KBC Alpha Asset Management is the Fund of Funds division
of KBC Alternative Investment Management. The two key principals,
Neale Safaty and David Walter have 20 and 17 years expertise
in Japan & Asian equity and equity-linked capital markets
that includes broking, risk-management, trading and direct
experience in setting up and running Asian hedge funds.
- How are the underlying hedge funds selected for your
fund?
We have identified 160 funds that are Japan-only or
have a significant exposure to Japan. This includes long/short,
merger arbitrage, distressed securities & real estate,
options and CB arbitrage and equity statistical arbitrage.
Weak managers and poorly run companies are removed at
the outset. The process is dynamic, however, as new entrants
are added and monitored. We then conduct qualitative research
during one or more site visits where the managers and
key support staff are interviewed. In addition each manager's
return data is analysed and key statistics are calculated.
Qualitative research is given priority over quantitative
research. At the shortlist stage we leverage our longstanding
independent professional network to assess managers credentials
and conduct a thorough legal review. Potential funds are
then evaluated for their risk-reward and correlation impact
to the portfolio. Finally we ensure that our diversification
objectives and risk management guidelines are not compromised.
- How would you describe the strategy of your fund and
what % of the NAV is allocated to which sectors? What do
you look for in managers in each strategy?
93.5% equity long/short and 6.5% relative value.
The mandate of the fund allows for investments across
strategies. The universe of Japan absolute return funds
is dominated by Long Short strategies and to some extent
our fund reflects this. Within the Long Short spectrum,
however, it is possible to attain diverse risk/return
profiles that don't have a great deal of correlation.
We do not think it is appropriate to invest in Japan CB
arbitrage or real estate/distressed securities at this
stage. We are however considering two corporate activity/
risk arbitrage type of funds to give us exposure to a
different source of alpha.
- How long do you monitor a hedge fund manager before
making an initial investment?
Monitoring is a function of how well we know the key
principals, whether the entity is an institution or a
boutique, the track record of the fund and whether it
is a start-up or a more mature fund. We can move rapidly
and invest several weeks after we've initially seen a
manager and we can commit on day one as an early bird
investor. However, we do not seed or take equity stakes
in investment management companies.
- What size are your initial investment?
Initial investments in our Japan Fund of Fund are normally
between $2 to $3million. We are in the process of constructing
our Asian Fund of Fund and initial investments so far
have been $1.5 to $2 million.
- What is your process of increasing investment from
the initial investment?
We have made additional investments in all our managers
bar our most recently acquired fund. We consider our concentration
risk guidelines, the overall potential volatility of the
portfolio, the performance of the underlying fund and
market conditions when directing inflows.
-
What information do you require from the underlying
Funds? How often is this information required?
Naturally prior to investing in a manager we may require
a reasonable amount of documentation as part of our due
diligence. Post investment, we require Weekly NAV's, monthly
newsletters and dialogue with the portfolio manager(s)
when appropriate.
- How often do you visit the underlying managers? And
examples of questions asked?
Across both our Japan and Asian Fund of Funds, our managers
are located in South East Asia, Japan, Australia, the
UK and the US. We conduct investment reviews on site or
in London several times a year. A benefit of being part
of a large institution is that we can travel regularly
and use KBC offices. We are also in regular communication
with our managers including formal conference calls.
- Please explain the background of the manager(s) and
analysts for the Fund.
The two main managers at the fund have combined Asian
experience covering the last 3 decades. Neale Safety specializing
in convertibles and then Japanese Equity. David Walter
having specialist expertise in risk management and over
6 years as a hedge fund manager.
- What type of risk management systems are employed
by the manager(s). How often is this analysed?
Qualitative risk
Operational, legal and strategy risks are assessed during
due diligence and monitored on an ongoing basis.
Quantitative risk
Key risk/reward individual fund statistics and correlation
analysis is integral to portfolio construction.
Monte Carlo Simulation Stress Tests are conducted and
the portfolio has performed robustly, although they are
of limit merit due to insufficient data.
Investment process risk
This is reduced through a consensus orientated Investment
Committee.
Organisational risk
Risks are mitigated through the segregation of portfolio
management and operational responsibilities.
Risk Management Guidelines
a) No single fund to exceed 20% of NAV. At the outset,
an initial investment is normally less than 10% and typically
will be 6-12% of the fund. If, through performance, an
investment appreciates significantly towards 20% of NAV,
the holding will be reduced or inflows or cash will be
directed towards other funds in order to reduce concentration
risk.
b) No greater than 30% of exposure will be in underlying
funds that have quarterly or longer redemption liquidity.
c) Currency forwards are used to minimise Yen/US $ risk.
d) The portfolio will not employ leverage other than
to manage mis-matches between redemptions and subscriptions.
This is limited to 10% of NAV.
e) With respect to boutique managers, the fund will normally
invest once assets under management have exceeded break-even
levels for the investment management company.
f) Top five positions will not normally exceed 50% of
total assets.
g) The fund will not normally own in excess of 20% of
the assets of a single fund unless the fund is a small
fund that is run by an institution that has significant
assets under management and the fund is expected to grow
in the near term.
- Can you describe the correlation of the underlying
funds in the portfolio.
We prefer to be discreet with respect to our underlying
managers. The majority of our funds have less than a 0.5
correlation to both the portfolio, the equity market and
to each other.
- Please describe the differences between building Asia
fof vs Japanese fof ? Is it harder to find suitable Asian
hfs vs Japanese equities long /short given that some view
Asia as a harder place to operate as an hf compared to Japan
where markets are deeper and more liquid?
It was relatively easy to construct the Japan Fund of
Funds because of our personal background in the Japanese
capital markets, our professional network and our practical
experience of the products and strategies. Asia is a different
beast, we've found a broader range of opportunities but
a wider variance in quality and greater strategy and entity
risks.
- Japan hf performance: any differences performance
and style wise between Tokyo, London and US based managers?
We have analysed performance based on location because
we thought intuitively domestically-based managers might
have an edge due to ease of access to companies and advantages
of operating during a live market. Our results were not
statistically significant.
- It's been suggested in some commentaries that institutional
investment from Japan in hedge funds worldwide has dropped
off quite radically this year, is this something you've
noticed and do you have any theories as to why?
In our case we have seen inflows into the Japan Fund
of Fund as it is distributed by Nikko Cordial in Japan.
The outbreak of SARS inevitably restricted face-to-face
meetings within the region and this may have caused a
reduction in capital allocation from Japan.
- How do you see the future for Japan and Asian Hedge
funds and fund of funds operating in this field?
We are optimistic that there is tremendous amount of
talented managers that are focusing on generating absolute
returns from Japan and Asian capital markets.
With respect to Japan, 70% of the universe has emerged
in the last three years and we anticipate even more investor
choice going forward. Nevertheless it is not a crowded
field relative to the size of its capital markets and
undiscovered compared to the US and Europe. We are excited
by our partnership with Nikko Cordial in Japan as they
have a strong tradition of distributing alternative products.
With practically zero interest rates and poor returns
from equities over the last thirteen years, low correlated,
good risk adjusted absolute returns derived from markets
that they are familiar with should appeal to local investors.
Asia is extremely interesting. It is less mature, less
sophisticated and culturally and economically diverse
which potentially throws up enormous absolute return opportunity.
In some sub sectors of the market place there are managers
who are generating returns against very little competition.
In the nine months we have been developing the product
we have visited managers all over the world and discovered
some excellent opportunities.
