The Billion Dollar Interview: Kevin Arenson, Chief Investment Officer and Javier Uribarren, Investment Director at Stenham Asset Management
Stenham has been active in investment management for over 25 years focusing exclusively on delivering strong absolute returns, achieving a multiple award-winning track record. Over 70% of the assets which Stenham currently manages originate from private banks, trust companies, asset managers, pension funds and other institutions in the UK, Europe, Channel Islands, the Caribbean, South Africa, Latin America, the Middle East and Japan. Providing market leading solutions for institutions, charities, private banks and family offices, including both discretionary portfolios and funds, Stenham’s total assets as at February 2013 are US$ 2.1 billion. The balance of assets is managed on behalf of the original families and other high net worth private clients in all those territories and elsewhere.
Eurekahedge: Stenham Asset Management has a history spanning over 100 years. When did the firm get into the funds of hedge funds business and what was the rationale behind this move?
Stenham's origins date back to 1901 when Osias Stenham founded the company to act as buying agents for wholesale importers C Saloman of Southern Rhodesia. Stenham grew into a confirming house providing documentary credit facilities and trade finance to a wider group of clients in Africa. Edwin Wulfsohn, now the Group's Deputy Chairman, joined Stenham in 1970 as its Chairman and Chief Executive and expanded its activities into a multi-family office offering trust services, wealth management and corporate finance/private equity services.
With the growth of the hedge fund industry in the 1980s Stenham evolved its wealth management business into an investment manager specialising in multi-manager hedge fund portfolios. Stenham launched its first multi-strategy fund of hedge funds, Stenham Universal, in 1992. In 1993, the firm launched its flagship global macro fund of hedge funds, Stenham Trading. In 2012, the firm launched its first long biased fund of funds, Stenham Emerging Markets. The fund attempts to capture the long term growth story linked to the rising middle classes in emerging market regions.
Over time, Stenham has moved from working with its original founding families and private clients to create wealth through trade finance and corporate finance, to helping them preserve and grow their wealth in a highly disciplined and risk-averse way. Today, Stenham’s clients include institutions seeking similar stable performance as its private clients.
EH: Being a multi-manager that covers most investment regions, which region has proved the most profitable for you in terms of risk-adjusted returns over a period of five years?
Our investments tend to be more idiosyncratic and we rarely take a top down view by region. Therefore reasons for under or outperformance will largely be driven by single managers or strategies than by regions. Having said that, given the recent turbulence in Europe, in the long/short equity space for example, US focused funds have recently outperformed European based funds. The US has presented a more benign environment in which to invest being more advanced in recovery than most of Europe. Global macro managers, for example, have been able to profit across all regions as they have the ability to trade tactically across all asset classes within these regions.
EH: On what basis and to what extent do you diversify the investments of your funds into the various hedge fund strategies and regions? On average how many individual funds do you hold at any given point in one of your fund of funds and what is your rebalance frequency? Are there any particular rules stipulating the rebalancing of portfolios (e.g. mandatory quarterly rebalance)?
We run concentrated funds of between 12 and 20 holdings depending on the fund strategy. Diversification comes in different forms according to strategy, for example our long/short equity managers are diversified by region, market cap, sector and, to a lesser extent, style. On the other hand global macro managers themselves are already highly diversified being multi asset investors who can express their views in a variety of different ways. Each new addition to a fund should bring its own distinct advantages ensuring diversification benefits are at optimal levels. While there is no mandatory timetable for rebalancing, there is a detailed review of each fund on a monthly basis and changes are made as necessary.
EH: Given the high-profile blow-ups and fraudulent managers over the years, operational due diligence has taken an important role in hedge fund investing. How much importance do you place on operational due diligence and how robust are your processes in this aspect? Have you ever come across or considered a hedge fund that was subsequently exposed as a fraud (Madoff, Bayou etc.)?
We consider Operational Due Diligence (ODD) as important as any other part of the investment process – it is unacceptable to lose money though the failings of the operational aspects of a business. We believe our process to be the best in practice having separated the function and made it independent of the qualitative investment process prior to 2008. From that point we continued to strengthen the process ensuring it not only looks at the failings of the past but also understands the risks of the future – it is not just a box-ticking exercise. The ODD team has the power of veto when it comes to making new allocations and has exercised that veto in the past on a number of occasions for a range of different reasons. We have encountered many of the funds that are now known as frauds, none of which progressed after the first stages of our ODD process.
EH: What are the key factors you look at in investing; specifically at fund managers? What are the key attributes of a potentially successful hedge fund manager?
There are many different attributes that can determine whether a manager will or will not be successful, some attributes are harder to define than others. We examine areas such as the manager’s track record, stability of the business, alignment of interests, and quality of risk management but try to assess these in combination with softer issues such as the thoughtfulness of the manager’s approach, his flair and passion for the product that he has created. We have found that managers who combine this with clear plans about the growth of their business and who raise assets in a controlled manner tend to have more longevity than others.
EH: The Stenham Trading fund delivered excellent downside protection in the 2007 to 2009 period and outperformed most other funds of hedge funds. What was it that you did differently from other funds of hedge funds that enabled you to deliver this performance?
Stenham Trading is invested at any point in time, in a combination of managers that have distinct macroeconomic views. This approach has historically helped us to both extract alpha with negligible correlation to equity markets and to minimise the downside in stressed environments.
EH: You have traditionally maintained a heavy bias towards discretionary hedge funds and very little exposure to systematic trading hedge funds – why is that?
Stenham Trading has a discretionary bias. Unlike many of our peers, our asset allocation process is very dynamic and the split between discretionary and systematic funds changes significantly through time. Our book was entirely discretionary in Q4 2009 but at other times, the systematic allocation has been as high as 40%. Systematic managers are used as a source of diversification during periods when their positioning is differentiated in order to reduce the potential volatility of the overall portfolio.
EH: Given that the Stenham Trading fund invests almost exclusively in global macro funds, how do you achieve diversification within the portfolio?
Global macro funds are multi-asset investors, expressing their views using a variety of instruments in equity, fixed income, currency and commodity markets. Diversification is achieved through access to managers with different strategies (discretionary and systematic) and distinct approaches (long-term fundamental traders and short-term tactical ones).
EH: The Stenham Emerging Markets fund was launched in September 2012 – were there any specific opportunities that you were interested in that led to this development? Why a broad emerging markets fund instead of a specific Latin American fund? How are the Asian investments of this fund different from Stenham Asia?
We launched Stenham Emerging Markets as a result of our conviction that the best growth opportunities in the public equities space can be captured by long and long-biased managers based on the ground. We decided to build a concentrated portfolio and take an index agnostic approach in order to avoid countries and sectors that we consider higher risk or where we do not see specific opportunities.
Our preference for a broad emerging markets equity long fund (as opposed to a regional one) is a result of our experience in managing risk and our understanding that correlation is still very high among emerging market managers dealing in local capital markets. Diversifying across markets with different unique opportunities helps to mitigate that risk.
Having being invested in Asian hedge fund managers for over 10 years, we have access to some of the best talent and intelligence in this market but were often restricted to investing in only those offering a hedge fund structure. Both mandates offer their own advantages; Stenham Asia is more of a hedge fund allocating to equity biased and global macro strategies while Stenham Emerging Markets focuses purely on long only equity. There is minimal overlap between the two, however the process for Emerging Markets leverages off of the existing work we do in Asia.
EH: A number of high-profile hedge fund managers have recently highlighted their bullishness on Russia, Eastern Europe and Central Asia – the Stenham Emerging Markets fund does not currently include these regions in its mandate. What are your views on these regions? Are you considering allocating to this geography at any time in the future?
As Stenham Emerging Markets takes an index agnostic approach we only allocate to countries, regions and managers that meet our criteria. This is based on three main factors: a top-down filter (primarily to assess risk), a fundamental bottom-up approach and a selection of managers from a broad talent pool. Although we have been developing our research in Russia, Eastern Europe and Central Asia, we do not yet have all these three factors coming together to allow us to make an allocation.
EH: Given that funds of hedge funds have been out of favour over the last four years or so, how did you manage to raise capital for the Stenham Emerging Markets fund? Does being a ‘South African’ multi-manager have any effect on fundraising?
Our current investor base showed interest in Stenham Emerging Markets and has therefore supported the launch and initial capital raise. Both our existing and targeted client base is spread globally therefore being South African neither helps nor hinders the fundraising process.
EH: What classes of investors are your funds targeted towards and what competitive edge do you offer your investors? Can you give us a rough breakdown of your investors by type and geography? (e.g. 40% European institutions, 20% HNW in Africa)
Our competitive edge can be summarised as follows:
We are an institutional group with an owner managed culture where senior management own a majority stake and are significant co-investments in our funds. We have extensive experience targeting absolute returns, specialising in multi-manager hedge fund portfolios with over 25 years of top quartile results. We are committed to strong absolute returns and low volatility with a proven track record tested through many economic cycles. We are focused on managing alternative investment portfolios with no distractions or conflicts of interest and have a strong emphasis on risk management. We have an experienced and stable investment team with a senior management team that has been working together at Stenham for over 10 years. We employ a robust institutional investment process with independent qualitative, quantitative and operational research teams. We have an extensive network with access to top tier managers that are closed to less established peers. We offer transparent and bespoke reporting with direct access to the investment team.
Our investor base comprises 72% institutional clients (including pension funds and charities) and 28% high net worth individuals (including family offices).
Broken down geographically, our investor base comprises UK and Channel Islands (43%), Southern Africa (25%), Europe (20%), South America (4%), Middle East (2%), North America and Caribbean (2%), Japan (1%) and other regions (3%).
EH: What type of hedge funds are you looking to invest in over the coming few months? There has been some interest in South African hedge funds recently, do you foresee any strong activity in the African hedge fund sector?
We aim to maintain high quality coverage in the markets in which we invest, hence we have a continuous effort to identify top managers globally. With Stenham Emerging Markets specifically, we are currently looking for funds investing in Latin America.
Stenham started its life in South Africa where we still have strong connections, not least through our parent Peregrine Holdings, a South African listed company, which has helped us to develop a good understanding of the market over the years. We recognise that the South African hedge fund industry remains small relative to traditional institutions, but this has been a good source of opportunity/arbitrage. Moreover, with the domestic pension industry due to open itself up to allocate to hedge funds in the near-term, one should expect further growth within the South African hedge fund industry.
Our view has been that the South African market offers very attractive long/short opportunities, which can be captured by quality hedge fund managers. We have had exposure to the region for a number of years which has thus far been a great source of alpha and de-correlation for both our equity and multi-strategy portfolios.
EH: Could you share with us your near term and medium term outlook of the global markets – which region or sector are you currently most bullish on, given the present state of uncertainty across markets?
Our view is that 2013 will be a markedly different year to any year post-2008. This is both from the starting point of the risk priced into different assets and what will drive markets and individual assets during the year. During 2012, concerns were real and elevated over i) the potential break-up of the euro zone; ii) the impact of the US fiscal cliff; and iii) a hard-landing of the Chinese economy and the concomitant impact on global growth. We believe that these tail risks have been much reduced with important consequences for what drives asset prices and markets. While there are still uncertainties as to how some of these issues will unfold, markets are becoming increasingly more investable and fundamentals seem to be coming to the fore in asset and security performance. As a result of that we are positive on the opportunity set for long/short equity managers. Importantly, the trend of fundamentals increasingly driving single name performance and reduced correlation between names continues and is a significant positive for the return expectations for fundamentally biased long/short managers, which we favour.