The Access Fund returned an estimated -1.26% net of all fees in May, following finalised performance of 0.82% the previous month, bringing performance for year-to-date to 0.10%.
The fund performed broadly in-line with the HFRI Fund of Funds Composite Index -0.72% and has out-performed it year-to-date by approximately +2.5%.
The Global Macro Fund returned an estimated +2.13% and Series C (GBP) + 2.32% for the month of June net of all fees.
The year-to-date return is +2.22% and +2.82 respectively. The fund out-performed both the HFRI Fund of Funds Composite Index -0.72% and the MSCI World -8.10%.
The Capital Commodity fund targets a 15% compounded return.
Q: We spoke to Blacksquare Capital’s chief executive Christopher Peel and started by asking him to explain the background to the company.
A: “Blacksquare Capital was formed a little over two and half years ago. Myself and my business partner Madilean Coen are co-partners. We came together from different parts of the financial market. Madilean’s background is in asset raising, investor relations and marketing. My background is in a more traditional investment banking experience. I spent the majority of my career at Salomon Brothers in London, prior to becoming part of Citigroup where I was on the fixed income sales desk. I ran those hedge fund businesses and was head of fixed income sales.”
“The two of us came together somewhat uniquely. Many start-ups are started up by individuals that have similar skill sets. We started with one person that had a core competency in trading and evaluating hedge funds and the other who is a proven asset raiser from around the world from many different types of products."
Q: What was the motivation behind setting up a fund of hedge funds company?
A: “Our business model is one that views the world somewhat differently from the large traditional multi-strategy fund of funds, who are concerned with building portfolios for new entrants into the hedge fund arena that want a large amount of diversification by instrument strategy, and a large amount of diversification in the number of managers in the portfolio. Those businesses have been very successful. The returns as those types of firms have grown have started to look more and more like an index return.”
“More importantly, they have also started to become very highly correlated with the equity markets; because the majority of hedge fund based trading strategies have a long equity bias to them. When Madilean and I came together we viewed the world differently. We wanted to create sector specific multi-strategy funds concentrated – meaning 12 to 15 managers in a portfolio – to allow a sophisticated investor hedge fund exposure without single manager risk. The idea is to create a suite of products where if someone wants commodity exposure we have created something for them that is an index that is concentrated.
“Statistically the benefits of diversification trail off significantly once you get north of 15 funds in a portfolio. What we do rather do is conduct a very thorough due diligence process and do a lot of work at a portfolio level, to build portfolios that do not have any correlation to declines in equity markets. We want a product that is not similar to a long only equity investment.
“I would say that there are several things that make us different. It is running concentrated portfolios, sector specific portfolios and to build products that have low or no correlation to equity market declines.”
Q: What was the thinking behind setting up the specific funds?
A: “As the business has grown the idea is we have wanted to have more funds, but I think in the case of the Global Macro fund, there was a real need in the marketplace for a concentrated product where managers are taking directional risk as oppose to relative value risk but on a top down thematic basis.”
“That was mainly because the world financial markets go through is in cycles, and currently we are in a period where there is a lot of volatility in financial market valuations. A lot of this is because in short interest rates move either up or down. That creates all sorts of disequilibrium in financial markets, whether it be currencies, equities or bonds.
“I think a macro investor or trader is uniquely positioned from a portfolio construction perspective because the world is their oyster. They can redeploy and allocate risk opportunistically as they see trading opportunities unfold in front of them, as oppose to a convertible opportunity trader who is limited by the amount of convertible securities and equity market volatility. What I like about the global macro space is that managers are able to react, forecast and build exposure to many different types of markets. Those markets are perhaps volatile but also moving in opportunistic fashion.
“The first fund we set up was the Access fund. We as a company have a close relationship with Caxton Associates. For a variety of reasons we are able to get capacity to funds that are managed by Caxton Associates that have been closed for many years. We thought about using the capacity in a macro fund or a long/short equity fund but we took a step back and thought what would be unique was to have a feeder – a Caxton-only fund of funds.
“The Caxton association has a twenty-six-year track record. The main fund Caxton Global has a twenty-five-year track record with a compound risk and return of about 24%. It is a unique organisation. The fact we had capacity and the ability to build a product that no-one effectively could replicate, we thought that we would be able to raise assets and build a client base with that fund. And that is exactly what we did.
“But it was always going to be a stepping stone or a launch board to other products so we subsequently have launched two other more traditional fund of fund products that are allocating to ten or fifteen managers. But we are somewhat different in that we only build sector-specific funds, as opposed to multi-strategy funds.”
Blacksquare Capital’s chief executive Christopher Peel
Q: How did you establish the relationship with Caxton?
A: “My business partner Madilean started that relationship when she was working with Prudential Securities on the futures desk, and was one of their clearing brokers. I had a relationship with them when I was at Salomon. Madilean also went on to help Caxton raise money for some of their hedge funds, when she left Scudder Threadneedle following the merger with Deutsche Bank and started up her own third party marketing company. It was more in recognition of a working relationship that Madilean has had with the organisation for over fifteen years.”
Q: And what was the thinking behind setting up the current Capital Commodity fund?
A: “Commodities have become very topical in the press over the last six months, but we began thinking about this fund over a year ago. It takes a lot of time to launch a new fund - to conduct the due diligence, and make sure we’ve mapped the sector and interviewed managers – despite the recent rally in markets we feel the timing is ideal given that we believe that we are in the early part of a long-term super-cycle for commodities.
“A key driver for commodity prices has been the emergence of China, India and the Middle East. The demand to build infrastructure – new roads, bridges, cities – and the demand for better diets is growing. Meat is a good example in China where the average person is now starting to eat meat weekly as opposed to monthly and the demand for cattle feed is increasing.
“There has also been a clear under-investment by oil producing countries in their production infrastructure and the marginal cost of output is increasing. This also holds true in the mining sector where it takes many years and substantial investment to bring new production online. Then you add on top of that the subsidies, the political backing to use more bio-fuels as substitute for fossil fuels which is distorting many agricultural markets. Crops such as corn are being used to create energy which is not only very efficient but has clear consequences in the developing world where people are struggling to feed themselves.
“The answer to the question why set up a commodity fund is that commodity markets offer a great deal of diversification between themselves. There are some very powerful new growth engines in the world today and the demand for energy and base metals in particular is set to continue. There is not enough arable land to meet the current demand for production in corn and wheat, for example. The world has become imbalanced because of the growth of India and China. We think that will continue to not only propel commodity prices higher but also create a lot more volatility which will create a lot more trading opportunities.
“The other motivation behind the fund was that there are over $200 billion invested in long only commodity index trackers, which are very good for investors who believe in the diversification benefits of having allocations to commodities, which historically have been a very good hedge against inflation. That is fine but it is still very much a one-dimensional bet that prices go higher. What we do is try to construct a portfolio which is more dynamic.
“We have a 70% allocation to discretionary commodity traders, a 20% allocation to systematic CTAs, but also a 10% allocation to natural resource long/short funds that allows us to get closer to the supplying chain of an underlying commodity. Because the managers are long/short we expect the fund to be less volatile that a long only product, but expect it to capture 80% of the upside but have very little of the downside. That is a much better and more robust product.”
Q: Have you attracted different types of investors to the three different funds?
A: “We have got quite a few investors for the different funds. The first fund is on the Merrill Lynch platform so it has been sold very gradually around the world. We find our funds tend to sit very well in a private banking network. A private banker can recommend our funds to their clients, and can point out the types of exposure in the fund because we are concentrated and sector specific.”
“One of our key beliefs at the firm is that we want to be fully transparent. We provide full transparency to our investors to every investment we have in the portfolio, so every manager’s historical returns and return characteristics we put into our monthly report.
“There is no ambiguity or uncertainty as to what is in our portfolios. Our investors will always know. They may not always agree but then again they always have the option to redeem. What we try and do is build portfolios, optimise and weight them with managers that have a minimum three year track record. But we may add some managers as we go forward that may have a two year track record, but currently we have not gone with any start-ups.”
Q: Has the success of the first fund helped you to attract new investors?
A: “It certainly has. We started this fund of fund business ourselves. We have got no outside equity partners. The two of us effectively funded the entire business from day one, and certainly when people look at a new firm they want to see that it is FSA-compliant in its infrastructure, is going to remain in business and is not only going to be able to produce returns but able build assets. It is not too dissimilar to the way most hedge funds have evolved, where they start very slow. The first £25m is the toughest, the next £25m is a little easier and once you break a £100m people look at you differently. We have now got £300m under management, a two-and-half year track record and three funds.”
“We are a long way from being in the billion dollar league but I think investors will look and evaluate us as different in our belief in our products. They will see the way that we structure them as refreshing, and maybe similar to the way in which some of the original GAM funds were created. They would have ten to fifteen holdings that were fully transparent. What our business model believes is that we are offering them more than fifteen funds in a portfolio and if all those managers close we close that fund. We could certainly start another fund with a similar mandate but what we don’t want to do is end up creating an index for our investors. We want each manager in our portfolio to effectively compete against one another but to remain within the portfolio.
“We don’t want to give ourselves the luxury of adding another manager and going to sixteen, seventeen, or eighteen because we feel from a disciplined portfolio and risk management perspective that leads to some very bad habits. It is easier to keep a manager that is under-performing for whatever reason, because if you have the option of adding another manager and scaling down that one position – we do not have that option. We will have to sell a manager to add another one.”
Q: Are there any strategies you are avoiding?
A: “We are avoiding any strategies that have a high correlation to equity markets. That is because we feel there is a huge amount of product in the fund of fund space that is highly correlated to stock markets. It is going to be very hard to differentiate ourselves if we have a multi-strategy fund that has a 0.8 correlation to the S&P 500. We will continue to build sector-specific multi-manager funds but those that we as a company and as a set of individuals have some core competency in that space, whether it be global macro or commodities.
“We are looking at launching a fourth fund in the fourth quarter but it will be a sector-specific fund where the principles and the portfolio manager that is running it will have ten to fifteen years experience in that sector.”
Q: Do you target any particular sectors?
A: “Currently we target global macro, and commodities. What we would like to do is to create a product that is focussing on the developing world, meaning hedge funds that are focused not so much on emerging markets – I’m not sure that is a good description any more – but to build a portfolio based on long short hedge fund strategies looking at India, China, Africa, and Latin America. I’m not talking about buying a bunch of US dollar Brady bonds. It is more a question of looking at those local markets from a debt and equity perspective and potentially allocating to managers that have really core competency in the local markets. The idea would be to bring them together in a portfolio so we would have something that is diverse from a global perspective.”
Q: Is that the fund you are planning to launch in the fourth quarter?
A: “Yes, though it is not finalised yet. If I look forward to what has changed in the world I would say it is not a question of coupling or de-coupling, it is a question of what is the opportunity sub-set in capital markets in the world today. There is a lot more depth and sophistication involved in building a product that allocates a percentage of the portfolio on a global perspective to managers that have genuine skills in managing risk in an area. I do not believe that someone can trade the entire world from a local market perspective sitting in London or New York. It is very difficult. I think local market knowledge is absolutely valuable to that, but that is something we will be looking for in the fourth quarter.”
Q: What have been the key drivers of asset growth?
A: “Our products are effectively tailor-made for private banks and high-net-worth investors. Our funs are relatively uncomplicated in construction and simple to understand at both at a manager and strategy level. We are fortunate that Madilean’s background is in the private banking sector because we have got some very good relationships with private bankers and the private banks themselves. To be able to approach them with a product that they can understand is very important.”
“We are not opaque in any way – we are very transparent. The due diligence teams at the private banks very quickly understand our products because we disclose all of the managers in the portfolio. We go through all of our back testing, all of our portfolio optimisation, and give them all that work. We are very happy to hear their feedback, if they feel that we can either weight things differently or add a manager or take a manager out. “The fact that we work very closely with our investors and that we are that transparent gives us a huge edge over our competitors."
Q: What do you do differently from your competitors?
A: “I think what we do differently is that we are sector-specific, we are concentrated – meaning 12 to 15 managers – and we are fully transparent. We don’t want to compete with large diversified fund of fund houses because they are building products for large institutional investors which will tend to be their first investment in hedge funds. We want to go to sophisticated investors who have been investing in hedge funds for many years and know that they are able to select managers themselves. They may want commodity exposure but they can get it through us through twelve managers that we choose as oppose to twelve managers they choose.”
Q: That answer probably also covers what your value proposition to investors is as well?
A: “I think so – like it says on the tin we have a very strong investment philosophy and guidelines that keeps us very honest. We have got nowhere to hide. If a manager has a bad month we still report our top ten holdings. Most funds may report their top ten holdings but they may have fifty other holdings that they do not report. We do not have anywhere to hide.”
“I was at Salomon Brothers for many years, and there was one thing in particular which Salomon did from a trading cultural perspective that many traders we hired from hated with a passion. We would meet up every week – trader and senior salesmen - and talk about what trades we had seen, what trades we liked, what trade we had on the house, and what trades we were thinking of doing.
“To stand up in front of your peer group and have to either propose a trade or defend a trade is a very robust exercise, and effectively it is a 360 review. What I have tried to do is almost re-create that here at a fund of fund level.
“We as a company, as the asset management, have nowhere to hide. By doing that we are very sensitive to our portfolio construction. We are very sensitive to any type of losses, and particularly sensitive to risk management. If we feel that for whatever reason a manager has not managed their risk well then we take a very hard line. It is not a 2% position – it is a 10% position.
“We want to run chunkier risk but because of our sensitivity to poor performance or poor risk management or poor performance versus a peer group we tend to react sooner than someone who has the benefit of fifty managers in a portfolio where each one has a 2% position. The fund could blow up and you would not even notice it unless it was in the monthly returns. But our feeling is that the sophisticated investors that we have been raising money from want to see an investment fund that not only produces returns but one where the manager adds value. The way that we structure our business does add value.”
Q: Do you think generally hedge fund industry needs to be more open? Since the UK Hedge Fund Working Group was set up last year transparency has become a bigger issue, hasn’t it?
A: “I think transparency is a big issue. I do not know why people are not more transparent, but I can’t speak for the rest of the competition. I find it very curious that most large fund of fund organisations employ a lot of research analysts – all very bright, all very articulate individuals but the vast majority of them have never worked at a hedge fund or at an investment bank or on a trading floor.”
“I find it very peculiar that these people have the responsibility of doing the first analysis of whether or not a fund would be a fit in a portfolio, How can somebody with two or three years experience at a graduate school be able to come up with as good and informed an opinion on a manager, compared to someone who has spent fifteen years on a trading floor, trading or talking or selling to hedge funds?
“I think that there is a big void in the marketplace especially in the fund of funds. From my perspective they need much more experienced individuals doing the due diligence because due diligence is not just about checking boxes. It is about having a real understanding of a company, assessing individuals, having the ability to talk about market risk, portfolio risk, and operational risk - and I do not think you can get that coming out of graduate school.
“There is no sure thing in this industry, but I would prefer to have people conducting due diligence that know as much about markets as the people they are doing due diligence on.”
Q: Do you have any company and market predictions?
A: “We are where we thought we would be two and a half years into the company. It is still a very difficult time to raise money. I think that investors – not matter where you are in the world – have had a difficult twelve months whether you have invested in equities or bonds or property.
“My guess is that in the case of property in North America and Western Europe property prices are going to continue to fall. It is challenging times for investors as to where they put their money. I guess we will see a slowdown in Europe and North America and that means equities will continue to at best trade sideways and if the short rates are going to continue to rise with inflation there is no safe haven in bonds either.
“It is a very difficult time for investors to know where to put their money but commodities historically have been a very good hedge against inflation. It is very clear given what we see at the pump and the food halls that prices have gone higher. It is hard to appreciate from a New York or London perspective but if you go to Asia it is booming, and their demand for raw commodities of almost every type is only going to get larger over the next ten years.”