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Sohn Investment Conference London Oct 2013 – Hedge Funds vs Pediatric Cancer

First Published in BBeyond Magazine 1/2014 – Download PDF


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FT Game Changers

May 27, 2013 1 comment

Henry Kravis & George Roberts of KKR. Copyright belongs to Financial Times Limited. 

Categories: Economics, Finance, Investing

Book Review: Global Macro Theory and Practice

November 21, 2012 1 comment

Perhaps most of you have heard of the term Sovereign Wealth Fund (SWF). It was a term coined by Andrew Rozanov in 2005 to describe government-owned funds that invest in whole or in part outside their home country. Global Macro Theory & Practice is a book compiled and edited by Rozanov, an expert and advisor to sovereign wealth funds and intuitional investors on asset allocation, portfolio construction, risk management and alternative investments. Contributors include current practitioners from discretionary and systematic managers, prime brokerage specialist, investment consultants, funds of funds (FoFs) managers and institutional investors.

The book begins with a brief overview of the origins of Global Macro investing starting from John Maynard Keynes who managed the King’s College endowment fund at Cambridge to hedge fund legends in the late ’80s and ’90s, such as George Soros, Michael Steinhardt, Julian Robertson, Louis Bacon and the ‘Commodities Corporation Mafia’. The Commodities Corporation (acquired by Goldman Sachs Asset Management) has produced legendary traders such as Paul Tudor Jones, Bruce Kovner, Michael Marcus, Ed Seykota and Jack Schwager, author of the Wizards quadrilogy books on trading. The author touched briefly on some of these traders who have really come to epitomise the term Global Macro in the late ’80s, ’90s and early part of the noughties. Those interested in reading more on the trading styles of these global macro legends should refer to books by Jack Schwager. This chapter concludes with the future prospects of global macro.

The next two chapters are written by a discretional macro manager and a systematic macro manager. They cover asset allocation, CTAs and the differences between systematic and discretionary macro strategies.  The fourth chapter provides more colour to the different shades of Global Macro investing and how it fits in within a global tactical asset allocation (GTAA) profile. The fifth chapter evaluates the role of a global macro strategist from behavioural school economics’ standpoint.

Chapter six covers global macro in the emerging markets context with rich examples from relatively recent economic developments. Chapters seven and nine offer perspectives from a risk manager and prime brokerage specialist whilst chapter eight describes a theoretical framework for navigating geopolitical risks. The last four chapters bring together various elements of global macro investing, its inherent leverage and the case for global macro in institutional portfolios.

This book is the first of its kind to attempt to shed light and build a framework to describe current global macro practices – ‘a loose term that has come to mean different things for different investors’.  As global macro investing continuously evolves, this book offers a fresh look through the prism of leading current practitioners in the field that is grounded in both theory and practice.

Interview with Michael Keer-Dineen, CEO of Cheviot Asset Management

November 15, 2012 Leave a comment

This article was first published in B Beyond 2012/3 (page 78) by BB Publications – a niche publisher catering for the global HNW and UHNW community. (http://bbpublications.org/)

B Beyond’s David Wong caught up with Michael Kerr-Dineen, CEO and co-founder of Cheviot Asset Management.

Michael Kerr-Dineen is one of those financiers whose focus on class and quality can only be overshadowed by his determination to deliver on his promise. He has demonstrated this by walking away from giants such as UBS to prove that business can be done with complete honesty and integrity. As the former Chief Executive Officer of UBS Liang & Cruickshank, Michael led 80 bankers out the door when he left UBS to form Cheviot in 2006. In less than five years, Cheviot became one of the UK’s largest independently owned investment firms with over £3.8 billion in assets under management.

Before he founded Cheviot Asset Management, Michael’s career path took many interesting turns. He started in the business intelligence department of the Bank of England. Moving to the British National Oil Corporation, he then transferred to the Guinness Peat, Crédit Lyonnais and UBS. Having experienced both French and Swiss bureaucracy, Kerr-Dineen decided to set up a true partnership – Cheviot – embodying qualities of a ‘class act’, as he himself refers to, in his latest venture.

B Beyond’s David S. Wong, in an exclusive interview with Michael Kerr-Dineen, covered some of the most burning issues around the changing financial landscape.

BB Having been involved with so many prominent financial institutions, would you say it is harder to run your own independent firm now?

MKD No, it is much easier. Now I think it is traditionally acknowledged that the partnership structure is absolutely the best way to deliver to clients two things they want. One is a genuine personal service – which is what everyone says they offer, but in practice, constraints of big banks mitigate against them being able to do so. Personal service ensures there is absolutely no conflict of interest of any kind and that is even more important on the investment management side where we can be sure that the processes are entirely ours and we are totally independent. There is no forcing into funds. Of course, being independent does not mean you are always right but it gives you a much better chance to get it right and genuinely tailor services to clients’ needs on individualised basis.  The second thing is ‘class and quality’ – which we like to think we are about.

BB I would like to ask you about your views on the current Euro Debt Crisis.

MKD I am very bearish about the whole thing with its political side. Europe was in denial about it for a very long time and I think they are probably just coming out of the denial stage. You just cannot engage in quantitative easing without longer-term implications. The fact is, whatever they do in relation to piling money into the economies, the debt simply will not go away.

It is down to Germany, who has obviously benefited from the whole situation. They are famous for taking decisions in their own economic interest, almost prepared to subjugate their political freedoms for their economic interest. However, for the first time you see splits within the German elite as to whether this is a good idea or not. It was always unwise to have a single currency without a genuinely integrated fiscal and monetary policy as well. So inherently there was a flaw from day one. Greece, Ireland and Portugal were relatively minor problems. Italy is obviously a big problem, Spain is a big problem, and the French banks too, both in their domestic markets and their sovereign lending. Even without the benefit of hindsight, it was always ridiculous to have a single currency system without integrating fiscal and monetary policies. Interest rates will continue to remain low for the foreseeable future.

BB The finance industry as a whole has been tarred by the same brush. How do you address that at Cheviot?

MKD Banks have rightly taken responsibility for a large part of the first bit of the crisis. But that is not all banks’ fault. It is not the banks’ fault that the Greeks and Italians have a relatively early retirement age. And also there are issues such as over-reporting, overspending and funding. From the asset management perspective it is the big banks that have got the real problem. I think clients now realise that if they want their money properly managed, a private bank is not the best solution. If clients want to go to a private bank to avoid taxes, and keep their money offshore (in bonds or cash) and have someone pay their bills in Monaco, that’s fine. It is a service provided by the private banks. But this service is miles away from genuine management and running of assets in the markets for the purpose of generating the appropriate returns. At Cheviot, we have got a very good partnership structure in place. We have good organic growth and the brand name is strengthening, so we must be getting something right. The equity ownership of Cheviot by our partners is a unique selling point where we have good people willing to put their names and reputation on the line – something which is not found in most firms. Our growth mandate, our balance mandate and our cautious mandate are all in the top deciles in the last one, three and five years, so there is real substance behind the theory.

BB What advice would you give people looking to set up their own firm like yourself?

MKD It is tough. It is perfectly clear that the trend is to move away from big organisations into smaller boutique firms. Part of the reason why it is difficult to start a fund is that you need a brand and a track record. It’s difficult to differentiate yourself from the rest and I think in some ways we have managed to do that at Cheviot. You will also need strong relationships and a credible base team to establish a critical mass.

BB What do you think is the greatest pitfall of the finance sector as a whole? Or the greatest opportunity going forwards?

MKD The IFA (Independent Financial Advisors) and RDR (Retail Distribution Review) debate will certainly create big opportunities for the discretionary fund managers like us. The IFAs are just bailing out, which will create opportunities for us. I think the structure of investment management firms is also important and I like to think that we have got it. There is still a lot of money out there that is not managed by anyone and accessing it through IFAs is a distinct possibility. Most of the inflows we get are generally new money. People are also moving to a more personal approach due to the bad performance of mutual and pension funds. Structural changes in the industry will force private banks and some wealth managers to move up the value chain, quit the market or seek a managed exit.

BB Just to finish up, can you please tell us a bit about your investment ethos?

MKD The asset allocation is key. Of course it all depends on the individual clients and the benchmarks they follow.  Our investment process combines strong disciplines with flexible asset allocation and stock selection. Our belief is that the best results come from a mix of styles adapted to the market cycle. So I suppose it is more top-down than bottom-up and it really is a matter of a close understanding of our clients’ individual investment objectives.

Six months after the initial interview was conducted, Michael’s bearish outlook of the European Debt Crisis from the political perspective continues to unfold. Spain and Italy’s borrowing costs continue to soar as the European Central Bank cut interest rates to a record low of 0.75%. The US Federal Reserve is expected to keep short-term interest rates close to zero “at least through to late 2014”.  Cheviot Asset Management won the Best Performing Fund Award for its Libero Cautious Fund in March 2012. Cheviot’s Liverpool office, its first office outside of London, attracted £170m of funds under management in its first year.

For more information on Michael Kerr-Dineen and Cheviot, please visit: www.cheviot.co.uk

 

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Enter the Dragon 2012

August 4, 2012 1 comment

This article was first published in B Beyond 2012/1 (page 88) by BB Publications – a niche publisher catering for the global HNW and UHNW community. http://bbpublications.org/

The S&P 500 index ended 2011 relatively unchanged despite a year of high volatility driven by the European Sovereign Debt Crisis and the pertinent risk of double dip recession. During the year, the markets witnessed the major impacts of the Arab Spring, the Japanese earthquake, the downgrading of the US credit rating and the risk of a Eurozone country defaulting on its debt obligations – none of which were ‘predicted’ by Wall Street analysts at the beginning of the year.

The future is much harder to predict than Wall Street would have us believe. As Nassim Taleb remarked: “To prophesize, don’t add anything to the future; just figure out and eliminate what will not survive.” This Popperian view, that all investment hypotheses are provisionally accepted until proven wrong, may not seem comforting to investors.  Nonetheless, it has not stopped the influx of money flowing into hedge funds.

Hedge funds on average lost 4.83% in 2011 despite amassing a record $2.04 trillion in total capital under management during the first quarter of 2011. The industry – which caters to wealthy and institutional investors chasing higher returns for bigger fees – appears to be licking its wounds as fund managers finished the year in the red. The hedge fund industry – which prides itself on outperforming the market – has failed to live up to expectations and delivered one of their worst annual performances last year. As 2012 – the year of the Water Dragon according to Chinese Zodiac – rolls on, can the industry reverse its fortune?

Renewed optimism in Europe’s ability to solve its debt problems and the U.S. economic recovery has led analysts to expect a brighter 2012 with hedge funds gearing up on riskier bets. The question then remains: Why are the so-called ‘Wall Street analysts’ invariably wrong?

Despite their relatively poor record in making financial predictions, it seems to be a staple publication for analysts each year. From a non-deterministic worldview, the future is unpredictable; therefore, a successful investment manager should be able to change his views as events that either confirm or refute his investment hypothesis unfold. Making a public prognostication in the form of a financial prediction begins a very slippery slope towards intellectual materialism. Subsequently changing one’s view would be tantamount to admitting that the former was, in fact, erroneous. Making erroneous financial calls reflects badly on an investment manager. This agency problem may manifest itself when the manager seeks out confirmatory evidence for his earlier thesis and subconsciously filters out contradictory evidence. Such intellectual materialism is a highway to financial ruins. Perhaps money managers should refrain from making explicit public commentary on financial markets for this very reason. It frees them from the shackles of having to defend their views and allows an unfettered approach towards investing. This separation is exemplified further in the financial service industry’s highly regulated relationship with its research divisions, requiring a Chinese wall between public and private functions.

So then, why are analysts’ predictions invariably wrong? To borrow from quantum physics’ Totalitarian Principle which states “everything not forbidden is compulsory” – it is not possible to envisage or even model the future states of all permissible events that can occur and affect the markets. This is akin to the adage commonly referred to as Murphy’s Law that is typically stated: “anything that can go wrong will go wrong”. The job of a money manager is therefore not just to react to such events but to be perceptive. George Soros famously remarked that “it’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong”. As the collective action of investors translates to the ebb and flow of the financial markets, the investment manager’s job is to remain one step ahead of the crowd. There is no point in being right one year in advance as the financial markets can remain irrational longer than one can remain solvent.

The hedge fund industry’s performance for 2011 is an egregious example of ‘smart money’ getting it wrong. The industry as a whole underperformed the broader market. This is an industry that hires the best and the brightest minds armed with MBAs and often wielding PhDs from the top business schools in the world. Compensation in this industry is second to none. Hedge funds understood what politicians have long understood – that there is no shame in buying success. The industry goes to great length to justify its compensation and management fees. Can this be one of the reasons as to why the asset management industry continues to churn out financial predications, the majority of which are often not worth the paper they are printed on? After all, the industry that pours millions into its research departments ought to be seen as making informed investment decisions based on well-researched ideas. A simple flick through previous years’ financial predictions and their propensity to come to pass will reveal dismal statistics. Nonetheless, the media’s deep-seated fascination for financial predications continues to contribute to the proliferation of analyst recommendations aimed at investors.

Ask any economist or analyst how precise their estimates are, their response will be that such predictions help guide decision-making in investments more satisfactorily than it would be otherwise. That however inaccurately or irresponsibly their predictions may help shape investment decision, it does so better than astrology. However mindless the culture of prophesying, it is more attractive than disremembering. And however deceptive the idea of an analyst’s estimate, it is more believable than that of a coin toss.

As for my financial predictions for 2012, it will take a leaf out of Chinese astrology. The year of the Water Dragon may bring more economic trouble in the year ahead. According to Chinese Feng Shui, the economy is very much affected by the five elements in Chinese astrology (wood, fire, earth, metal and water). In the Chinese calendar, the fire element will generate optimism and happiness. Therefore, if the financial market represents the collective optimism of investors, it should rally with the fire element.  The water element is the opposite and it represents fear in the five-element system. Happy 2012 – the year of the Water Dragon!

 

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Categories: Economics, Finance, Investing Tags: , ,

Interview with David Rosier – CEO of Thurleigh Investment Managers

January 15, 2012 Leave a comment

The S&P 500 index ended 2011 relatively unchanged, despite a year of high volatility driven by the European Sovereign Debt Crisis and the pertinent risk of double dip recession. During the year, the markets witnessed the major impacts of the Arab Spring, Japanese earthquake, downgrade of the US credit rating and the risk of a Eurozone country defaulting on its debt obligations – none of which was ‘predicted’ by Wall Street analysts in the beginning of the year.

The future is a lot harder to predict than Wall Street would have us believe. As Nassim Taleb remarked, “To prophesize, don’t add anything to the future; just figure out and eliminate what will not survive.” This Popperian view that all investment hypotheses are provisionally accepted until proven wrong may not seem comforting to investors. Nonetheless, it has not stopped the influx of money flowing into hedge funds.

Hedge funds on average lost 4.83% in 2011 despite amassing a record $2.04 trillion in total capital under management in the first quarter of 2011. The industry – which caters to wealthy and institutional investors chasing higher returns for bigger fees – appears to be licking its wounds as fund managers finished the year in the red. The hedge fund industry, which prides itself on outperforming the market, has failed to live up to expectations and delivered one of its worst annual performances last year. As 2012 – the year of the black dragon according to Chinese Zodiac – rolls on, can the industry reverse its fortunes?

B Beyond caught up with David Rosier, CEO and co-founder of Thurleigh Investment Managers.

David Rosier and Charles MacKinnon, founders of Thurleigh Investment Managers, are a rare breed of investment managers who have skin in the game. David and Charles stress the importance of ‘eating your own cooking’ and have their own personal wealth invested alongside their clients.

BB In your view, what is driving the current market conditions?

DR At the moment, there is greed and there is fear. There is greed because you are leaving your money on deposit and earning next to nothing and there is fear because the markets have become so volatile. It is a ‘risk on risk off’ mentality. The flight to safety, or what investors perceive as safe investments, has been driving this ’bubble’ in the gilt-edge securities. I mean, it’s mad to buy 10-year gilts yielding less than 3% when inflation is 5%.

BB Has this affected your strategy?

DR The way we implement our strategy hasn’t changed. We have always focused on asset allocation and academic research has shown that 90% of portfolio returns can be attributed to asset allocation rather than stock selection. We have always invested in a mixture of index funds, ETF and absolute return funds. We believe that by active asset allocation it is possible to capture short-term cyclical opportunities to enhance the returns without increasing risk. I’d say the main change is we no longer invest in hedge funds with the exception of a few CTAs (Commodities Trading Advisors). People got very frightened in 2008.

BB Why do you no longer invest in hedge funds?

DR We no longer invest in hedge funds for two reasons: liquidity and control. Firstly, our clients wanted liquidity. After the credit crunch, our clients would ring us up and ask ‘how soon could we liquidate our portfolio?’, not necessarily doing it, but just the comfort to know they could turn it into cash. Secondly, when you invest in hedge funds, you lose the element of control. In early 2007, we put orders on to sell the hedge funds, but when we wanted the cash to invest – when markets had fallen – we couldn’t get the cash. It’s not that we don’t think there are some good hedge fund managers out there. The structure or the lack of liquidity is something that neither our clients nor we can take. Also, the UCITS III funds can essentially do what hedge funds do with slightly more onerous restrictions. With a UCITS III fund, you can get similar investment policies with the added benefit of daily dealings.

BB Can you tell us about your investment strategy and has that changed recently?

DR We have four core strategies based on volatility. The very low risk strategy has a maximum volatility of 4%, the low risk is 6%, medium is 8% and the high risk is 12%. Our strategies have not changed as we actively manage them to the desired risk levels. We are constantly checking our proprietary risk models to ensure our strategies run to a certain volatility level.

BB Any thoughts on the European Debt Crisis?

DR As central banks continue to debauch their currencies, government bond yields do not offer a smart risk-reward profile. We think there is a distinct possibility the Eurozone area would fragment with either departures or some form of dual currency emerging (convertible euros and non-convertible euros) to enable the most indebted nations to reflate their economies. It is unlikely for the Eurozone to survive in its current form. Regardless of the outcome, there will be a wealth of investment opportunities that will arise out of the ashes of the Euro project.

BB Any insights on investing in 2012?

DR We think that the large growth economies of China, Brazil, South Korea and Taiwan will continue to grow, and their currencies and bond markets will continue to deepen and strengthen. Within the equity and the bond portfolios, we will continue to move them towards a higher yield profile. We currently have 20% of our bond portfolios exposed to high yield, and we anticipate growing this significantly at the expense of the strategic bond positions. Within equity portfolios, we anticipate altering the weighting of the indices and funds we use to increase the dividend yield significantly with a continued focus on global multinationals.

For more information on David Rosier or Thurleigh please check out: http://www.thurleigh.com

Book Review: My Life as a Quant: Reflections on Physics and Finance

December 11, 2011 2 comments

Written by Emanuel Derman – physicist and ex-Goldman quant – the book combines my love for physics and finance and is one of the best books I’ve read in a long time. The first half of the book covers his life as a physicist at Columbia, Oxford, and Bell Labs. He talks about various luminaries and Nobel Prize winners he worked with or came across during his first reincarnation as a physicist. The book is excellent for those interested in physics and in search of the ultimate ‘truth’.

Emanuel Derman was head of Quantitative Strategies at Goldman and also spent time at the now infamous Salomon Brothers. He describes his work with Fisher Black (yup, THE Fisher Black of the Black-Scholes model) at Goldman and the famed John Meriwether’s bond arb group at Salomon.

The first half of the book is physics heavy whilst the second half focuses on one of the most interesting times in finance, where academics emigrated into Wall Street as quants in the 80s. As an armchair physicist, and currently working in finance, I thoroughly enjoyed this book.

I particularly like the part where he wrote:

“I began to believe it was possible to apply the methods of physics successfully to economics and finance, perhaps even to build a grand unified theory of securities.

After twenty years on Wall Street I’m a disbeliever. The similarity of physics and finance lies more in their syntax than their semantics. In physics you’re playing against God, and He doesn’t change His laws very often. In finance you’re playing against God’s creatures, agents who value assets based on their ephemeral opinions. The truth therefore is that there is no grand unified theory of everything in finance. There are only models of specific things.”

Perhaps he is my role model – finance is means to an end, not the end.

Derman is currently Professor at Columbia University and Director of its Financial Engineering Program

 

 

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