Singapore Hedge Funds Club
Evening Reception, 3 Sep 2019
Sydney Hedge Funds Club
Evening Reception, 10 Sep 2019
Hong Kong Hedge Funds Club
Evening Reception, 7 Nov 2019
Tokyo Hedge Funds Club
Year-End Reception, 2 Dec 2019
16 May 2019
The Eurekahedge Asia ex-Japan Hedge Fund Index was up 7.87% year-to-date as of the end of April, sup...
10 May 2019
Alain Bordoni, a former managing director at PAG, the alternative investment manager, has joined Hon...
18 Apr 2019
Hedge fund managers focusing on Asia ex-Japan were up 2.04% in March, with strong returns registered...
1 Apr 2019
Bryan Goh has today started a new job as Chief Investment Officer of the Karuna Family Office in Sin...
21 Mar 2019
The Eurekahedge Greater China Long Short Equities Hedge Fund Index was up 8.31% over the first two m...
18 Mar 2019
Scott Treloar’s Singapore-based investment management firm Noviscient has added Ray Ferguson and JP ...
Interview: Gerben Oldekamp of Circle Partners – a new arrival in Asia’s fund admin industry
7 May 2019
Interview: Omar Taheri of Spark Plus talks about Australian expansion
14 Mar 2019
Interview: Mio Kato, founder of LightStream Research
5 Dec 2018
Interview: Lessons from an emerging manager
17 Sep 2018
- Interview: Gerben Oldekamp of Circle Partners – a new arrival in Asia’s fund admin industry
Shout It Out Loud
Hedge fund industry interviews
In addition to our daily news feed, Hedge Funds Club’s Shout it out loud publishes interviews with interesting hedge fund managers and other senior industry figures that have something to say.
HFC’s Stefan Nilsson caught up with Gerben Oldekamp of Circle Partners in Singapore to discuss the group’s fund administration offering and its growing client base in Asia.
As a global fund administrator – how important is Asia to your business?
Until a little over a year ago, we did not have a presence in Asia. We had offices in the US, the Caribbean and in Europe and always thought Asia would be a great next step. It took us a while to take the plunge but we don’t have any regrets that we finally did. We have experienced massive growth due to our strategic plan and timing to enter the market. Both the turmoil in the fund administration landscape as well as a large number of new initiatives, have contributed to this.
Do you mainly onboard existing funds that want a different fund administrator or emerging fund managers at the pre-launch stage?
Both. Although we onboard quite a few emerging managers, we have a very diversified client portfolio. Especially here in Asia, we have onboarded quite a few existing funds as it seems that all the changes have led to some of our competitors struggling to keep up service levels. In the space we are active in, mid-sized fund administrator with AUA over 10 billion, I believe we are one of the few, if not the only one, still independently standing and I believe we have profited from this.
You personally have a background as a lawyer. How helpful is that when you work on fund administration and fund structuring?
It has added a tremendous amount of value, especially when talking about fund structuring. I have for many years been involved in setting up funds and structures. Being a director of fund structures in Europe, this experience has taught me to be creative and has given me a good network of resources to consult when I don’t have the right answers, which prospective clients appreciate. I have furthermore been involved with Circle Partners for more than 10 years now and, because of this, have added knowledge and experience in accounting, investment strategies, etc. which is helpful too.
How have fund managers’ needs changed in recent times in your experience?
In my experience, regulation and enhanced compliance requirements have made it at times quite complicated and overwhelming to launch. More than before, we try to be transparent and complete in the advice we give on setting up. We also try to be realistic in terms of time to market. To answer your question, more than before, managers need to be guided and hands need to be held.
We have seen a lot of consolidation in fund administration in recent years. How can independent fund administrators compete with fund admins that are part of banks and other broader financial services groups?
I see it as a tremendous advantage that we remain independent. Senior leadership, including myself, are very much on top and very concerned with service levels while at the same time being competitive on price. With an organization of just over a hundred people, we are nimble, timely and highly responsive. I furthermore think it is an advantage to be service-provider agnostic. Our clients are free to use any broker/custodian, platform, etc. This independence has proven to be very effective.
You have two local offices here in Asia. Is it vital to have a regional presence in order to win business and serve your clients properly?
Absolutely. During the time we were only active in Europe and the US, we would occasionally win some Asian business. We, however, often received feedback that not being able to offer the same time zone reporting and not offering Mandarin speakers was a reason to choose another service provider. With our office in Singapore, we now offer the above and we could have never experienced the growth we have experienced without it. We will now place people in our Hong Kong office, which has always been more of a representative office, as we have noticed that in order to further grow in both Hong Kong and China this is necessary as people like to meet and call people locally.
HFC’s Stefan Nilsson checked in with Omar Taheri in Singapore to talk about Spark Plus’s expansion into Australia. Spark Plus provides listed companies access to accredited investors across the Asia Pacific region.
Having already established yourself with operations in Singapore and Hong Kong, you recently opened an office in Perth, Australia. Was Australia the obvious next step for Spark Plus?
Given that most of our clients are ASX listed, we thought it was a good idea to have our operations and sales team built in Australia. One really has to be close to the capital markets and be on the ground to be able to grow one’s businesses. We knew that travelling back and forth was not sustainable in the long run so we hired Mr Daniel Rootes to head up our Perth operations and grow the business.
Is the new office focused on hosting roadshows and events in Australia or is it more focused on marketing your Asian capabilities to listed companies in Australia? Or both?
The current offering is to take Australian companies to connect them with Asian investors on a non-deal roadshow basis. However, we are thinking to expand the offering to also have Australia as a roadshow leg for non-Australian corporates.
Perth is a city known for companies in the mining, petroleum and agricultural services. Was this a major factor in the decision to locate your Australian office in Perth?
The main reason we chose Perth as our first office is due to the same time zone, proximity, and our client base. We have a lot of firms coming from Perth given that it only takes five hours to get up to Singapore which is nearly the same as flying from Perth to Sydney. We realised that Perth for its population had a lot of entrepreneurs and a broker network that is very supportive of taking companies up to Asia.
In Asia, you have recently been active in sectors such as natural resources and healthcare. What are the hot sectors for Spark Plus in 2019?
We are actively looking for industries that are disrupting the status quo. We are quite bullish on the e-sports segment. The interest coming from large brands, sponsorship, tournament prize pool and viewership in this space is getting us excited. There are only a few companies listed in this space currently so we are hoping this trend will change as the industry matures. I highly recommend your readers to check out an e-sports event to understand the magnitude of the industry and how some of the major stadiums in the world are now getting filled with a whole new sub-sector of fans and followers. The other sector that we are looking at is the aircraft leasing sector. We do tend to find that this industry has great potential and yield. We constantly see rise in passenger numbers and a rising middle class in Asia, so hence we realise that airlines will need to purchase more planes and lessors will benefit greatly from this.
Spark Plus is providing independent corporate access, something which was earlier done by banks and brokers. Do you see any potential in partnering with banks and brokers to provide your service or do you see Spark Plus continuing to operate independently?
Currently, we do work with niche brokers to give them access to our Asian investor base. However, the larger investment banks already have this space covered given that they have an office in all major financial cities. We have had plenty of success with brokers that don’t have a presence in Asia but are looking to get connected to our buyside. We are also actively signing MOUs with new partners in Japan, China and the UK, which will allow us to mutually benefit each other’s organisation.
LightStream Research was founded in 2017 with the goal of melding traditional research with alternative data and artificial intelligence to provide deeper insights into companies, industries and economic conditions. HFC’s Stefan Nilsson checked in with LightStream Research founder Mio Kato in Tokyo to find out more.
You launched LightStream Research in 2017. What led you to set up your own business?
I think it was mostly a desire to be able to focus my time on things which seemed useful and were simultaneously enjoyable to me. Equity analysis is simply something I enjoy doing and my education also heavily focused on mathematics, economics and econometrics, so the new big data and alternative data wave seemed like it was right up my alley. My time as part of company management at the firm Uzabase also made me realise that I like developing and training talented juniors. Lastly, I believe there is a significant advantage in being able to tap the lower wages and financial skills of labour on the Indian subcontinent but there is some rigidity of contract terms and high fixed costs for traditional KPOs. The confluence of these three factors made me believe that there was scope to develop a small team of talented juniors in Sri Lanka to emphasise data-driven research and flexibly provide investors with analytical help, both through standard research notes and bespoke research.
LightStream is part of a wider group of related companies that cooperate on different levels. What advantages does this set up give you over some of your competitors?
We partner with Nowcast under the umbrella of the Finatext group. Nowcast is Japan’s foremost alternative data provider and together with Sandalwood one of the few go-to companies for alternative data in Asia. We sit in the same office as Nowcast and collaborate with them extensively so we have access to a variety of credit card, point-of-sales and point card data. Naturally, this gives us some unique insights about various consumer product and ecommerce trends which are important to investors, but the longer-term picture is really about combining the skills of equity analysts and data scientists to convert very interesting data into accurate alert mechanisms to highlight investment ideas and also help build real conviction. To this end, we started an initiative to have all our equity analysts trained in Python programming, not just for the purpose of web scraping and data crunching but also to try and understand the way our Nowcast colleagues come at a problem. That deepening of collaboration will be a key determinant of generating the most actionable and high conviction insights in my opinion. We also publish our research on the Smartkarma platform. While we have no capital ties with them, we know the founders well and have a strong regard for the direction they are trying to push investment research in. It is early days for these online research portals, but there are a number of extremely experienced and capable analysts on the platform whose expertise we can tap. We are all about collaboration and trying to understand as many different perspectives on a potential investment as possible so we are very focused on trying to generate conviction on investment ideas by passing them through multiple filters – alternative data, traditional fundamental analysis, the perspective of industry experts outside of the investment world.
Your business and your research analysts are split between Tokyo and Sri Lanka. What was the thinking behind this set-up?
Mainly cost and the ability to provide an attractive opportunity to talent in Sri Lanka which is interested in cutting-edge analysis. Many KPOs focus on the cost advantage of analysts in Sri Lanka or India, but from my perspective what is more important is the ability to select the very cream of the crop when you don’t have to stress over budget. Conceptually, rather than trying to hire good analysts for a fraction of the cost, we want to hire the very best analysts in Sri Lanka for what is by Tokyo standards an extremely reasonable cost, but quite generous pay by Sri Lankan standards. We believe this better maximises the cost/benefit ratio. Also, I am half Japanese and half Sri Lankan and I grew up in Sri Lanka so I have an interest in trying to provide talented Sri Lankans with similar opportunities to what I was luckily afforded in my career. The cost advantage does, however, have important implications for the scope of what you are able to do. For example, with our Nowcast collaboration, developing entirely new methods of analysis and combining data analysis with the understanding of company business models and operating leverage is time-consuming. It would not be easy to make the necessary investments for this process if you were to hire only Japanese analysts, but by creating mixed teams it is much easier to obtain the manpower while still ensuring an understanding of the local dynamics.
You have a focus on Asian research rather than global. What made you decide on a regional focus?
Well, my own experience is in Japan where I have been analysing stocks since 2004. I also see a lot of positive developments in the Japanese market and among Japanese businesses so given the gradual migration of analyst talent over the last decade plus I do not consider this a bad time to be focusing on Japan. For Asia more broadly, we largely focus on three areas: 1) industrials, where China is often the marginal demand driver and where Japanese companies are particularly strong, 2) tech where Asia is often a key source of demand and very dominant in the supply chain, and 3) consumer products and retail, mainly focused on Japan where we most heavily utilise data from Nowcast. Since a lot of incremental global growth comes from Asia and we believe that Japan’s companies are not just healthier balance sheet-wise but also increasingly successful at expanding in Asia, and profitably no less, we believe that the key swing factors which drive performance will be frequently located in Asia.
Data and artificial intelligence are all the rage now. How are the data revolution and changes in how data is collected, analysed and used impacting your business?
It certainly feels like the future. On a personal basis, I think that the increasing abundance of data as people start to understand its true value could eventually lead to a greater emphasis on long-term success and strategy as alpha becomes harder to generate purely from data sets, therefore we are not by any means de-emphasising the importance of company strategy and qualitative analysis. With that said, in the medium term, we believe data analytics could become a very strong generator of alpha. In particular, we believe effective forms of data cleansing, which Nowcast is expert in, and generating high signal-to-noise ratios will be key. With that said, data quality is an issue throughout the industry and making effective use of a lot of the data coming through is not easy. At present data collection and tagging is not done well by all generators of data and improving this will be a process. Once that can be done it is a matter of integrating the much more granular and high-frequency data into financial models to parse the impact on company earnings. We are also quite fond of very traditional numerical analysis such as correlation analysis and doing specific factor analysis of company earnings. It is simple, but often effective and now we have even more data to play with. Manipulating and combining data in appropriate ways to generate investment insights also requires a certain amount of understanding of finance and equity analysis which many data scientists lack. Thus, we believe collaboration is necessary and easier said than done unless priorities are appropriately aligned. Given that the alternative data industry is just starting to come into its own, best practices have yet to be established. Hopefully, LightStream and Nowcast can combine our expertise to do that.
You have worked with analysis and portfolio management in the Tokyo offices of a couple of international alternative investment funds in the past. How does this hands-on experience help you in working with fund managers as clients now?
I think the biggest advantage is understanding what they want, what they value and how they think. I prefer to think of LightStream as an outsourced buy-side analyst shop rather than a sell-side research provider or even independent research provider. We want to generate ideas that generate good returns and we want to effectively identify risks to the trade and be very aware of the path risk for stock prices. I personally do not consider myself a particularly good or bad trader, but I consider it important to try and accurately frame the catalysts and risks of an investment case to make the life of someone who is a good trader as easy as possible. I consider the analyst side of the work to be my calling but portfolio construction and risk management is also a very interesting discipline and intellectual challenge. Being conversant in the latter I feel helps when articulating ideas to PMs and particularly so when you are talking to many PMs who could have very different trading strategies, risk tolerances and investment horizons. My own bent is to look for ideas which are structurally sound and likely to be attractive on the long side for 1-3 years, but within that time period desired sizing could change dramatically based on price performance and upcoming catalysts. On the short side, I find that effective time horizons tend to be shorter, perhaps 6-18 months. Of course, for alternative data driven ideas, trading periods could be much, much shorter depending on what the data is telling you.
When it comes to working with hedge funds and other alternative investment managers as clients, it is becoming more and more important to be able to offer a flexible and often customised service in order to win new clients and keep existing ones. How flexible is your offering?
I absolutely agree. Flexibility and adaptability are increasingly important given the changing landscape not just in the alternative investment management industry but in almost every industry globally. So much is changing that the ability to deploy resources flexibly and have access to a diverse range of skill sets is truly key. We feel that we work very well with funds that require ad-hoc bespoke research as we do not demand specific time period commitments. Many outsourcing companies lock clients in to year-long contracts and bill monthly so even if you don’t have specific ideas that you want work done on you are still paying for that time. We are structured to steadily conduct our own analysis on companies and publish this through platforms such as Smartkarma as our “day job” but have the flexibility to respond to urgent or short-term requests, especially regarding data analysis. Ultimately our client relationships operate on a trust basis and “selling” is definitely not our speciality. We thus focus on trying to be high touch but low maintenance. When our clients have a need we are there and happy to customise our offering according to the exact scope they are looking for. When they don’t, we are quite happy to be out of sight and out of mind until they next need us.
Himali Kothari, Founder of Aquamarine Value, is having a conversation with Anand Ramachandran, Partner and Fund Manager from River Valley Asset Management in Singapore. River Valley Asset Management started at U$10 million in 2014 and as of today, their AUM is U$60 million.
How did River Valley Asset Management get started?
The Partners in the firm have all worked in large global funds for over two decades and felt a need for stepping out of the straight-jackets which institutional asset management firms are finding themselves in. Large firms increasingly manage assets in specialised pools trying to outperform narrow market benchmarks while the return vs risk trade-off is left for the asset allocator or investor to manage. This creates dissonance as, during periods of market drawdowns, many investors feel disillusioned if their managers make a loss but claim they outperformed the benchmark. Secondly, active managers are finding that exchange-traded funds replicate narrow benchmarks cheaply, putting pressure on their revenues. In the past, as investors when we looked around the marketplace to invest our own capital, we could never find funds which could deliver the return expectations we were seeking. It was easy to find funds focused on themes such as a China fund or an India fund or a technology fund but very few mainstream funds focused on absolute return across sectors and themes. Most absolute return funds were in the hedge fund space employing complicated strategies but there were limited funds which employed a plain vanilla bottom-up long-term oriented multi-asset investment strategy. We felt that there was a need for delivering steady absolute returns, taking focus away from index-based benchmarks and delivering on a client’s absolute return expectations, ultimately the true benchmark. The result of this is River Valley Asset Management. The investment philosophy of the firm is a gist of how any professional investor will invest their own personal wealth, absolute return with low volatility. We believe in an active security selection process and are not straight-jacketed by the boundaries of benchmarks and asset classes. Our objective is not to beat benchmarks but to beat our clients’ return expectations without taking excessive risk. This approach takes away the complication of asset allocation and investment decision making which many investors want financial firms to take responsibility for.
What was your approach in raising seed money for the fund?
Our initial source of capital was friends and family as well as referrals from professionals who understood our philosophy and objective of delivering consistent absolute returns. In the initial days, we did not approach institutions because from past experiences, we knew that an established track record and an ability to demonstrate delivery of the investment process with proper systems and controls were key to attracting institutional money. As we started building a track record, we have seen increasing traction with institutions who are now doing due diligence on our firm.
Who were your initial hires? After your initial hires, did you wait until assets grew before expanding and, if so, what key positions were the hires?
We are a small firm with just five professionals. A lot of our activities were outsourced from day one and our belief is that as a firm we need to focus on the activity which adds the most value, i.e. investments. In the beginning, the firm started with two partners with the third partner joining subsequently. Other than investment professionals, from day one we had a dedicated person responsible for operations and compliance. Once we got our initial pool of capital, the first hire was an associate who could help us with middle office systems, financial modelling and record keeping. Our future hiring will be a function of our asset growth and we have a long-term plan whose objective is to grow headcount in line with asset growth mainly to ensure that client servicing is appropriate to the level of assets.
Was location a factor in your decision for the use of service providers for the fund?
Yes, location was a factor but, in addition to location, we focused on cost and the ability to provide adequate service for our clients. We were conscious that as a small boutique we may not get enough resource allocation by service providers and that was a key factor we took into consideration.
Did you outsource any middle, back-office processes from the beginning as you ramped up your AUM? If so, was the fund’s breakeven point a determinant or some other factor that was the reason to outsource?
We understand that scale matters in a lot of routine functions in investment management firms and so from day one, we outsourced the processes we thought could be done more efficiently by third-party providers. These include activities such as administration, trade settlement, accounting, technology support and compliance. We also understood that as a small boutique having well-recognised third parties supporting us on various functions would give investors added comfort in investing with the firm. The fund’s breakeven was definitely a factor under consideration and it was something we discussed with our outsourced providers, though that was not the primary consideration.
This is an excerpt from a 2017 Yale Endowment brochure: “Start-up and early-stage firms play a central role in the Endowment’s sourcing process. While many institutions seek established managers with long-standing audited track records, Yale keeps an open mind to nontraditional firms and looks beyond standard metrics to assess the integrity and skills of investment professionals. Yale pays particularly close attention to start-up and early-stage firms run by seasoned principals, believing that investment talent and entrepreneurial drive outweigh the risks of backing an unproven firm”.
Do you have any opinion on this from an emerging manager viewpoint and can you share your firm’s experience with allocators?
Our challenge with allocators is that while they may understand us and also like us during their due diligence, most of the investment allocation is very siloed and follows a cookie cutter allocation process, akin to what I call as “tick the box approach”. We struggle with this approach as what we are looking to deliver from our investment process straddles multi-asset class boundaries. Allocators typically classify managers by putting a manager into a particular asset class bucket and comparing funds with one another in the same bucket. They try to pick the best manager within a bucket while we would want to be picked across buckets on the pure merits of our risk-adjusted returns. A comment from one of the third-party agencies in Europe who has been tracking us for a long time highlights this dilemma: “What you guys do from a quality perspective is way above what I am used to seeing normally, but the challenge that I find is how to classify and present you and moreover your small size also does not help with that”.
HFC’s Stefan Nilsson checked in with Omar Taheri in Singapore to talk about his new business venture. Spark Plus provides listed companies with access to investors in the Asia-Pacific region.
You’ve honed your skills working for a couple of firms in the alternative investment industry in Singapore over a number of years. What made you recently start your own business?
I decided to start my own venture as I saw it much more rewarding from an intellectual standpoint than working for someone else. I decided to launch due to changes in regulatory environment namely MiFID2. I saw that the way corporate access is consumed was changing in Europe and was having spillover effects into Asia as well. I always had a passion for doing something on my own as I think running one’s own business is a fast-tracked MBA.
Your firm, Spark Plus, provides listed companies access to investors in the Asia-Pacific region through roadshows and events. Tell us about what you do and how you do it.
Essentially we choose small-mid cap companies that have very poor coverage and a very domestic shareholder register and bring these companies to Singapore and Hong Kong to do non-deal roadshows for them. We try and focus the investor base to family offices and funds that can take an exposure to a small cap company. The format that we generally do for a roadshow is to host a group luncheon with investors and a series of one-on-one meetings.
With regulatory changes happening globally and new restrictions impacting both brokers and their fund manager clients, you seem to have launched a very timely service. Do you think that this shift in how corporate access is done will continue to create opportunities for new entrants such as Spark Plus?
Most definitely. We are seeing other industry participants such as Smartkarma, WeConvene and other independent corporate access providers setting up. I do think that the traditional brokerage model will be broken into a variety of different pieces. Banks are starting to talk to us as well trying to understand our model. Currently, corporate access is a cost centre to a bank and what we are doing has made it into a profitable model, as we charge the corporations for taking care of all their roadshow activities. We will definitely see big buy-side firms building their own corporate access teams internally, independent corporate access/IR firms being set up and independent research firms continuing to set up. We realise that small- and mid-caps will be the ones that will get hurt the most in terms of coverage and these are the type of companies that need the most help in their investor outreach.
You seem to work with listed companies from a number of different industries and countries. What kind of firms, industries and opportunities are currently of interest to your fund managers and other investors that are part of your roadshows and events?
With our fund management community, we have had a lot of interest in certain sectors such as technology, healthcare and mining. Lately, we have received several requests to bring small- to mid-cap Japanese companies to Singapore and Hong Kong given the recent interest from activist funds. We also get constant requests for firms that have exposure to the electronic vehicle space. So, we have brought lithium, cobalt and graphene companies to our investor base. Most of the companies we roadshow are sub $500 million in market cap and are mainly from Australia. But we are starting to diversify our corporates and they are now coming from Germany, New Zealand, Japan and China.
You currently run events in Singapore and Hong Kong. Do you have plans to expand to more locations?
Yes. Currently, we conduct our non-deal roadshows in Singapore and Hong Kong. We are looking to do the same in Australia. The obvious expansion plans seem to be looking at the UK and Japan as the next few markets to look at.
If you had not worked in finance, what would you have been doing for a living?
I would most likely have taken a career in the casino industry. I had the opportunity to be a junket for a large casino chain but thought I didn’t want to disappoint my parents too much so decided to get into finance instead.
Jeff LeVeen, Managing Director and Head of Outsourced Trading at JonesTrading talks with Himali Kothari, Founder of Aquamarine Value.
Can you tell me how you entered the outsourced trading space at JonesTrading?
I joined Jones in August of 2014. As I left my previous firm to join Jones, I noticed a growing interest in outsourced trading in our industry. When I got to understand Jones and the legacy business better, it became obvious that an outsourced trading platform would be a great fit and complement the trading that was being done by the firm already. I also found that in my travels I spoke with many emerging managers that were currently outsourcing with a competitor and had frustrations with their current providers. What became obvious to me was there was room for another platform and there was a strong interest in something better than what was currently offered by our competitors. I started making a list of items we could do not only differently but better than my competitors. I wanted to build a platform that put the needs of the emerging manager and their investors first. We spent a lot of time listening to the challenges of not only the launching and emerging managers, but their investors as well. We looked at ways where we could improve execution, source liquidity, consolidate the research budget and get our managers access to as much of the sell-side resources as they could possibly get.
What is the primary reason why small emerging managers will outsource their trading? Is it regulation, rising costs or keeping pace with technological changes?
Fee compression has driven the initial demand for outsourced trading. Launching managers have much smaller management fees to work with to run their businesses. It’s not just small emerging managers, we have been approached by funds managing well over US$500 million in AUM wanting to discuss our offering. Outsourcing is not just about managing costs, although hiring a trader and paying for an expensive order management system creates additional expenses for an emerging manager. We spend many hours working with our managers to help them build research budgets. We provide that manager a team of global coverage so that at all hours of the day he or she has access to an experienced trader. I think the emerging manager has realised that they’d have to hire two or three traders to replicate the experienced and comprehensive coverage from an outsourced trading desk.
And if emerging managers do outsource their trading, what type of strategy usually outsources?
We’ve seen many different equity strategies outsource their trading. It’s mostly your traditional long only, or equity long/short manager that engages an outsourced trading platform. We trade on behalf of both generalists and sector-focused funds.
Outsourced trading also makes sense if a fund wants to enter a new geography and/or a new asset class. Outsourced trading is a relatively low cost for the funds to enter new markets or an asset class. Has the MiFID II directive increased outsourced trading for JonesTrading thus far in 2018?
We have had a number of inquiries from European clients about our platform, but MiFID II hasn’t been the cause for our new client base in the US. The first quarter of every year tends to be an active quarter for new launches. Many of these new launches will outsource their trading and we’ve been fortunate to win a number of new opportunities this year. We do think as MiFID II continues to unfold in the US, clients will focus more on execution, driving even more interest in outsourced trading.
I agree, as MiFID II adoption increases, we will see more firms targeted on the unbundling of research and execution costs benefiting outsourced trading as we have seen a growth in outsourced third-party research firms based in the US, India, and Singapore. Can you dispel some of the common reasons or beliefs why emerging manager firms do not outsource trading?
I think there are a number of reasons managers choose to not outsource their trading. I think the first concern is that some managers don’t rank execution quality as a high concern for their new business. Many of these managers trade small and mid-cap stocks where spreads are wider and liquidity is thin. Execution performance could vary dramatically and poor execution could lead to hundreds of basis points of unnecessary performance slippage. I also recognise that outsourcing requires building a level of trust with the coverage team. Allowing an outsourced trading firm to understand the names you are trading, the timing, the style of trading is a sensitive relationship. Some managers never get to a point where they feel comfortable sharing this much information with another firm. The reality is every broker-dealer handles sensitive client information and sensitive client orders every day. Outsourced trading is no different than the normal trading that broker-dealers handle currently. There are strict compliance and surveillance in place to make sure we are handling our clients’ orders properly and protecting their anonymity.
The current break-even cost for emerging funds that manage less than US$500 million is US$86 million. In addition, investor reporting is the second area to outsource after middle-office processing over the next few years. Firms will continue to monitor their break even as operating and regulatory costs increase in order to remain competitive especially in their early years of survival which will increase the overall demand for outsourcing.
OP Investment Management recently invested in an equity stake in the company FundSeeder. HFC’s Stefan Nilsson decided to check in with OPIM’s CEO Alvin Fan to find out what this is all about.
You keep evolving OPIM’s fund business. You recently bought a stake in FundSeeder. Tell us about it. Why did you decide to partner with FundSeeder?
Our mission has always been to seek out undiscovered talent is Asia, and then help them gain exposure in the institutional space. Having interviewed hundreds of managers last year alone, we’re acutely aware that talent can come from anywhere – financial and non-financial backgrounds. However, the system is inherently biased against those without pedigree, capital, or an audited track record – all of which are expensive privileges. And this is where the gap begins. We came across FundSeeder having spotted Jack Schwager’s startup in social media. His books have been immensely influential to traders and managers including myself. Out of curiosity, we met with the team in 2016 during a promotion trip they were running in Shanghai. It was pretty obvious that we shared the same vision and their technology could bridge the gap between emerging managers and investors.
What can FundSeeder do for newer managers in Asia?
As I mentioned, investors gravitate toward track record and pedigree, but the hedge fund industry in Asia is still young. You can count on one hand the number of managers with more than $50 billion AUM. So by definition, most of managers and traders are filtered out by a Western-biased filter. FundSeeder ignores this and re-focuses the priority on analytics, performance. A verified track record makes allocation a meritocracy again – the way it should be. Just look at the advent of Chinese fund managers – there are thousands of AMAC registered private funds onshore, many with strong risk management skills, but without an expensive due diligence process, it’s very hard to assess their credibility as offshore managers. These new managers who link up to FundSeeder will gain otherwise impossible exposure to institutional investors.
As you mentioned, Jack Schwager, the man behind the “Market Wizards” books, is one of the co-founders of FundSeeder. How important is it for a new firm like FundSeeder to have a well-known name such as Schwager onboard when it comes to creating awareness?
It’s important, not just because of the name, but because of his ethos, intensity and purpose. This is a man whose dedicated his life’s work to demystifying the psychology of greater money managers. It takes the same commitment to build a successful company and attract the right talent. It permeates into the product and the message. This is true not just of Jack, but of his partners, Emanuel and James as well.
What does OPIM bring to the table in this deal?
Access to Hong Kong and China. Hong Kong is the pearl of asset management with the largest regional AUM in the hedge space. China’s asset management industry is at an early inflection of a renaissance period. OPIM’s strong brand in the region draws more talent to the partnership.
Have you localised or amended anything in the FundSeeder product/service for the Asian markets or is it exactly the same as it in the US?
In the initial stage, OP Fundseeder will be localised including Chinese interfaces, but once we have more regional talent appear in the database, we’ll be able to rank traders and licensed managers based on their local peers. We’ll also have new analytics and functions for investors interested in talent in this space.
What is the biggest challenge in introducing this new concept in Asia?
Language will still be a major hurdle. Getting lost in translation is an underestimated barrier to allocation. The managers’ ability to articulate their edge is just as, if not more, important than the strategy itself. This is especially true with distributors who need to communicate the same to their investors. Even with good performance and high ranking, this is just a starting point. It doesn’t guarantee allocation. We still need to conduct extensive due diligence on traders and managers. To manage money in Hong Kong or China you still need to be licensed, and this means running a business that answers stringent DDQ scrutiny.
What are your long-term plans for FundSeeder in Asia?
It still early days, but the natural evolution is to build out stronger analytics to help traders improve discipline and build a feedback system to help them grow. This also means providing analytics to help investors make better decisions about their existing portfolios.
What will be your next acquisition?
If I told you, I would have to kill you.
His day job is in operations at Australia-based fund manager Global Commodities Limited, but in his spare time, James Smith, aka The Walking Creative, is an emerging artist creating some eye-catching modern art from his base in Adelaide. HFC boss Stefan Nilsson checked in with Smith to talk about his bold and playful art and inspirations.
How would you describe your style of art?
My style is predominately neo-expressionism and abstract.
What inspired you to start creating art?
My creative flair began at about seven years of age. My grandfather taught me how to draw after I discovered ink drawings stashed in his cupboard he had drawn when he was a young man. I was so fascinated by them and then knew I wanted to learn more!
What inspires you nowadays?
For me I really love immersing myself within the arts, whether it might be at a gallery, an exhibition or even live music! There’s always something that I can take away from that experience to improve my skills as an artist. There’s also times where I am inspired by risk. Starting with no idea and just using my own imagination to see where it leads.
You’re an Aussie lad from Adelaide. Do you find any local inspiration for your art?
I support a lot of local artists and always love to see what new projects they’re working on. Again, back to experience, there’s an idea or something I can take away from it and utilise. There’s a lot of stuff happening around Adelaide at the moment and the city has become very supportive of the arts especially emerging artists. It’s great to see young and old talent out there inspiring others like myself.
What techniques do you use to create your art?
I am very experimental when it comes to using my creativity. I do vary it up and switch between different media. I tend to use acrylic or oil paint but there are also times where I like to get the Posca pens out and draw something too. Sometimes I might even do a mixed media piece where I’ll paint a layer of acrylic and use bright-coloured Posca pens over the top. It just depends on what I’m feeling or what I’m inspired by at the time.
You recently took part in your first exhibition in your hometown Adelaide. How did that go?
It went extremely well! It was a really big event because it was artists of all categories including fashion, makeup, photography, visual and music. My friends and family came along to support me. I had lots of people come up to my display to talk and appreciate my work. I priced all my art work well in an affordable price range so I sold plenty of pieces which was a good result. I met some really talented artists of all kinds all doing great things. It was sure a busy evening!
This is the beginning. Keep an eye on The Walking Creative because this young artist will clearly go on to bigger things.
Privium RKR is fast growing its Asian business by providing investment teams with an institutional infrastructure right from the start. HFC’s Stefan Nilsson had a chat with industry veteran Clayton Heijman about Privium RKR’s business.
Tell us about Privium RKR’s services for fund managers and investors?
Since 2008 the final industry has seen an increase in regulations, compliance and checks. At the same time investors have started to conduct more due diligence on infrastructure and potential risks while applying pressure on management fees. We are also seeing regulators worldwide implementing more rules for the asset management industry. As a result of these developments, the barrier to entry for new asset management initiatives is increasing. The full scope of services that we are offering provides portfolio managers an institutional infrastructure that will allow them to be set up with a limited investment and full transparency. At the same time, it is scaleable for growth and globalisation.
How did the two firms Privium Funds and RKR Capital come together in this Asian venture?
Privium had developed a business in Europe with an AUM of over US$1.5 billion and offices in London, Luxembourg and Amsterdam. Our ambition is to grow our business also into Asia met with the regional expertise of RKR Capital. These conversations resulted in a strong combination that was welcomed by the market.
Where are you currently at with your Asian business and what are you trying to achieve?
We already knew that there was a desire from portfolio management teams to work with a global player. However the response has exceeded our expectations. The positive responses came both from international managers that want to grow, again, in Asia as well as Asian managers locally. All are reviewing the benefits we provide them. We have a very compelling business case for them. Privium RKR can help them to set up a solid infrastructure and provide access to various service providers and markets. Asian portfolio managers should want to set up their funds allowing them to reach investors across the globe. With our global coverage we can help them to achieve these goals.
What kind of funds do you currently have on your platform in Asia? Can you give us some examples?
We have seen a lot of new initiatives over the last 12 months. This is an encouraging signal for the overall asset management industry. The teams managing private equity and venture capital are experiencing new regulation for their activities. In addition there are several funds starting with an equity long/short strategy, a quantitative strategy and a macro strategy. We have also seen traditional long-only managers and there is also a renewed interest for funds of funds. As for the location of the activities we obviously review initiatives that have a link to mainland China but basically see initiatives all over the Asian region.
You have chosen Hong Kong as your Asian headquarters and recruited an experienced team to manage it. Was Hong Kong an obvious choice?
Hong Kong has long played a role as a large asset management hub in the Asian region. The decision for a Hong Kong location was further strengthened due to the longstanding history that many people in our firm had with Hong Kong. For me personally it felt like I was coming home.
You personally have a solid background in alternative investments. Tell us about what you have done before you set up Privium and what led you to set up the business.
The set-up of this business has only been possible because of the different previous roles and experiences I had. Learning the ins and outs of the fund industry by working, amongst others, in the prime brokerage and equity finance group of Goldman Sachs in Asia, Europe and the US, having experience in fund operations at MeesPierson and setting up investment vehicles at Fortis. These experiences were all essential in Privium RKR becoming the single point of contact to discuss different matters for teams that want to set up or expand their asset management initiative. Our global team has a broad experience in the different areas of the asset management industry.
If you hadn’t been working in the fund management industry, what do you think you would have been doing?
Exploring and supporting new initiatives is part of my DNA. As a result I am a big fan of Sir David Attenborough and his work. My alternative career would probably have been accompanying him on his travels across the globe and unravelling the mysteries of nature.
Three years ago, Mohammed Ali-Reda founded Darkhorse Capital in Hong Kong to manage his own bottom-up emerging Asia and Middle East and North Africa equity long/short strategy. HFC’s Stefan Nilsson decided to have a chat with him about this journey so far.
You manage an equity long/short investment strategy focused on Asia as well as the Middle East and North Africa. What can you tell us about it?
Our strategy focuses on identifying quality companies that are run by honest and capable management who value shareholder creation. We look to capitalise on discrepancies between perceived value and underlying fundamental value of a company by adopting a rigorous and disciplined bottom-up research process. Our focus is on protecting capital while maintaining a sustainable long-term return profile. The portfolio is concentrated and will typically hold around 15 positions and currently has an estimated return on invested capital of 40%. In addition, virtually all my personal net worth is invested in the fund and I view all my investors as true partners in the fund.
What’s your edge? What sets you and your fund apart from the pack?
We focus on a business’ long term prospects, concentrate our holdings and focus on high-quality companies and management teams. This approach means we are able to delve deeper into a company versus a fund that has a shorter holding period. In essence we are looking to maximise the return on time invested for each position that we own and our target holding period is five years. Our investable universe is focused on companies between $500m and $10bn in market cap, with a preference towards ~$1bn range where there is little or no analyst coverage. This allows for us to really conduct differentiated primary research and unique view on the stock. We spend a lot of time on the ground talking to companies, suppliers, industry experts, regulators, other investors, etc. to help form that view – as an example I took over 40 flights last year. We are extremely focused in various sectors such as consumer, specialised manufacturing and specialised financial companies and our focus on the industry value chain provides a better understanding of the industry and competitive dynamics. I’ve spent a decade investing in Asia and most of my career looking at consumer companies. When you look at the world through the lens of trade and business as opposed to what the MSCI and other indexes outline, you find that the Asian and Middle East regions are very interconnected and show signs of further integration. In addition, the development of the capital markets and certain industries are following similar paths as they move from frontier to emerging to developed markets. We believe that ignoring benchmarks while focusing and analyzing companies using this approach provides us with a differentiated view and edge.
What can you tell us about your career prior to launching Darkhorse in 2014?
Prior to Darkhorse I was managing money for Asiya Investments in Hong Kong as Head of Consumer for the group, where I ran various portfolios that consistently generated alpha. I had joined the firm in early 2007 as the third member of the investment team and helped build out the firm. During that time the Kuwait government wanted to provide a way for the public to invest in Asia’s future, instead of opening another office for the sovereign wealth fund, Kuwait Investment Authority, in China. So the KIA and a few other institutions along with the public capitalised the firm. That’s how I got started and focused my career on Asia. Before that I was managing propriety capital for a large bank in Kuwait where we had a global mandate. Over the years I have also been actively involved with the CFA Society. I was a board member and treasurer of the Kuwait chapter.
You have launched your fund on the OPIM platform. Why did you choose to work with OPIM?
I found the OPIM platform was more focused on making sure all the middle and back office functions were taken care of by capable team members and systems. This allows me to focus on the portfolio and investing. The onboarding process was simple and having other mangers around also makes setting up the business part of the fund easier as you can talk to them about any questions, etc. Recently they have been helping a lot more on capital introduction and getting us in front of investors. I also like the people I work with, which is a big plus.
Why did you launch the fund with Hong Kong as a base?
Hong Kong geographically is situated well within Asia with a best-in-class airport infrastructure. Most cities are within a three-hour flight and a flight to Dubai is now around six-seven hours, so traveling is easier than if I lived in another city. The regulatory landscape in Hong Kong is very efficient and recognised globally, which is very important at a time when regulation is becoming more stringent. I also love the food and culture in Asia so I enjoy living here.
If you hadn’t been a fund manager, what would you have been doing?
Growing up I had started a few small businesses, the earliest already in middle school, so I always thought I would be an entrepreneur. I looked up to many successful entrepreneurs and read all their biographies. The notion of running my own business was very appealing to me. In a way I consider running a fund as an entrepreneurial venture within the financial services industry. On top of that, I get to be a part owner in many great companies through our investments as opposed to managing only one which can be a lot more interesting.