Interviews
"Unser Overlay ist eine Alpha-Quelle für unsere Fonds"
Beim 84. Hedgework im Mai referierten Sarah Caygill und Mark Purdy von Arrow Capital bereits zum vierten Mal. Das Thema lautete „Transparency, liquidity, and actively managed overlays for funds of funds“. Im folgenden Interview präzisieren sie die einzelnen Punkte und geben einen tiefen Einblick in ihr Unternehmen und ihr Leistungsangebot
Hedgework: This is Arrow Capital’s fourth presentation for Hedgework. That’s a record. Congratulations!
Sarah Caygill: Thank you Uwe. It is a pleasure to be here again and share our insights into Arrow’s specific approach to portfolio management, combined with our focus on both early stage managers and the Canadian market.
Hedgework: Even though we are interviewing Arrow for the fourth time, I would like you to explain briefly your business model for those of our readers who don’t know you.
Caygill: From the outset, our model was based upon full position level transparency from our underlying managers. Today, transparency has become a basic requirement for many funds of funds, but 10 years ago that was not the case. Over the past 10 years, Arrow has learned how to process the vast amounts of data we gather and to use it effectively. At the individual manager level this gives us detailed analysis of investment patterns and allows us to manage our allocations accordingly.
At the fund of funds level, we are able to roll up or aggregate our portfolios and analyse performance attributions very precisely. As a result of our “look through” capability, we can react to investment opportunities and risks in a timely and precise manner.
Hedgework: It is very interesting to see that your presentation has been changing – or let us say – evolving over time. As far as I remember you started with the topic “Due diligence and early stage managers”. Second time you were talking about transparency, third time about liquidity. And now, the fourth time, your presentation is titled: “Transparency, liquidity, and actively managed overlays for funds of funds”. What is the reason behind this evolution?
Caygill: 10 years ago, we noticed that early stage talent was frequently overlooked in favour of larger, more established funds. We set out to explore the early stage segment and assess the talent pool. We discovered very talented managers, who generated superior risk adjusted returns and also benefited from a liquidity advantage. For my second talk at Hedgework, I spoke about transparency, as this was a fundamental part of Arrow’s selection process. Early stage managers require a dedicated selection and monitoring process, and Arrow found that full transparency was the only way to monitor this segment accurately.
The third time I spoke here I highlighted liquidity, as we had just come through the worst of the global financial crisis, and many funds had gated their investors. Due to our full transparency, Arrow always monitored liquidity very accurately, and therefore our funds offered monthly liquidity throughout the financial crisis. However, that was not good enough for us and our investors, as our funds were down approximately 15% during the crisis, and we saw many opportunities where we could have mitigated those losses if we had used a macro overlay. So we implemented an actively managed macro overlay shortly after the crisis and over the subsequent two years the overlay has provided an additional source of alpha for our funds.
Hedgework: So let us talk about your investment process. What is special in your manager selection?
Caygill: Our manager selection is qualitative initially, with a quantitative and risk assessment applied once our investment team has identified a manager with an edge in a specific strategy. This is a time intensive selection process, drawing upon our network and requiring manager meetings and on-site meetings early on. We do not rely on data bases and screening tools to identify managers. We meet them through our network and assess their skills according to our robust, proprietary due diligence process. Once a manager has passed the first stage of our selection process, we ask for full transparency, and that is the real test that shows us if the manager is really doing what they claim to do. Then we keep checking on a regular basis until we are convinced that the manager in question has an edge.
Hedgework: Can you tell us something about your portfolio construction?
Mark Purdy: Firstly, the Investment committee sets a target mix of hedge fund managers based on prospective risk/return profiles. The fund will allocate to managers with different style orientations (growth, value), market capitalization (small, mid, and large), and geographic focus (Asia, North America, Europe) within the context of the investment strategies.
Consideration is given to general macro-economic trends including interest rates, credit conditions, volatility, liquidity, equity valuations, and currency and commodity markets. Direct discussions with our managers and other market participants are also critical factors in setting the allocations. Position-level transparency provides critical insight into manager idea flow and specific trades. Once our qualitative and quantitative assessments are completed by the analyst, each idea is then critically reviewed by the committee.
Examples of our discussions include, but are not limited to, whether the strategy is recommended for diversification or insurance reasons, what the manager’s “edge” is and how the strategy will perform in our current macro environment scenario, and under what market environment would the strategy underperform. The conclusions formed based on these discussions will assist in how the strategy is sized in the fund.
Secondly, the Risk Management committee performs comprehensive risk management on three distinct levels. First, we ensure that the portfolio is always diversified by style, geography and market capitalization. Second, we ensure that the portfolio is not overly concentrated and that correlations between managers are minimized. We then analyze the portfolio in aggregate from the bottom-up using position level transparency. Arrow utilizes proprietary software and spreadsheet models to measure and monitor the portfolio risk characteristics including VAR and Monte Carlo simulations.
Finally, we allocate to specific managers with a view to the FoHF portfolio exposures bottom-up from the underlying security level. Position level transparency provides this essential information.
Hedgework: How do you handle your risk management?
Purdy: Our risk management committee is led by our head of Risk Management, Rob Maxwell, and supported by the Director of Risk & Operations and Risk Analysts. The risk management committee meets weekly, operating independently of the investment committee. The risk management committee makes recommendations to the investment committee.
The risk management committee performs comprehensive risk management on three distinct levels. Firstly, there are broad strategy allocation guidelines to ensure that the portfolio is always diversified by strategy. Secondly, there are specific manager allocation/guidelines to ensure that the portfolio is not overly concentrated and that cross-correlation between managers is minimized. Finally, and most importantly, all positions are “rolled up” and analyzed in aggregate. Arrow utilizes proprietary software to measure and monitor the portfolio’s risk characteristics. We maintain excellent relationships with our underlying managers and can therefore have intelligent dialogue on any issues that are highlighted through our risk management process. The best level of risk management remains at the manager level.
Hedgework: Please describe your overlay process in detail.
Purdy: Our proprietary overlay system enables our investment team to identify opportunities to improve the risk profile of our multi-manager portfolios. We use our portfolio level transparency to estimate our FOHF asset allocation on a “rolled up” basis and actively add or remove exposure at the margin with the overlay.
Hedgework: What kind of risks do you usually want to hedge out of the portfolio?
Purdy: We are generally trying to hedge out idiosyncratic or concentration risks at the macro level of the fund of funds that may be difficult at the individual hedge fund level.
Hedgework: What are the experiences with the overlays? Do you avoid drawdowns?
Purdy: Ideally, we should have a steadier ride for our investors over time as we try to minimize drawdowns by taking risk off more quickly at the fund of funds level, which we were able to do in Q1 2009. We were also able to add risk to the portfolio in the back half of 2009 as markets recovered more quickly than most people had anticipated. There is a cost to providing insurance at the portfolio level but we firmly believe that over time the benefits more than outweigh these costs.
Hedgework: After all, Arrow has proved in the critical years 2008 and 2009 that its philosophy to look deeper is successful. You have a clear outperformance of traditional and alternative benchmarks over the market cycle. Also you haven’t been involved in frauds and you were not forced to use side pockets. Both aspects are in contrast to a huge number of competitors. I think, you are proud of that, aren’t you?
Purdy: Arrow is dedicated to securing outstanding and highly-skilled hedge fund managers on a global basis. We are focused on evaluating the people who will be entrusted with both our capital and our client’s capital. We seek to invest with high-calibre investment professionals, with a strong decision-making framework and rational temperament for implementing those decisions. The manager’s pedigree and credentials are critical.
Our main investment constraint is the high level of liquidity that we offer to our investors. This in-turn requires that Arrow invest in highly liquid assets. Our requirement, since inception of the firm, on receiving position level transparency ensures that we are able to properly match our underlying portfolio liquidity with our own redemption terms and therefore helped us to avoid many of the problems experienced by other hedge fund investors during the financial crisis.
Hedgework: What do you think is the average overall benefit for your portfolios per year compared with a portfolio without overlay?
Caygill: The overall benefit has been approximately 150 bps per annum additional performance and has reduced volatility slightly. The overlay provides an extra layer of protection for our investors, as the risk and investment team at Arrow benefit from a look-through capability which they can act upon in a timely manner in order to reduce exposure to market risk. At other times, Arrow can add specific exposures in order to capture opportunities which are not expressed in the portfolio. We are using transparency actively to manage risk and enhance returns.
Hedgework: Sarah, at the end of the interview I would like to ask you about your new company structure. Arrow Capital is now part of the Generation Group. What does that mean for your investors?
Caygill: This means that we have considerably strengthened our international coverage, with a team of 12 investment professionals in London, as well as our long standing presence in Geneva. We also offer a Luxembourg UCITS platform, a dedicated emerging markets absolute return strategy and a wealth management advisory service. Our expanded team and services, lead by Sixten Eriksson in London, is described on our website www.generationam.com.
Hedgework: I know you are a kind of ambassador for investing in Canada. Please give our readers at last three reasons for investing in your country.
Caygill: First, Canada is one of the few developed economies and markets which boasts a healthy economy. Canada came through the financial crisis relatively unscathed and benefits from multiple drivers for sustained economic growth. Second, Canada is the world’s largest resource play and a safe way to play emerging market’s via their strong demand for Canada’s resources. Third, it is a relatively uncrowded market, and therefore more rewarding for discerning investors than crowded markets.
Hedgework: Sarah, Mark, thanks a lot for the interview and I hope I see you a fifth time.
Das Gespräch führte Uwe Lill
Vita
Mark Purdy
serves as Chair of the Investment Committee at Arrow Capital Management Inc. and has over 10 years experience in the investment industry.
Mr. Purdy shares responsibility for the hedge fund manager selection and asset allocation process and has served on the Investment Committee at Arrow Capital Management since inception. He held senior roles at BPI Financial Corporation and IBM Canada Ltd.
Mr. Purdy graduated from the University of Toronto with a Bachelor of Commerce and Economics degree. He holds the CFA designation and is also actively involved in the Varsity Blues alumni fundraising projects at the University of Toronto and is on the Board of the Ireland Park Foundation.
Sarah Caygill
has over 25 years experience in the investment industry.
Mrs. Caygill started her career at Chase Manhattan in 1984 and then became a senior analyst at BZW and Schroders in London. She worked in asset management with Trygg-Hansa, and later JPMorgan and CIBC.
She managed and advised private client and institutional portfolios ranging from US$1-7 bn.
Mrs. Caygill launched an european equity hedge fund, White Mountain, and later joined Arrow Hedge Partners.
Following the joint-venture with Generation Group in 2009, she extended her investment role to advise Arrow and Generation Group.
Mrs. Caygill holds an MA from Lincoln College, Oxford.
Arrow Capital Management
is an employee-owned company, founded in 1999 by James McGovern. Arrow‘s expertise in active portfolio management and manager selection is evident in its strong, diverse platform, which provides our clients with access to a global selection of outstanding alternative investment funds. One of the most experienced alternative investment fund companies in Canada and with an extensive network of global resources, Arrow has successfully navigated its clients through all types of market conditions.
With its‘ affiliates, Arrow manages over CAD $1.2 billion of assets, compromised of both single manager and multi-manager portfolio funds. Arrow‘s investment research, portfolio management and trading operations are located at head office in Toronto. Arrow has research and sales offices in Calgary and Vancouver, as well as in London and Geneva.
Kontakt
Sarah Caygill
Head of Investment Consulting
Telefon: +41 22 319 23 24
email: s.caygill@generationgroup.com
www.arrow-capital.com
