An interview with Simon Hopkins, managing director at Close Asset Management.
U.K. merchant bank Close Brothers Group acquired the majority stake in fund of funds firm Fortune Asset Management in 2006. Having recently bought the remaining shares, Close Brothers has this year integrated Fortune, its team and funds, into Close Asset Management. This has created an $11 billion asset management business, of which funds of funds account for roughly $3.5 billion.
Simon Hopkins founded Fortune in 1996. Aside from managing funds of funds and managed accounts, the firm offered advisory services to money managers and family offices, and has raised over $4 billion in seed capital for early-stage hedge funds in Europe. With the integration of Fortune into Close Asset Management, Hopkins has taken on the new role of head of global institutional business. He is tasked with building the firm’s asset and wealth management businesses worldwide, and is already in discussions about acquiring a fund of funds firm in Asia.
Hopkins began his investment banking career at SG Warburg & Co. in 1986, joining UBS two years later as a European equity specialist. From 1990 through 1996, he covered the French equity markets from Paris, first with HSBC James Capel and then Nomura France, before returning to London to set up Fortune.
AR: Most of your multi-manager funds lost money in 2008, but these funds all bounced back in 2009. To what extent does this simply reflect the general hedge fund recovery story? What conscious changes, if any, have you made to your investment approach?
Simon Hopkins: We, like everyone, suffered drawdowns in 2008, and recovered somewhat in 2009. However, the drawdowns in the hedge fund industry were, by and large, less severe than in most other asset classes. Overall, we suffered an average drawdown in the order of 10%, with no significant liquidity issues, whereas the industry appears to have lost 15–20% but have been characterized by suspensions, gates and uncertainty with respect to the value of certain illiquid holdings.
The absolute-return objective proved to be unattainable but the protection that is embedded in hedge fund strategies served nonetheless to preserve capital. Fortune had already shifted much of its client capital into managed accounts and liquid strategies, and this permitted us to avert the worst of the downdraft.
By contrast, your MAP managed account platform had a positive 2008 but lost money last year. Why were the results for this product so different from those of your other funds of funds?
The MAP fund switched into CTAs progressively during the course of 2008 and the timing helped stave of losses in that year but left us exposed to the poor performance of algorithmic trading strategies in 2009. Nonetheless, the uncorrelated nature of the returns has captured the attention of many investors who are petrified about being exposed to another deep drawdown.
How are you responding to the perceived flaws in the fund of funds model?
Headline fund of funds fees are unacceptable but in reality today only a very naïve investor would ever fall victim to paying them. Institutional management fees probably run at 50-75 basis points currently. We haven't adjusted our fees as they have always been fair. However, we have been banging the drum for transparency and liquidity for years and feel quite vindicated following the 2008 experience. If anything has changed it's our commitment to an absolute return philosophy which — despite the failings of the investment banking infrastructure, the long-only world and the private equity asset and real estate classes in the meltdown — nonetheless delivered excellent relative returns.
Has the financial crisis made it easier or more difficult to find good managers with which to invest?
Many investors have forgotten the way many hedge funds behaved in the crisis. Even some of the better names in the industry treated their clients with utter disdain. Incredibly, the clamour for capacity with the best names in the industry has been phenomenal, to the extent that many of them are once again closed to new investors. For the smaller firms, however, the environment has been dire, irrespective of performance. There is a sense that increased regulation and enhanced infrastructure, plus smaller balance sheets and less benevolent prime brokers, will squeeze many smaller firms out of the game.
Do you think that the push for transparency is overblown?
No. This is a ludicrous notion. One may never get transparency across all managers, but the more one has, the better off one most certainly is. It always astounds me that some investors still question the value of transparency. Perhaps they are worried about being revealed as unequipped to make use of it. Transparency is knowledge and we look for as much as possible to better inform our understanding of our clients' portfolios.
How does Fortune approach making an investment in a single-manager hedge fund? Do you take a top-down or bottom-up approach, or a combination of both?
We are happy to exclude strategies that are out of fashion or, in our view, unlikely to make adequate risk-adjusted returns for our clients. While we are always interested in finding and investing in the handful of perennial money makers, we are more interested in constructing portfolios of managers that fit sensibly together to deliver an absolute return profile. More often than not we will pass on a manager not because he is doing a poor job, but because his return, risk and volatility profile is no more convincing than managers we are already invested with.
Do you invest in early-stage and start-up managers, or do you want to see a track record? How large does a fund need to be before you will consider an allocation?
Size per se is not the decisive factor in allocating to a manager early-stage. It really depends on the strategy. In the liquid trading arena, we could conceivable fund a small account on a managed account platform, where assets are custodied in an account controlled by us or our chosen counterparty, and transparency and liquidity are significantly enhanced. For an allocation to a standalone hedge fund, we would typically expect the firm to demonstrate enough assets under management across its activities to provide a robust infrastructure.
What strategy types are you most positive about?
We are still very focused on liquid trading strategies. Investors want liquidity. Indeed, an ability to offer weekly liquidity through managed accounts has been the salvation of many hedge fund investors whose portfolios had previously been hamstrung by an inability to invest the cash portion of their funds in anticipation of further redemptions or write-downs. Credit strategies, at the other end of the liquidity spectrum, still offer opportunity but the easy money has arguably already been made.
Elsewhere, taking up the window of opportunity to invest with some of the best-known managers, which have previously been closed to new capital, has been beneficial.
Are there any strategies that you are consciously avoiding, or reducing your exposure to?
We are totally averse to esoteric strategies that are unregulated, illiquid or vulnerable to highly unpredictable outcomes. We avoid lending strategies to counterparties of dubious creditworthiness—ABL and ABS. We have steered well clear of life settlements, for example.
Is your firm still active in seeding new managers? Is this done via your existing pooled funds of funds, or through a standalone seeding fund?
Fortune has seeded over 20 managers over the past decade but today we feel that capital-raising for startups is a very tough business. We are not averse to providing day-one capital, however, and have focused in recent years on seeding managed accounts on multiple platforms to enable us to bring variety and quality to what, in the mainstream, is otherwise a rather unexciting universe from which to pick.
How has the seeding landscape changed in the past few years?
In recent years there has been the emergence of a number of institutional placement agents who bring knowledge and experience to this space. Fortune always tried to demonstrate detailed knowledge not only of the manager but also of the opportunity set from which the investor could choose. Others have followed this model. Nonetheless, the environment for capital-raising for new managers has been horrible for two years now.
How can a hedge fund manager increase its chances of receiving investment from you?
Fortune is now part of Close, and in our new guise we will be looking to carve out capacity with the better managers for our advisory business. Consequently, we will place great value on effective client relations, transparency and mutual cooperation with our managers. We haven't given up funding early-stage managers but this is most likely to be in the CTA or macro arena, where we can notionally fund a managed account.
Interview conducted by Robert Murray.