Robeco-Sage storms foreign shores
August 24, 2010
Suzy Kenly Waite
In our Q&A with Jill Schurtz, the former army captain and recently-appointed chief executive of the $1.3 billion fund of funds, talks about her plans to target Asia and other emerging markets.
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Jill Schurtz
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Four senior executives from Goldman Sachs founded fund of funds firm Sage Capital Management in 1994 with $20 million. In 2002, the firm was acquired by the Dutch asset management conglomerate Robeco Group. The firm now manages 65 times its original capital, with the renamed Robeco-Sage managing $1.3 billion as of July 31, making it an important part of the overall business at Robeco Group, which manages $194 billion.
Robeco-Sage Capital, the firm’s flagship global multistrategy fund of funds, was launched in January 1994 and has produced a net annualized return of 8.3% from inception through July 2010. The fund has been up for 13 of the past 16 years, producing minor losses of 1.07% in 1994 and 0.91% in 1998. In 2008, it dropped 22.29%. Last year, the fund rose 11.33% and it is up 52 basis points through July. Altogether, the firm manages seven funds of funds.
Under the guidance of its new chief executive, Jill Schurtz, Robeco-Sage is eying emerging markets and distressed investing, and is in the process of launching an Asian and emerging markets-focused fund of funds.
Schurtz was promoted in July, replacing Michael Abbott who held the role since 2007. She was hired in 2008 as chief operating officer, and before joining Robeco served as a director at Knight Equity Partners, where she was responsible for the firm’s hedge fund, broker dealer and institutional clients. Previously she was an attorney at Skadden, Arps, Slate, Meagher & Flom, and an investment banker at Bancorp Piper Jaffray. She graduated from the United States Military Academy at West Point in 1986 and served with the Army, attaining the rank of captain. Following her military service, she graduated from Columbia University law school in 1996.
AR staff writer Suzy Kenly caught up with Schurtz, and discussed the fundraising environment, what Robeco looks for in potential managers, and which strategies they are betting on.
What strategies do you expect to do well this year, and why?
We believe a recovering yet still uncertain world filled with overleveraged companies will provide ample opportunities for hedge funds focused on distressed investment opportunities. Much of the recent decline in defaults is directly attributable to the robust high yield new issuance market and the resulting phenomenon commonly known as “kicking the can down the road” or “amend and extend.” Unlike normal credit cycles, where companies default and repair their balance sheets through a financial restructuring, this time around it appears as though the problems are simply being deferred; in which case, default rates will likely once again increase as the cliff of maturities approaches in 2012 to 2014.
We are excited about prospects for economic growth in Asia and the emerging markets both on an absolute basis, and relative to the more muted growth expectations for developed markets. While the concept of “faster growth” in developing regions is certainly not a new phenomenon. Historically, key risk concerns have required a very cautious stance toward Asia and emerging markets. Namely, these markets were directional, volatile and liquidity driven; there were few strategies besides buying equities; regulatory restrictions created an inability to sell short; many economies were industry-focused and predominantly export driven; and these regions were characterized by less stable political and financial regimes.
In the wake of 2008’s financial crisis, however, an interesting pattern of facts began to emerge that supported the notion that the opportunity set was becoming increasingly attractive and, more importantly, risks were diminishing considerably. First, Asian and emerging market institutions largely escaped exposure to the Western world’s toxic assets and credit bubble, leaving those economies in a much better position to resume high historical growth rates. This is in contrast to the West, where normal non-government stimulated growth is still a long way off and credit availability has been reduced considerably.
Second, growing domestic consumption means that many emerging market economies no longer need to rely as heavily on exports, resulting in economies that are less prone to sudden shocks. Similarly, improved political governance and more open markets have reduced the risk premiums demanded by investors in prior years and have led to more overall stability. Finally, capital market developments have led to the increased liquidity and availability of hedging instruments, which enable funds to employ active hedging strategies.
How many of your existing managers are invested in Asia and emerging markets?
In our multistrategy funds, around 20% of our managers have some exposure to Asia and emerging markets, but not all of them are fully dedicated to the region.
Do you plan on increasing that amount? How will you exploit these opportunities?
We’re launching a fund of funds dedicated to Asia and emerging markets. We expect to launch the fund on October 1 and on day one, it will invest in 12-15 managers. Eventually we’ll increase that amount to 20-25 managers.
Are there any strategy types that you are purposely avoiding?
In our diversified multi-strategy portfolios, we don’t categorically avoid any specific strategies, although we are always conscious of the weaknesses of certain strategies in particular macro environments.
More generally, we avoid strategies that require high levels of leverage to generate satisfactory returns and illiquid strategies that lack appropriately matched liability structures.
How has the fundraising landscape changed?
The fundraising environment has definitely improved this year. We’ve just had our fourth consecutive quarter of positive client inflows and the pipeline looks good. And, more generally, individual and institutional investors are returning to the space and acknowledging that funds of funds have proven their worth as a significantly important strategy that can provide solid risk-adjusted returns and much needed diversification.
What are the main criteria you look for when deciding whether to invest in a manager?
Our list of key attributes includes: outsized intellectual capabilities, unquestionable character, the ability to monetize trading ideas, a disciplined risk framework, an intense personal and financial commitment to the business, and the ability to adjust to changing market environments.
We also heavily weight non-investment criteria in our decision making process—our managers must employ strong and repeatable processes and have a robust business and operational infrastructure. We have an independent team dedicated to the operating aspects of potential managers, and we also have a team dedicated to assessing the investment side.
While we don’t rule out start-ups, our criteria establishes a high hurdle—as a result, our portfolio tends to include experienced managers with a history of strong risk-adjusted returns about whom we have extensive first hand knowledge.
How many single strategy funds does Robeco invest in? How many funds of funds does it manage?
We invest in approximately 30 to 35 managers in our multistrategy funds. While the majority of our assets are in diversified multistrategy funds, we have also launched a long/short equity vehicle and are in the process of launching an Emerging Markets/Asia strategy. We also manage some customized accounts.
Do you prefer to invest in established managers or startups?
Our investment criteria, particularly our operational infrastructure standards, tends to limit the number of start-ups we actively consider. We are very cognizant of the fact that the investment, operational, and business risks associated with newly-formed managers can often outweigh the potential rewards.
Having said that, we would not hesitate to invest in a newly formed exceptional hedge fund with principals who have a demonstrated prior track record of success, are well known to us, and have made the necessary investments in the business to create a robust investment and operational environment.
How long do you typically spend negotiating with a manager before investing in them?
Robeco-Sage has an extremely rigorous due diligence process that balances quantitative analysis with a qualitative assessment. The amount of time we spend evaluating each potential investment is largely dependent on the type and strategy of the individual manager. Our normal due diligence process averages about 3 months. However, we’ve done our work as quickly as 6 weeks. At the other extreme, we’ve watched funds for years before investing.
How many managers do you meet with for every one you invest in? And roughly what proportion of ‘serious’ discussions fall apart before a deal is reached?
Our team screens approximately 40-50 funds for each one in which we ultimately invest. Roughly 10% of the managers that make it into the final stages of our due diligence process don’t make it into the portfolio.
The industry has changed and most launches are smaller now than three years ago. What constitutes a substantial launch, and how much capital does a manager need to get off the ground?
The amount of capital necessary for a successful hedge fund launch tends to vary based on the specific strategy. On average, $200-300mm constitutes a decent launch. The actual asset number is less important than the manager’s ability to sustain its business and infrastructure.
What can a hedge fund manager do to increase their chances of an established fund of funds firm investing in them?
In general, providing full transparency with respect to the portfolios, investment process, and portfolio risks, including using third party risk aggregators is absolutely critical. We expect ongoing access to senior investment staff as well as to the independent third parties that provide core services to the funds. Additionally, our due diligence process places a strong emphasis on the quality of a hedge fund managers’ back office, infrastructure, and service providers—we expect to see a significant and continuing investment in these parts of the business.