Orion Capital Management are an investment advisory company
and fund of funds manager. Eurekahedge talks to Peter Rup,
the Fund Manager for the Orion Constellation Partners LLC
Interview with Peter Rup
- What is the difference between your approach to hedge
fund selection and other fund of funds? Essentially, what
is your edge?
Orion is a multi-strategy fund that differentiates itself
through its unique, economic cycle-based approach to hedge
fund strategy selection. Orion believes that not all hedge
fund strategies perform optimally in all stages of an
economic cycle. In this regard, hedge funds are no different
than any other asset class. Based upon our experience,
strategy allocation is more important that manager selection
and the key driver of returns.
Our starting point in portfolio construction, therefore,
is strategy allocation. We analyse the economic condition
of the U.S., Europe and Asia. We review about 100 economic
indicators a week. We look at trends to determine which
geographical regions and which hedge fund styles will
be the best performers as well as which styles will be
Orion's proprietary asset allocation process analyses
a typical economic cycle along two dimensions: growth
rates and interest rates. Accordingly, cycles can be segregated
into four distinct quadrants and begin in Stage I, where
the economic activity is low or weak and the monetary
policy is accommodative. As economic activity increases
the cycle continues clockwise until it terminates in Stage
IV where the economic activity is being slowed by restrictive
monetary policy. As quadrants change so change the hedge
fund strategies that will perform optimally in that environment.
This analysis is performed for three geographic regions:
US, Asia and Europe.
The process developed for the Kaufman Family Internal
FOF is a culmination of over 15 years of experience that
Peter Rup has in managing investments in hedge funds as
well as managing internal macro hedge funds for his clients.
- Equity markets have performed well recently. How has
Orion Constellation Partners LLC Fund performed over the
last few months? Is it harder to attract investors in bull
As of 11/30/03, Orion has recorded a year to date performance
of +11.00%, net of management and incentive fees. Orion
has also recorded 13 positive months in a row. Orion's
12 month Sharpe Ratio, utilising monthly returns from
December 2002 to November 2003, is 4.88, which is higher
than the Sharpe Ratio of 97% of the fund of hedge funds
in the Pertrac Database. While a multi-strategy hedge
fund of funds might be considered a substitute product
for a long-only equity position by the early adopters
of hedge funds - high net worth individuals - the product
is becoming increasingly important in the far larger institutional
world as the "portal" by which most institutions
will take there alternative exposure. To an institution
a product like this should never be thought of as a substitute
for a long-only equity product. The risk/return parameters
of a hedge fund of funds make it an intelligent addition
to a well-diversified portfolio and will only enhance
its efficient frontier.
How often do you visit managers and, on average,
how long do you take to make an investment decision after
'discovering' new funds?
With regard to our existing managers we visit telephonically
once a month to ascertain exposure, leverage, assets under
management and geographic exposure. At least once a year
we physically visit each manager. We have developed a
strategic relationship with many of them as they are as
interested to hear from us about the global economy as
we are to hear from them as to how their strategies are
faring. With regard to potential managers, we are constantly
looking to identify new managers, and conduct 20-30 visits
per year, both in-house and at the managers' offices.
Since our relationships with managers are strategic and
not transactional, we usually have at least a six-month
review before hiring new managers.
- Do you perform economic analysis of the markets where
the hedge funds invest and if so who does this? Who are
the other key members of the team?
Economic analysis of underlying markets is the key competitive
edge of Orion Constellation Partners. Therefore, we invest
more time and effort into economic analysis than other
fund of funds. Peter Rup heads this effort, as Chief Investment
Officer of Orion, and Co-Director of Investments of the
Kaufman Family LLC, and is assisted by two analysts.
- How many funds do you hold and what do you see as
the optimal number of hedge funds in a portfolio. How many
Asian hedge funds are in your portfolio?
Orion currently holds 15 funds. We consider this to be
the optimal number of funds to achieve the best risk-adjusted
diversification, and this view is supported by considerable
empirical and theoretical industry analysis. Over the
past four years, we have had as much as 25% exposure to
Asian assets, as opposed to funds.
This is a relatively large % of your portfolio for
a global fund of funds? Are you finding more favourable
returns from Asian-focused managers?
Distressed debt in this region has been a significant
contributor to our performance over the past few years.
That being said we are only exposed to Asian NPL's which
are collateralised by non-Asian assets so exposure is
perhaps overstated. Deflation risks make Asian collateral
difficult to hold. Our relative outlook for 2004 would
cause us to overweight the region but the truly opportunistic
areas in Asia are emerging markets which we take very
little exposure to. These countries can carry incalculable
political risks and until such time as we can determine
a way to alleviate that problem we are unlikely to take
- Do you invest in start ups? If not, why not? Are there
any other requirements to manager selection?
Orion does not invest in start-ups. Our requirements
for consideration are:
- Minimum three year live track record with consistent
out-performance relative to an underlying style;
- Minimum of $250 million in assets under management;
- Sustainable edge in their strategy;
- Separation of trading/risk management functions.
We tend to invest in strategies with a fair degree of predictability/link
to economic cycles.
We also exclude strategies where we have no knowledge
as to how managers generate their returns, e.g. CTA's.
With our stringent criteria, this provides us with a
universe of about 350 to 400 managers.
- How often do you revaluate your portfolio?
Orion's portfolio undergoes a major rebalancing once
every two to three years as we shift economic quadrants.
While within a quadrant the portfolio requires rebalancing
on an annual basis to adjust weightings. Accordingly,
fund rebalancing is a dynamic process. It is accomplished
as soon as practicable given the restrictions imposed
on withdrawal of capital by the underlying Portfolio Managers.
Why do you think investors should invest in a fund
of funds? How would you persuade experienced investors
that paying performance fees twice is a good thing?
As mentioned before, a well-balanced, well-managed multi-strategy
fund of funds has extremely favourable risk/return parameters.
The better performers in this space have been able to generate
1000BP over the cash rate with about half the volatility
of a long-only equity posture. A product like this significantly
enhances one's efficient frontier. If it is evaluated in
this fashion the benefit is obvious. A fund of funds is
not an efficient substitute for a long-only strategy in
any asset class. In the case of Orion we provide a significant
value proposition with our dynamic allocation "process".
We don't sell ourselves on an "access and diversification"
basis like most other fund of funds, which is worth perhaps
50BP a year. We provide that service as well but we feel
our fees are justified by the former and not the latter.
Bottomline - low fees infer low value added. What should
be relevant to an investor is net-net performance and if
you are not receiving superior performance on that basis
you should look elsewhere, irrespective of fees.
What are your views on passively managed index fund
of funds and capital guaranteed fund of funds? Do you
see these new products as a threat to more traditional,
actively managed, fund of funds?
The market is always efficient in that it will provide products
to meet demand. Major investment banks are rushing to the
market with their fund of fund offerings but have a major
problem in differentiating themselves from all of the other
"me-too" products out there. Capital guaranteed
fund of funds is a good example of differentiation but serve
what I believe will only be a small market niche. This type
of fund appears to be a European phenomenon more than anything
else. Passively managed index fund of funds will also find
a following but once investors understand the imperfection
and bias inherent in the construct of the benchmark indices
they will realise that the returns that these products produce
are inferior. I believe the average investor would be surprised
to find that a simple "equal weighted" portfolio
construct of hedge fund strategies has historically substantially
outperformed both the Tremont and HFRI Indices. So why pay
someone to manage an index-linked portfolio when you can
easily outperform it yourself? Finally, most of the existing
FOF products are what I refer to as "first generation"
in that they meet the diversification and access needs of
the early adopters - high net worth individuals. The far
larger opportunity is to provide access for institutions,
endowments and pension funds in the world of alternatives
which they have very little sophistication in. They have
very specific risk/return profile needs which will not be
met by a "shrink wrap" /plain vanilla fund of
funds offering out there today. The next generation funds
will provide customised risk/return profiles that, when
added to a portfolio, will optimise a far larger asset pool.
Orion Capital Management LLC
+1 212 838 9000