m in capacity, that's not something of interest to you?
No. It would not offer anything to our product offering or our clients. We can't turn around to our clients, and say, "We have this new asset management capability, but hey, you can't join." Why have it?
THFJ: Long/short equity funds are obviously of less interest to you as you're developing these already within Robeco.
Yes, this is an important point. What we can develop ourselves from within our long only platform, we will develop ourselves. We're really looking for complementary asset management skills.
THFJ: Have you considered launching a managed accounts platform or using managed accounts as the underlying for structured products?
No, and we're not planning to do so. I have great admiration for what Lyxor did, but they started years ago. There, definitely, we would be late into the game. Given the way the industry is developing at the moment, my fear would be that if you opened a managed accounts platform today you would end up with second tier managers. Most of the first tier managers are somewhere else by now: they're no longer interested in accommodating more managed accounts. Actually, if you look at Transtrend, we're behaving the same way: we're not allowing them to enter into any managed account relationships, just for reasons of operational efficiency.
THFJ: Many hedge funds have built their success around the trading skills of one or two individuals. How do you cope with the fact that you might have a structured product with a 20 year lifespan tied to a fund where it is pretty likely that the principals don't have any intention of staying there, running the fund, for 20 years? We don't structure a product of that length on a hedge fund where we believe the longevity is not there. It is something we really do consider when we structure a product. We don't want a situation where you have a 20 year product, where the principal is gone after five years.
When you look at Transtrend, or at AEM, these firms employ trading techniques that are not tied to one individual in the way you might see on the traditional asset management side, in equities. Both employ quantitative investment techniques. A lot of people will call that 'black box,' but on the other hand, if you use a quantitative investment model, it is far easier to transfer it to the next generation. You codify your investment knowledge. The only thing you are dependent on is for the next generation to be as inventive and as innovative, in working on the quantitative investment model. But that's always a challenge; it's not specific to us.
When structuring products, we have a preference for hedge funds which have codified their investment techniques and investment strategies. We also have a preference for the investment teams that look likely to stay involved with the business, either because they have an equity stake, or have all kinds of bonus arrangements that will keep the managers interested, as we have with Transtrend. For instance, we would not consider a hedge fund where the owner is also the principal investor in the hedge fund, and would simply cash out and be gone six months after the transaction.
THFJ: On average, how long do you expect the principals to stay with the firm following your acquisition?
A minimum of five years. And after that as long as they enjoy being an investor.
THFJ: Would you ever consider financing a start-up fund?
It would depend how you defined a start-up. Let's say it's you, and you think you have an innovative and returns-yielding investment strategy, and you've hired a Bloomberg, and ask us for seed capital, we'd say, "No, not interested." If it would be somebody from a prop desk with 10-15 years experience, and in some way we can verify the track record, and he has some business skills, and can communicate with other people, then we might be interested. But we haven't done it so far.