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Archive for May, 2008

The European Commission has postponed the ratification of the Ucits IV draft directive, according to an official from the Committee of European Securities’ Regulators.

The CESR source told Thomson Investment Management News on Thursday that there is no indication of when a new date might be set. An announcement from the College of European Commissioners on the ratification had been scheduled for April 30.

CESR has been advising the EU on the issue.

This follows an announcement in Dublin on April 1 by Didier Millerot – a member of the EU Internal Markets Committee – that the decision had been made not to introduce a full management company passport as part of the updated legislation.

At present, the Ucits directive allows funds to be marketed – and to a lesser degree operational practises to be shared – cross-border. The aim of the full passport was to allow trading cross-border, but opposition from jurisdictions like Dublin and Luxembourg, among other issues, succeeded in halting the process.

In what has become a rather ramshackle introduction of the latest revision to the directive, industry players have raised issues about different elements which are giving cause for concern within the draft.

Gavin Gray, managing director of administrators firm, Phoenix Fund Services, told Thomson IM News that the proposals around pooling in the draft seem flawed. He said: ‘To some degree you get the sense that they (the EU) are not doing enough in that area.’

Gray said that the directive proposes 85 percent of pooled funds must be held in a master, and that the master will need to be approved as a Ucits master. He argues this requirement would reduce the potential for investment in this area.

He would rather see feeders being allowed to invest in multiple masters, with investments around the 20 percent mark rather than 85 for each feeder.

He argues: ‘This would to allow a greater multi-manager type-product to really work for Ucits.’

Gray is also disappointed at the EU’s failure to agree on the introduction of a full passport – he said: ‘I think it would pull a lot more people into the Ucits product.’

The focus of Phoenix’ fund clients is primarily long-short equity: ‘Japanese long-short, global long-short, some event driven,’ Gray said.

Phoenix has an office in Chelmsford, UK, while its hedge fund servicing operations are centered on Dublin. The group has $12.5 billion of funds under management of which $2.5 billion are alternative assets.

On March 5 the firm announced the launch of its UK investment scheme administration operations, providing services to UK collective investment schemes (CIS), under Stuart Mathieson.

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 Mehraj Mattoo is indisputably one of the leading lights in alternatives investment management and, as the Global head of Commerzbank’s hedge fund of funds investment strategies – Comas – is on a crusade to divest traditional fund of hedge funds of out-dated practises.
    Mattoo began heading-up Comas in April 2006; the division now operates a “unique business model… setting the scene for how the fund of funds industry will evolve”, he told Thomson Investment Management News.
    The funds’ head argues that an ‘out-dated’ model for fohfs assumes  investors are only interested in diversification and want to shun risk – something he challenges strongly.
    He said: “The reason investors come to us is because they want exposure to hedge funds… and we have to deliver returns that are reflective of the hedge funds industry, not reflective of Treasuries.”
    And, to avoid mediocre returns, Comas has made active asset management part of its investment process: “We can’t hide behind diversification and still demand 1 and 10,”, Mattoo said, referring to the layer of management and performance fees fofs typically charge on top of hedge fund fees.
    “Much of the funds of funds industry is still rooted in a very simplistic view of the world,” he argues.
    “Under the old model you go through databases, short list managers using some criteria; perform due diligence on short listed managers – (if) you like a hedge fund you put them in the pot.”
    This out-dated process is still being practised by a number of fofs, he said, with analysts making recommendations to their investment committees irrespective of what incremental value the managers adds or what additional risks are bing introduced into the portfolio.
    Mattoo also argues funds of hedge funds (fohfs) initially became popular because investors had no idea where to start when considering allocations to hedge funds: “Fund of funds had the knowledge advantage as there was no yellow pages investors could lay there hands on,” he said. 
    Now things have changed, he said, especially amongst institutions – the core of Comas’ investors – which no-longer need hand-holding.
    And, he sees much of hedge fund growth in the future coming from pension funds and insurance companies, as opposed to high net worth (HNW) individuals.
    In preparation for this, Comas’ new approach includes the offer of a flexible and diverse platform for investors, he said, including multi-strategy and single strategy fund of hedge funds – as well as more tailored solutions to large investors.
    Having done away with the concept of a single portfolio management team run by a CIO, Comas has three distinct portfolio management teams; each specialising in a particular strategy or related strategies.
    “We have invested in a diverse skill set which is reflective of the complexity and diversity of the underlying hedge funds industry,” Mattoo said.
    An advantage of creating specialist portfolio management teams is that they add value across the board to Comas’s multi-strategy products, as the single strat teams are jointly responsible for the management of all multi-strategy funds, he added.
    “What that means is the credit part of the multi-strat product benefits very significantly from the expertise of the fixed income team, as credit is their bread and butter.”
    The second most important change Mattoo said he has made is to Comas’ operational processes.
    He has introduced an additional degree of corporate governance by ensuring the independence of due diligence from portfolio management, creating an investment committee in which five of the seven members are non-Comas global trading heads of the bank. 
    “Hedge funds have become more complex and the number has increased dramatically,” Mattoo said.
    Given that, there is a much greater need for a far more sophisticated and disciplined processes in business, he argues: “The kind of discipline you take for granted in the traditional asset management industry, or, for that matter, any other industry.”   
    He added, it is currently the opaque nature of hedge funds that causes the most concern for investors.
    “Most of the time it’s like going down a blind alley,” he said.   
    Mattoo has directed the development of a number of independent committees since joining Comas, which are designed to up the due diligence and corporate governance groups areas of the business, “to guide us through investments.”
    These include independent, asset allocation; fund selection and risk committees as well as the investment committee.
    Mattoo likens their independence to the independence of corporate governance directors.
    Other independent teams include internal audit and Legal and Compliance.
    “Due diligence is our first line of defence because that’s where things go wrong,” Mattoo said.
    And, most of Comas’ due diligence executives have experience in excess of twenty years: “They have seen it all before which is very important,” he said.
    They are concerned with having particular focus on the risks of business failure, he said.
    Meanwhile, the portfolio management team has plenty of young talent:     “Ultimately, Comas is in the business of creating portfolios of hedge funds – what are hedge funds? Hedge funds are portfolios made up of what used to be proprietary traders but who are now securitized separate legal entities,” he said.
    Given this philosophy, Mattoo said it is not difficult to see why he reports to the head of investment banking, rather than falling under the auspices of the asset management division of the bank – and he views this as  unique for an alternatives division.
    And, he said, to ensure that Comas funds don’t over diversify, the group has invested heavily in technology.
    “If you were to ask me what’s our most important contribution to this new model, the brave new world for funds of funds, it is the use of technology – both analytical as well as IT.”
    Mattoo has put together a team of researchers in conjunction with Imperial College London, and Kings College London, called Portfolio Analytics which is reported to be using artificial intelligence to unravel underlying hedge funds, in Comas’ fohfs structures.    
    “To create portfolios that deliver consistent returns over time we must ensure that we don’t diversify away Alpha. Optimal diversifications means we must determine very precisely the risk and return drivers of each hedge fund in our portfolios.”
    The first project for the Portfolio Analytics unit was to re-classify hedge funds to determine their true style, not the labels given to them by their individual managers.
    “We’ve done it on around 800 hedge funds so far; it takes their (the funds) finger print, their DNA. Taking into account everything; every market that trades, the way humans would if they had perfect memory and unlimited analytical power.”
    He argues that current conventional solutions which exist to deal with problems in the hedge funds industry will no longer suffice. Relying purely on historical data to determine the future performance of a manager and his fund is not enough, Mattoo argues.
    Even quant funds, for all their mathematical complexity, are basically only designed to buy and sell equities, bonds, derivatives.
    He argues further that the type of risk management technology Portfolio Analytics is developing would, in theory, have been able to detect the failings at funds such as Amaranth through an early warning system.
    If Comas had been invested in Amaranth – through one of its multi-strat fohfs – the system would have been able to show during early 2006 that the convertible arbitrage hedge fund was drifting in style; the system would be monitoring every small movement, he said.
    “No statistical model will pick this up because one (month’s) data point is not enough to change the overall picture – this is the problem with statistical inference.” Statistics is about reducing large sets of data to its distributional characteristics and data fits, he said. “What we’re doing is the opposite of that.”
    Therefore, the drift from multi-strategy convertible arbitrage to energy futures would have been detected way ahead of Amaranth’s collapse, in 2006, and quick redemptions could have been made.
    Comas had no allocation to Amaranth.   
    While Mattoo is unable to put a date on it, he said Portfolio Analytics’s artificial intelligence systems will eventually be able to calibrate each hedge hedge fund in terms of all markets that trade as well as the (economic) environment in which they trade.   
    Mattoo told Thomson IM that Comas is aiming to make its practices the new “Holy Grail” for fohfs through predictive optimisation (the best possible outcome), as opposed to optimising portfolios on the back of historical returns.
    “Fofs who are still rooted in the traditional model are going to suffer very significantly and there’s going to be a shift away from that… as fofs like ours start to perform significantly better… and have institutional ownership,” he said.
    Ultimately, Mattoo wants everyone to think of fohfs as “super hedge funds”, delivering value specifically in terms of risk adjusted returns.
    Comas was founded in 1999 and currently has seven fund of hedge funds. Its largest fund is the CGALE Comas Global Alternatives, a multi-strategy fund, which was re-domiciled in Dublin in 2007 but was originally launched in 2000.
    It currently has over $600 million in assets under management and has  grown nearly fifteen fold since being re-domiciled, Mattoo said. CGAL also ranked number 1 and 2 respectively in 2006 and 2007 among its peer group, in terms of risk-adjusted returns.
    Comas has $1.37 billion of AuM in total at the end of Q1, having almost doubled that figure from $700 million since the end of July 2007.
    Amongst this a $0.45 billion from retail investments.  And, of current assets, $0.92 billion is managed for institutional clients, with the vast majority of monies invested across its CGAL, CGALE, CAS, CGO and CFIX funds being institutional money.
    Comas declined to disclosed the names of its institutional clients.

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