Interview with Steve Gilboy, Michael Newlander and Jason Gilboy of GLL Investors Eurekahedge
Founded in 1995, GLL Investors manages five multi-manager hedge funds – all of which have posted superb returns – while maintaining unusually low-risk profiles with little or no leverage. The largest and oldest fund, GLL Investors, LP, has recorded a 10.26% average annual return over 15 years with a beta of only 0.22. Since inception, GLL is up 287.29% net through June 2010 while the S&P 500 is up 124.42%. GLL Single Strategy, which we created in 1999, invests primarily in hedge funds that specialise in PIPEs (Private Investments in Public Equities). This GLL fund also has a low correlation to the stock market (0.22 beta) and, for the past 11 years, has produced an average annual return of 8.55% despite a tough market environment. Since inception, GLL Single Strategy is up 137.96% net through June 2010 while the S&P 500 is down (16.77%).
Although we seek superior returns for our limited partners, we do so only within the parameters of prudent capital preservation. We are committed to hedging to offset risk and make sure that all funds meet our stringent requirements.
A guiding principle at GLL is to remain small and nimble. Our experience, supported by industry research, has shown conclusively that small funds hovering around $100-500 million in assets perform better at lower risk than larger funds. A large part of our success has been due to early identification of talented fund managers with integrity and experience who invest their personal assets in their own fund. We then invest in these funds before they close to new investors and monitor their performance and investment consistency over time.
How did your funds of funds fare through the financial crisis and the subsequent recovery? Has the recent volatility in the US markets affected performance? Which of your funds has delivered the best returns? How do you see the returns of your fund compared with the rest of the industry?
GLL's hedges have protected us as expected through the crisis. We have recovered well and today are close to the high-water marks of our investors. For 2010, our funds have experienced very low volatility despite the market's rollercoaster ride the general public has been enduring. As of July, all of GLL's funds are profitable for 2010.
Being a fund of hedge funds that invests across various asset classes and strategies, on what basis and to what extent do you diversify the investments of your funds into hedge funds employing different strategies? Do you also look at sector-specific funds?
At GLL, we prefer picking people over sectors within our investment areas. We feature eight different strategies spread through 15 hedge funds run by highly-experienced managers who have solid integrity and honesty. We believe that conducting lengthy, in-depth due diligence on the people managing the funds that meet our strict criteria separates GLL from other fund-of-funds that often focus more on creating the 'perfect' sector allocation.
Which strategy has proved the most profitable for you, in terms of risk-adjusted returns over a period of, say, five years? Which sectors and strategies are you currently most bullish on, given the present state of uncertainty across markets?
Our convertible arbitrage and distressed securities funds have performed well for us since 2005. Given the current investment environment, we favour mortgage-backed trading vehicles including agency and non-agency paper. Distressed securities continue to be attractive as well as risk arbitrage.
As a multi-manager, what sort of risk control structures do you have in place in order to safeguard the investments of your fund? Did your risk management protocols change over recent times due to the high volatility across different sectors?
Constant communication with our managers is the most critical risk-mitigation practice at GLL. We want to avoid surprises at all cost. GLL's due diligence continues well after an allocation is made to a fund – in fact, it is just the first step on a path where vigilance is key. We visit the offices of all our managers regularly as well as maintain frequent telephone and email contact. These risk management protocols have served GLL well over the years, keeping us prepared for the unexpected. They derive from our extensive trading background where volatility was part of daily life.
Can you give us an overview of the qualitative/quantitative research that goes with your investment decisions? How often do you meet the managers of the hedge funds that you invest in?
Here are just some of the many filters GLL utilises in manager selection: Are they leveraged? How do they correlate to the downside with respect to the stock market? Are they hedged? Are they risk averse? Are their returns stable? Do they have a strong trading background? Are the managers themselves the largest investors in their own fund, like GLL’s managers? Are they sector-focused? Is their infrastructure deep enough to manage the AuM? Do they employ high-water marks? Do they have timely reporting which includes monthly estimates, monthly statements and K-1s? Do they have high employee turnover? Are they cleared by a major brokerage firm? Do they have a third-party administrator including an annual audit?
We look at past performance to eliminate managers, not select them.
As previously discussed, we are in constant contact with all our managers regularly. Aside from travelling to see them, they frequent our offices as well.
How do you drive synergy between the different funds? Are there similar research and risk methodologies across the different funds and strategies?
Although counter-intuitive, synergy within GLL's portfolio is achieved by our funds being uncorrelated. Each fund stands on its own as the best in its strategy. Within a sector, we do achieve synergies by playing on the different ways to obtain alpha with a low beta. For example, a PIPE manager can construct a deal with equities and warrants while another one can obtain profits by investing in convertible or asset backed bonds. In this case, we have synergy within PIPEs by the first manager finding profits with equity movement while the second gains with coupon payments.
How do you foresee the amount of stress laid on tightening regulations across the hedge fund industry to affect your firm?
Tightened regulations should not affect GLL. Since inception, GLL has always committed to complete transparency that surpasses any compliance levels required. Much of the debate over stricter controls stems from large institutions that have employed excessive leverage without the knowledge of the investor. From the onset 15.5 years ago, GLL has had little to no leverage.
Many funds of funds faced exceptional redemption pressure through the financial crisis and the Madoff scandal. Did you also witness outflows from your funds? Have you faced any challenges recently in capital raising, given the tough environment over the last year?
GLL experienced very few redemptions in 2008 as a result of three factors: a) consistently low or no leverage; b) our success at preserving capital in the toughest environments; and c) the profile of our investors. GLL seeks investors who fit our multi-manager fund. In a sense, we interview them while they interview us! We want to avoid investor turnover or those with short-term profit targets. We believe GLL has one of the lowest – if not the lowest – redemption rate of any fund of its type. Despite this challenging period for hedge fund growth, GLL just launched its newest fund, GLL Private Equity Fund, LLC, that targets banking industry restructuring opportunities. Our current asset base is approximately $150 million, or half the way to our goal where we plan to close to outside investors. We have always believed 'small and nimble' funds perform better and carry lower risk. Regarding Madoff, many investors have the wrong idea of what a hedge fund is to offset investment risk. The press has repeatedly reported Madoff as a hedge fund manager, and he clearly was not a hedge fund in any regard.
What classes of investors are your funds targeted towards? And what competitive edge do you offer your investors? Would you like to comment on the profiles of your current investors and how you think your fund would be suitable for potential investors looking to gain exposure to the North American hedge fund sector?
GLL targets high-net-worth individuals, family offices and small institutions. Fully one-third of GLL's assets come from this group – a critical fact for any new investor to consider. At GLL, we eat our own cooking.
Lastly, could you share with us your near-term and medium-term outlook on the global markets in general and on the North American markets in particular?
As trader-managers of GLL, we have learned to avoid making predictions and falling for that never-ending search for the crystal ball. We focus on the 'now' – making sure our hedges are in place for whatever eventuality pops up. Our capital preservation in down markets has been superb primarily due to our commitment to hedging, not to predicting market movements. Even in stagnant markets, our strategies performed admirably. Along the way, GLL's investors reaped the benefits, preserving their hard-earned capital base while maintaining the upward potential that a risk-averse, well-diversified, manager-focused multi-manager fund can provide. We help wealthy individuals stay wealthy.