Collins Stewart Fund Management also launched a new UK equity focus fund in the first half, overhauling a range of multi-asset, multi-manager funds for re-launch in the second half.
The firm claimed that market falls have impacted total discretionary assets under management and administration which totalled £3.7bn, falling from £4.2bn in December 2007.
Over the past three years Collins Stewart’s only hedge fund – the Absolute Return Plus Fund - has generated returns of 23.70%, compared to sector returns of 9.01%.
In 2008, though, growth has almost halted with the fund only generating slightly positive returns of 0.05% to date in 2008. However, the fund continues to outperform the sector significantly, which has generated negative year-to-date returns of -7.96.
We spoke to Martin Baxter, lead manager of the Absolute Return Plus fund, and started by asking him to explain the background to the company and the fund in particular.
A: “Collins Stewart have been investing in hedge funds since 1996. We were one of the first on the Channel Islands to invest in hedge funds. In 2000 we realised that because of our expertise we could put together a fund of hedge funds product for the in-house team to use. It was sub-advised for about a year and then we did not like the returns and the way it was being done, so we took it in-house. And we’ve been running the fund – that is the Absolute Return Plus fund – internally since 2002.
“It was all based on internal money getting exposure to hedge funds on an absolute return basis, which seemed to work. In the last six months for the first time we’ve started to market the performance of the fund by saying ‘here is a fund that is doing quite well and you’ve probably never heard of it.
“We are a multi-strategy fund of hedge funds company and invest across the whole spectrum. Although we did not go into CDO (collaterised debt obligations) funds. We had a chat with them but it did not really make sense to us. There was only one broker that was given one quote, or maybe two at the most. That helped us last year and this year that we were not involved in that area. That is really where the fund has evolved from and it has always been run from Guernsey.
“My own background is that I am an industrial chemist by trade and then joined a financial firm where I learnt to trade futures on a futures exchange. I then worked in Guernsey for administrators on the island for the account on private equity and hedge funds. I moved to Collins Stewart in September 2004 working as a hedge fund analyst, and took over running the fund in September 2007.”
Q: What was the thinking behind setting up the particular fund?
A: “It was around 2000/ 2001 during the problems when the bubble was about to burst in the tech sector so it was set up to try and deliver the absolute returns. Then we had a few investors say, well we would not mind an absolute return vehicle in the fund of hedge funds. We had the expertise to set it up and it progressed from there. We currently have around £140m assets under management.”
Q: What is your investment strategy?
A: “We are not asset allocators. We think it is virtually impossible to asset allocate a fund of hedge funds. You can do it around the edges but because of the time lag and the inability to redeem and go into funds when you like you can not do it. So it really is a bottom-up fund picking vehicle. We do it on the edges - where we think there are problems in sectors we might reduce our holdings.
“Take, for example, commodity funds– we do not go into those, and we do not get into specific funds in specific areas because it does not make sense for us to do it. We would rather let the manager have the option to invest in these areas themselves and to the different sectors. We are not the bright or super-intelligent ones but we pick the ones that we think are, and have got the ability to trade and trade well. That really is our standpoint in fund of hedge funds. We do not asset allocate – we just try to provide an absolute return vehicles through all problems, and as we have seen this year it has been a very difficult one.”
Q: Are there any strategies you are avoiding?
A: “We are looking at all areas where we think there might be problems coming up. Emerging markets is one. It grabs your attention – the fact that they have done so well over the last eight or nine years. Are there going to be problems there? I have no idea, but there are some parts of the emerging markets debt that we are not 100% sure about. We are not looking to add to that area, and we are looking at the one position that we do have in that area.”
Q: Do you target any particular sectors?
A: “When I took over we had a really good clean out of the market neutral sector. Before I took over we had statistical arbitrage funds which we do not like because of the extreme leverage, but we do like the discretionary market neutral players. UK/Europe - because they have got the ability to go short, the markets are quite mature.
"US – we steer a bit clear of because we are a little bit unsure of that market and how it is played, especially the US managers. They are over on the other side of the pond which makes it difficult for us to get good access, and we are not too happy with the terms that US managers have on their funds. Although having said that we do hold two and they have done very well for us and we have a very good rapport with the managers. It is an area we look carefully at, and for good reason."
Martin Baxter, Collins Wealth Management, Absolute Return Plus Fund lead manager
Q: Are there any regions you favour?
A: "As a hedge fund you can not make money in every single market but you must have the ability to go short, and you must show that you will use that ability. It is about markets where you can short. It is hard in Asia to go short but if you are a global manager you can tip your toe in Asia and still use other parts of the world. So we have got one or two global managers but we have a number in UK and Europe because we find they are providing the best, stable returns."
Q What type of investors have you attracted, and has this changed over time?
A: “We originally had on-island and Channel Islands investors but now we are starting to look outside to London and other areas so it is changing. They are private investors/trustees. It is starting to gain traction. We had a very good quarter last quarter – we were up 3.5% sterling – and we have also dipped our toe into the charities region through London.”
Q: How has the fund performed since launch?
A: “The fund has achieved 9.5% annualised sterling since November 2002 at launch through to June 2008, and that has been through some difficult periods. This year it has been a bit more difficult – we are up 1% year-to-date to the end of June 2008. We performed well last month – for the quarter we are up 3.5%.
“It was a difficult first quarter but the whole idea is we try and hold on to your money. This is what we try and get across to investors: that fund of hedge funds are actually a good stable return. Good stable vehicles. We are not asset allocating – we are trying to make you 8 – 10% calendar year. This year is going to be a bit harder but we are not going to lose you money and hopefully get you a bit over cash. And that is during a very difficult time. During the good times we will get you that extra bit back.
“Education is the main goal. All of us in hedge fund of funds as a community are trying to work together to educate everyone.”
Q: What have you done differently from other similar funds?
A: “To be honest a lot of us are investing in similar areas but we like good houses. We have got certain houses in the UK we invest in but the actual funds themselves might be small but they are in first-class houses, which have other hedge funds. And they have been producing good numbers. We are small enough where we can go into these funds and get good toeholds. It has worked very well for us this year – those funds have been making good money and steady returns. That is where we do have a bit of an edge.
“My trading background helps quite a lot to try and find the problems out there – or the future problems because liquidity is the most important thing you can have in any investment. That is where our edge lies but to tell you the truth we are all trying to do the same thing – we are all trying to produce good absolute returns. It is a bit harder when you are a massive £10 bn or £4-5 bn fund – you can not move around quickly enough, especially in nasty times like these. We are not going to get huge – we have no interest in getting massive because it just does not make sense.”
Q: What have been the key drivers of asset growth?
A: “The key drivers have been returns. It has been a steady ship – when we get through this year I am sure we will have seen that it has done quite well. Against the competition we have fared up. We are top quartile for that time period, i.e since we started up, and the volatility is not too bad. We have got a good name – Collins Stewart – out there in the wider industry so we try to leverage off of that. We have only just started. It is a long road but hopefully we will get more assets in with good performance.”
Q: Do you think the name Collins Stewart will help attract new investors?
A: “I think it will. We have got a good London office with quite a diverse set-up – including stockbroking, and Hawkpoint, who are involved in corporate finance. They have the ability to point people in the right direction, and say ‘here is an absolute return vehicle that can be very good for SIPPs (self-invested personal pension) or other type of pension mandates.’ They are all working together to help each other. If it does not stack up with performance then you are not going to point them towards it, as it has stacked up with performance they are quite ready to do it.”
Q: Do you have a particular investment philosophy?
A: “Investment philosophy? Yes, try and make money in all markets! Make sure you do not lose any money - be safe, be careful and try and produce the 8 – 10% per year.
Q: Do you have any expectation of future growth with regard total assets under management?
A: “You have to be careful on how quickly it grows and how much it grows to. Expectations? There is nothing really at the moment because we are bringing the money in so there is no real limit at the moment. And through these markets it is quite good being a little bit smaller than the rest but it is good getting the money in because there is a lot of places now that are coming up where we can invest. Opportunities are emerging and they will over the next year and a half. It is interesting times and good times coming up in the next year. I am sure the markets will be up and down, and volatile – I am not sure where they are going but it will create opportunity.”
Q: Do you have any predictions for the market and the fund moving forward?
A: “Absolutely no predictions for the market - we just go on what our underlying funds say. Hedge funds are a bit bearish at the moment but of course they have the ability to go long and short. They are not sure where it is going to go but they are not too positive on the market. “With regards to our fund, we are ticking along – we would not mind getting cash plus 2% this year. It is going to be a difficult year but we are doing quite well through it and I think we will get cash plus 2% - 3%. That is what we are aiming for.”