When science meets art: choosing the right manager.

Managing a multi hedge fund managers portfolio or a fund of funds, generally implies that, as the manager of such portfolio, you need to consider 3 main characteristics during your selection process from an investment point of view, (leaving aside the operational aspects intentionally for now).

Quality
Risk/return profile
Individual correlation

The first one is universal and resides in the intrinsic quality of a hedge fund manager, meaning his ability to generate consistent returns in line with his proposed strategy specifications and within a corresponding time horizon. It also takes into consideration the pedigree of the main decision maker, the experience and competence of the research team.

However, this intrinsic quality leaves quite some room for interpretation as for the investment rational, since this hedge fund will be part of whole group supposedly targeting a certain return objective and potentially a risk constraint. Picking a hedge fund exclusively on these terms may have, however, undesirable impacts.

Therefore 2 other characteristics? come to consideration in that context, so to maintain the integrity of the pool and to contribute to your diversification requirements.

The first one relates to the risk/return profile of the hedge fund you are selecting. This profile provides a strong indicator as per its return capability vs. its risk level, often looked at as its volatility of returns. The more the profile is detached from the other components of the portfolio, the more diversification it is expected to contribute to the portfolio. The Sharpe ratio is an indicator of such profile, but it is not sufficient to identify the hedge fund actual positioning vs. your other investments (Graph 1).

Graph 1: Risk Return Profile. Source: NS Partners

The second characteristic is the individual correlation of the hedge fund you are selecting to each of the other components of the portfolio. The lower the correlation the better additional contribution to diversification this new hedge fund brings to the mix. It is generally accepted that a correlation of 0.5 or lower is preferable, a negative correlation being considered as the best possible situation, all other conditions being validated, i.e profitable with an acceptable level of risk (Table 1).

Table 1 : Correlation analysis. Source: Ns Partners

From there, one need to appreciate that these characteristics bear some subjective factors, not in absolute terms since a ratio is a ratio. But it is only a ratio. Meaning that as a portfolio manager of a fund of funds you still decide what ratio is acceptable and in what range of profile and correlation do you allow your portfolio to be allocated to. I can’t deny that a few years of experience, multiple market cycles proven resilience are co-substantial to rational choices. Nevertheless, it is probably where science meets art.

Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS Partners provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data, quotes, research notes or other financial instrument referred to in this document. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the FINMA cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners Group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request.
© NS Partners Group

“Three months late is useless”: Swiss selector’s reporting woes

The content of a report is key but timing and punctuality are also important and many companies fall short in this area, says Notz Stucki’s Caron Bastianpillai.

‘If you take some of the old macro managers, you’ll be lucky if you get a quarterly report three months late, at which time it is really out of date, if not useless,’ he says.

These comments originally appeared in the March edition of Citywire Selector magazine, click here to read the entire article.

Written by Jessica Beard

Swimming against the tide: picking an out-of-favour manager

Angel Sanz is answering City Wire‘s question about funds’s selection:

“Picking an out-of-favour manager may prompt investors to question your selection methods but which funds have you stood by and benefited from despite all signs telling you to sell out? Who repaid your faith in their potential and became a top contrarian call?”

Picking-up a good manager is normally a two-step process. First, we must like the asset class and we must like the specific fund within it. If the manager is not performing well because the asset class is doing poorly we may focus our attention on the manager and take the decision to invest if we happen to like the asset class and if we like the manager also. A group of examples illustrate well this process.

Between December 15th and January 16th, many US high yield managers were performing poorly because the drop of commodity prices. We took the decision to invest in PIMCO High Yield because we considered that spreads were already too high and because the fund had a position much less exposed to energy than the peer group. The fund made 12% in 12 months.

BB Biotech is a Swiss based close-end fund. After the Hillary Clinton’s tweets talking about price control for drug prices, and in the middle of a market correction, the price of the fund dropped dramatically and was even trading at 15%-20% discount to the NAV in January 2016. This level of discount gives a precise idea of how much out-of-favour it was. The fund is managed by a selected group of high talented experts in the fields of Biotech and finance with a very good track record to spot successful Biotech companies. We added to this fund and made about 20% in a year.

What are we doing today using the same approach? We are adding to a fund called Notz Stucki Raymond James Strong Buy Selection, a fund that invest in the Strong Buy list of Raymond James. The fund is biased to mid-small caps and holds 20% exposure to energy. Both asset classes are out-of-favour but we do believe that this is a good investing opportunity.