KGR Capital is a new entrant in the Fund of Funds world, and one of the few to
specialise in Asian hedge funds. Eurekahedge talks to one of the principals, John Knox:
Interview with John Knox
Who are KGR Capital?
KGR Capital was founded late last year by three principals - Christopher
Rampton, Nick George and myself. Between us we have about 65 years of
experience dealing in Asian markets, covering equity broking, trading,
derivatives and risk management. We have all worked together for about 10
years, first with Jardine Fleming, and then with JPMorgan, where Christopher
Rampton was head of the institutional equities business in Asia Pacific. My
personal background is in equity derivatives and I have been in Asia for the
last 10 years, during which I set up and was responsible for the equity
derivatives group in Asia for what was then called Jardine Fleming. Nick has
been involved in Asian markets for 20 years, heading up various institutional
and corporate broking groups, most recently for HSBC.
We are based in Hong Kong, and we expect to open an office in London soon. The
Asia Pacific Absolute Return SP, which started trading on 1 August 2003, is our
first fund and invests in hedge funds focusing on the Asia Pacific region.
You should check out our website .
The fund of funds market is getting very crowded with many new entrants, and
scale is important given the cost of the research and investment professionals
required - how are you going to achieve this?
We think that the fund of hedge funds market in Asia is still in its infancy.
There are currently just over 30 fund of hedge funds focusing exclusively on
the Asia Pacific region, mostly small, with cumulative assets of less than US$1
billion. These numbers are very small compared to estimated assets under
management of about US$28 billion for Asia Pacific hedge funds, which have now
grown to over 300 in number. We think that most of the growth in the Asian
hedge funds is yet to come, driven by increasing allocations to Asian managers
as the hedge fund industry matures and the underlying capital markets attract
more capital and become more liquid.
We have built a team of motivated and seasoned professionals from a number of
different disciplines, with many years of experience in the Asian markets and
risk management and we believe we are very well placed to make a significant
contribution to this specialised area.
Why do you think investors should invest in a Fund of Hedge Funds?
There are many reasons why some investors prefer funds of funds, but the two
main areas where a fund of funds can add significant value for an investor are
risk management and the ability to conduct a thorough due diligence of the
underlying hedge funds.
At KGR Capital, we currently have about 20 different hedge funds in our
portfolio, with funds pursuing a range of different strategies spread across
the different countries and capital markets of Asia Pacific. This degree of
diversification provides investors with a very significant reduction in overall
risk levels when compared with an investment in a single manager hedge fund. We
also employ a number of sophisticated quantitative techniques, which our
research indicates helps to reduce the risk further, including co-variance
optimisations, and VAR calculations.
It is of course also important to invest in the right hedge fund, and that is
again where a fund of funds should also be well placed to add value. It is
important to have a thorough understanding of the strategy employed by the
hedge fund manager and to really understand how they make their returns, as
well as the risks involved in the process. This includes operational and legal
risks, and not just investment risk. It is particularly important in the
current environment of rising markets across Asia to be able to distinguish
between good managers and poor managers who are just plain lucky. This involves
a significant investment in people who have the experience to go in and really
understand what is going on.
How do you persuade investors that paying performance fees twice is a good
In our view, if a fund of funds can significantly add value to the investor, by
reducing risk, improving returns, or even just saving time, effort and angst,
it's a fee worth paying. If performance results are good and investors like the
team and the infrastructure, in our experience, they do not mind paying the
What do you think are the main advantages of Asian hedge funds as opposed to
European and US hedge funds?
The Asian hedge fund industry is relatively new and is still small, but it has
significantly outperformed global hedge fund and major equity market indices
over the last three years, and perhaps surprisingly, with lower levels of
We believe that this relative out-performance is set to continue over the next
few years. We think that this will be driven by the significant inefficiencies
inherent in a region comprising 12 or 13 countries, each with their own legal
systems, currencies and capital markets, most of which have not fully recovered
from many years of bear markets and recession.
Equity markets have performed well recently. How has the KGR Capital Asia
Pacific Absolute Return Fund performed over the last 3 months? What returns and
volatility are you targeting?
We are targeting returns of 10-15% pa. Obviously this will be higher in good
years, and a bit lower in the bad years. In August our fund was up 2%,
September was up 2.4%, and we are optimistic for another good month in October.
We are very focused on risk management and capital preservation, and are
therefore targeting a low volatility level for this fund, aiming for annualised
volatility of between 3.5 to 5.0%. Although it may be a bit early to be saying
much about our volatility, we are currently well within this range, with a
pro-forma figure of 3.6%.
How would you describe the strategy of your fund and what % of the NAV is
allocated to which sectors?
The fund is a multi-manager multi-strategy fund of Asian hedge funds. Asia for
us includes Japan, Australia and the Subcontinent. It minimises risk by
diversifying across strategies and managers. We currently have about 20
managers in the portfolio and are looking to add a couple of new managers over
the next few months. We are also well diversified across strategies, with more
than half the portfolio committed to market neutral, distressed debt, fixed
income and equity arbitrage funds that are largely uncorrelated to directional
movements in the equity markets. The rest is invested in nimble long-short
equity funds that can capture upside in the booming equity markets and reduce
their exposures in times of market decline and volatility.
What is your investment process? Are you top-down or bottom-up? What do you look
for in managers in each strategy? How are the underlying hedge funds selected
for your fund?
We are both top-down and bottom-up. The first bottom-up stage involves us
looking through all of the 300 or so funds which match our criteria of being
invested in Asia Pacific. We are looking for managers that have a credible
track record, and are supported by a robust infrastructure.
The second phase is the portfolio construction, which in turn is both
quantitative and qualitative. We do use a number of quantitative techniques,
including co-variance optimisations, but then we add a human element, and will
tilt the portfolio towards the strategies that the Investment Committee feels
are most appropriate.
How often do you visit the underlying managers? Please provide examples of
We meet our managers frequently and have regular phone conversations with them.
We make data requests on a regular basis and track performance attribution,
exposure levels, performance drivers, strategy drift, etc. We monitor
performance of our funds at least on a weekly basis and more frequently in the
event of major market movements or dislocations. We do not want to micro
manage, but we put a big premium on transparency, openness and access.
Do you invest in start ups? If so what are your selection criteria and what % of
the fund is balanced with those of managers with a proven track record?
We do not have startup investments in the portfolio at the moment but would be
ready to invest a small proportion of the fund in promising start-up managers.
A significant proportion of our fund is invested in well-established managers
with at least a two to three year track record.
What is KGR Capital's edge?
Our biggest edge is Asia. We feel that it is a very big advantage for us
to have so many years of experience and such a deep knowledge of the Asian
markets that underlying hedge funds are trading. In many cases we have
first-hand experience of the products and strategies that they are trading, and
we also know many of the hedge fund managers personally.
Is it harder to attract investors in the current bull markets? How has the
capital raising been for your product?
We believe we have appeal
in bull as well as bear markets. It is true that there is
a tendency for money to chase direct equity exposure in
very bullish markets. However, the sharply increased levels
of capital flows into Asia and into equity markets, increasing
investor comfort with hedge fund products, and an increasing
investor preference for downside risk limitation are resulting
in strong inflows of funds into alternative investments.
We are very pleased with the way that our capital raising has been going.
Initially we focused more on building the infrastructure and getting the
product side right. Now that we are comfortable with this, and we have a couple
of solid months behind us we are concentrating a little more on marketing, and
I am pleased to say we have been attracting some very high quality investors,
and we have now seen assets under management double since we launched in the
KGR Capital Limited
+852 2843 6888