On Bloomberg

There is uncertainty about the global economy, we worry about a number of markets.

Sascha recently joined Bloomberg to discuss the Fed rate outlook December 2015/2016.

Article contribution to Campden Family Business

If advisers get too close, they feel they own the whole thing

Please see our contribution to Campden Family Business (Campden FB) article “Heir Raising: Millenials’ Attitude To Their Impeding Inheritance”. We thank Daniel Bardsley to reach out for our views.

Insurance Linked Securities

"...if it is good enough for KKR, it is good enough for us to investigate."

Last quarter the team spent significant time reviewing the insurance industry, in particular the Cat Bond and Insurance Linked Securities (ILS) market, and how and why there has been a recent investment uptake by hedge funds. And if it is good enough for KKR, it is good enough for us to investigate. We conclude that the ILS Fund universe appears ripe for consolidation while the market is likely to double by 2020 as some industry specialists suggest. Please contact us for a the full article (info@citeinvestments.com).

Press Release: CITE and METTA form strategic alliance

METTA Capital (Hong Kong) and CITE Investments (London) have agreed to the terms of a Strategic Alliance that will allow both entities to collaborate on asset management company sourcing, due diligence and acquisitions. This partnership further enhances CITE’s reach into Asia while giving METTA access to European clients. Both entities will continue to operate under their respective names and clients will benefit from the synergies the collaboration provides.

“We have worked with CITE for the past 8 months and initiated a working relationship on a number of projects that are beneficial to both our organisations. CITE’s novel approach to sourcing nascent asset managers is aligned with our process of selecting best-in-class early stage managers”, says Vivian Kwok, co-founder of METTA Capital. “We expect to combine our best practices across due diligence and investment management to enhance our joint service delivery to our respective clients.”

Sascha Klamp, CEO of CITE Investments agrees with Ms Kwok. “METTA Capital is a new outfit that comes with significant pedigree and reputation that both Vivian and Janie Chen (co-Founders) have built over their long careers. We are particularly impressed with the due diligence efforts METTA Capital have established and look forward to cross-fertilize our core competences. No doubt, sharing intelligence across the APAC-EMEA time zones will enable us to collaborate effectively on projects, which ultimately benefits our clients. Day-to-day, the Alliance will have a joint management team to ensure swift communication and execution of projects.”

See the Press Release.

The Case for a Venture Partner Model

Sascha Klamp, CEO of CITE, reviews the shortcomings of the nascent fund manager distribution approaches and argues for a more widespread use of the holistic venture partner business model in asset management.

Initially, it took allocators some time to fully comprehend the implications of the market events and the impact it had and still has on the funds industry. But once the initial shock-and-awe moment settled, redemptions across the fund of hedge funds landscape accelerated. As a consequence, the number and size of funds of hedge funds (FoHF) are riding down an inverse S-Curve.

While the initial redemptions were sluggish and appeared to be a drop in the ocean, this trend has now accelerated as larger allocators adjusted their investment and operating models to focus on sourcing and building internal hedge fund investment capabilities. For the first time, many FoHF analysts were confronted with writing redemption tickets rather than filling in subscriptions documents.

The natural assumption was that single-manager hedge funds would suffer and follow the decline of their largest source of capital pre-2008. Far from it: after an initial phase of decline in assets under management, which was long overdue no doubt, hedge fund assets have now surpassed the pre-crisis levels (previous peak $1.95 trillion in June 2008 versus $1.97 trillion in November 2013, according to Eurekahedge, 2013).

CITE speaking in Zurich on investment due diligence

In November 2013, Sascha was invited to speak at a two-day Family Office event hosted at the Balder Grand in Zurich, Switzerland. The event was organized by Prestel and Partner, as a working forum focused on German Family Offices. However, some high profile family office participants from the rest of Europe, Asia and the US also attended and we had some great one-on-one conversations at the event. Prestel and Partner deserve much credit for ensuring an impressive participant line up at a stunning location.

Sascha’s presentation provided CITE with an opportunity to engage investors on the topic of investment due diligence. No doubt, it was challenging to pitch to an audience who mostly regard hedge funds as ‘locusts’ and in the main prefer domestic (German) private equity deals over international ones.

The audience had mixed views on the range of due diligence challenges that prevail today. Sascha reinforced the importance of manager due diligence in the allocators’ decisions, emphasizing the various aspects of both investment and operational due diligence, over and above the usual “past performance” review.

Our view is that due diligence must be looked at holistically and that due diligence has a price tag. In a nutshell: too little due diligence and at worst an investor stands the chance of losing the principal amount invested, too much due diligence and the costs may become prohibitive across a portfolio of investments.

Sascha’s presentation was followed by a lively Q&A session, with Sascha’s cross asset class due diligence perspective allowing for a broader discussion beyond the German audience’s usual private equity focus. Many of the hedge fund nuances were new to the audience and Sascha’s depth of insight highlighted the disconnect between due diligence as it is customarily performed and the holistic business assessment that is truly needed when making an investment decision.

We left the audience with a couple of takeaways:

  • Due Diligence duration: making an invest/divest call is for a reason and one should not change one’s views moments after that call has been made (decision paralysis)
  • Believe in gentleman’s agreements: if you agree terms verbally (whatever they may be) and if a manager subsequently breaks them – walk
  • Use references: we recommend calling a significant number of referees per portfolio manager (easily done in Hedge Fund land, harder in Private Equity)
  • Get on the road: do visit companies – don’t just meet fund managers. There is a lot to learn when talking to CEO, CFO and COO!

The ensuing panel discussion was hosted by Markus Hill (Media) and joint panelists were Dr Manfred Adami, Rosie Norris and Dr rer. nat. Daniel Ziggel.

On the second day, Sascha participated in a panel discussion on “Risk Management as part of your allocation” which was hosted by Alexander Pick (Allianz Global Investors). The discussion focused on the parameters of asset allocation and there was a lively debate among the panelists as to whether a structured, top down model serves clients better than a fundamental bottom up approach with loose allocation parameters in terms of geographical or style attributes. Our view is that investors should form a macro view, and then use the manager allocation decision as a means to execute and achieve the medium- to long-term investment and performance goals.

State Street debunks misconceptions about the Alternative Investment Industry

“Managers who remain innovative as they respond to demands from investors will be positioned for success in this new era where investors will look to employ alternatives more commonly than ever before.”

State Street released a new report titled “The Next Alternative: Thriving in a New Fund Environment” (September 2013). The report stresses that Fund Managers are adapting to the new order, finally.

Specifically, Fund Managers are reporting more information to investors and do so more frequenty. Finally, we appear to come close to mutually agreeable transparency levels. The report also examined the fee levels again. Not surprisingly, fees continue to be under pressure. One way to combat fee compression is to diversify into new product offerings which 29% of managers indicated they plan on doing over the next five years. Some 25% report that is what they have been doing since 2008. The burden of regulation is seen by some as an opportunity although they appear to agree that their cost base is going up as part of increasing regulatory scrutinity.

At CITE, we have been vocal about Transparency for many years and have always stated that it is not position level transparency that investors demand but rather (1) frequent access to the management teams and (2) to ad hoc reporting. We stress that product diversification is welcome in general to come closer to actually building businesses, further we maintain our view that the transition from a single strategy to a multi-product offering demands an exponential scaling of the underlying business. That is resources, including human resources, need to be carefully added. Lastly, our view is that the current regulatory regime may have been a step too far as public demand to put an end to ‘speculative’ investments has taken precendent over common sense. We feel that we will see a call to more pragmatic solutions over the next five years.

EY ITEM Club releases Financial Services Outlook Summer 2013

The hedge fund industry is likely face some challenges ahead.

Ernst & Young released its Financial Services forecast Summer 2013. The report is a quick to read and relatively content light. However some key observations are being made that are interesting to note.

The asset management highlights are (Source: Ernst & Young):

  • UK share price will rise almost 15% this year, helping to increase equity asset under management (AuM) to GBP409bn
  • Bond AuM will drop to GBP133bn in 2017, from GBP136bn this year
  • 10% of UK equity funds are now index trackers rather than actively managed
  • Multi-asset funds will account for one-fourth of UK-focused assets by 2017

The report falls short to explain how the macro variables will unfold according to their forecast. Regrettably no mention is made on how the Fund of Funds and Hedge Fund industry will develop specifically. That is, are we likely to see a further consolidation among the Fund of Funds players and are the largetst Hedge Funds likely to get bigger? Equally, there is no suggestion how new and emerging fund managers will develop over the next few years and where the investor capital is likely to come from.

BCG releases report on Financial Services Needs of Next-Generation Companies

Boston Consulting Group (‘BCG’) conducted research into a new breed of innovative, fast growing next generation companies (‘NGCs).

BCG suggests that NGC are little understood and we recommend reading their report for further details.

Academic Contribution - Hedge Fund Research

"...there is still much we do not know about how managers’ prior employment experience influences the performance of entrepreneurial spawns."

We are grateful to Philip Meyer-Doyle to reach out to us to gather our views on the hedge fund industry and its practioners. Specifically, we were able to contribute to the paper “Inherited Agglomeration Effects in Hedge Fund Spawns”, jointly published by University of California Berkerley and The Wharton School, University of Pennsylvania.


From the abstract:

This paper studies inherited agglomeration effects, which we define as human capital that managers acquire while working in an industry hub that may be transferred to a spinoff. We test for inherited agglomeration effects in the hedge fund industry and find that hedge fund managers who previously worked in New York and London outperform their peers by about one percent per year. The results are driven by managers who worked in investment management positions previously, and are at least as large as traditional agglomeration effects that arise from being located in an industry hub contemporaneously. The evidence suggests that inherited agglomeration effects are an important, but as yet overlooked, factor influencing the performance of new firms.