Fund to reapportion money to convertible arbitrage and event-driven strategies, which are predicted to perform in 2007
By Joanne Frearson
The Altin fund of hedge funds favours directional strategies, but it is starting to position itself towards convertible arbitrage and event driven as a result of the rise in M&A activity taking place across Europe, the US and Asia.
The product is run by José Galeano, head of portfolio management and research at 3A - the alternative division of the Swiss banking group SYZ & Co. It has achieved an annualised performance over a three-year period of 11.90%, compared to the Hedge Fund Research Fund of Fund Composite index of 7.75%.
Galeano says: "The fund has had a directional bias and has been invested in strategies such as macro and equity long/short. We have been very bullish on equity markets and these strategies perform well in these conditions. For example, the Chinese and Indian economies have been booming and we see opportunities in the equity markets continuing. With M&A increasing in Asia as well as Europe and the US we want to be able to capture this opportunity."
According to Galeano, the fund will continue to have a directional bias in 2007. However, he is considering taking money out to put in relative value or convertible arbitrage strategies.
He explains these managers are now starting to perform well after the credit crisis of 2005 when credit spreads were contracting leaving little margin for errors.
"General Motors credit rating was downgraded. This acted as a catalyst for the repricing of risk across all the credit spectrums. There were large market losses for convertible arbitrage and high-yield funds," he adds.
Galeano believes this situation has now changed and volatility in the equity markets should help convertible arbitrage strategies.
Another area that Galeano expects to do well is event driven. He is planning to increase his exposure from 6% to 10%-15% in 2007.
He says: "We expect M&A activity to increase in Europe and the US, because companies' balance sheets look good and there is a lot of liquidity in the market. Companies now have cash to spend and are looking to undertake mergers to expand. Similarly, we favour Japan because a new law has been passed to allow foreign companies to buy Japanese firms."
Galeano would not name individual managers in the portfolio but says the product has a mix of established hedge funds, as well as smaller vehicles. He explains the smaller hedge funds operating in niche strategies helped boost the portfolio's performance by exploiting new strategies and geographies.
Overall, there are around 40 funds in the vehicle with around 60% of these managers closed to new investors.
In choosing fund of hedge funds, 3A takes a top-down view developed by the bank on the major asset classes and markets, then managers are chosen using a bottom-up approach.
"The managers selected for the portfolio must have a good track record," says Galeano. "We like managers who can adapt to all market conditions and prove they can change their portfolios to suit them.
"Their portfolios must have enough liquidity and flexibility to change if market conditions turn. Managers must be convinced by their own investment ideas and demonstrate their investment approach is sustainable."
For example, although the Japanese market has suffered during 2006, the portfolio was able to avoid losses by choosing funds that could short stocks and capture gains when markets went down.
To help reduce risk in the portfolio, a risk management team is employed. This team analyses a manager's operations to detect potential for risks related to systems, processes and trading. Portfolios are also reviewed when there are changes in strategy, new managers are added or there are changes in key service providers. To make sure the vehicle does not become too concentrated there is no more than 7% of the portfolio in one fund.
In addition, the fund avoids products that have lock-up periods of more than a year. Galeano says if a portfolio drops in performance and they cannot withdraw investors' money, the performance will suffer.
The minimum investment is one share and there is no redemption period. There is a performance fee of 5% on absolute returns if the fund falls below 12% and a performance fee of 10% if the portfolio performs between 12%-20%.
The closed-ended vehicle is listed on the Zurich and London stock exchange. The product was launched in December 1996 and now has a 10-year track record. It has $323m of assets under management.
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