Allocator Quarterly Q3 2016

This AQ focuses on the hedge fund industry holistically, exploring the challenges faced by both allocators and managers.

[CITE AQ – Q3 2016]

At the last count, our textbooks have no mention of how financial theory should play out under a prolonged (sub-) zero interest rate environment. For now, we can conclude it is one of the largest financial services experiments ever seen. And we thought China, opening up its currency and equity markets in a highly controlled manner was an experiment in how to develop a capital market that deserved attention.

Meanwhile, the hedge fund industry is tethering at the edge of a cliff. On the one hand it wants to be recognized as a mature asset class, yet it does not know what adult it wants to be. It reminds us of adolescence, whereby it changes its attitude on a nearly daily basis, experimenting with different outfit, colours, and tone of voice. We continue to stick to our thesis that for it to be a mature asset class it needs to recognise that investors demand more than a star-manager and huge egos.

Investors remain bewildered by industry fees, which remain high despite the more recent compression, and the value creation cycle they promise in return. We have avoided contrasting funds against passive products. This has been done by academics repeatedly. Instead, we play lotto metaphorically and remind investors to take the long view.

With performance being under ever more scrutiny, we are putting forward another thought on business models within asset management. Our key recommendation remains largely the same: corporate governance improvements will remain a key differentiator for early stage asset managers. Inviting independent directors and advisors to the business and being transparent about the business plan is likely to create a stronger relationship with a firm’s key customer base: the investors.

Press Release - CITE signs LR Global ex Rockefeller Family Office Asset Manager

LR Managers chooses CITE Investments and its wholly owned subsidiary iGen Capital as their Investor Relations, PR and Corporate Governance partner

Click here for the PDF Press Release: LR Managers (New York) and CITE Investments (London) have agreed to the terms of a Master Distribution Agreement that will see both entities collaborating on investor relations, PR and corporate governance.

LR Managers is one of the oldest independent Frontier Markets asset management companies. It was incubated out of the Rockefeller Family Office and launched in 1997. The firm quickly demonstrated performance success in the early years despite launching just ahead of the Asian crisis. At peak, prior to 2008, the firm managed $900m in assets. The firm is now seeking to rebuild the business to take full advantage of their core expertise. The team continues to employ 12 research staff in their ‘field’-office in Vietnam whilst the management team is based in New York bringing total headcount to 20.

“We have had a lot to digest over the past few years, not least the passing of four of our key principals during the 2006-2007 period. Despite the various headwinds over the years, we continued to develop the business and we are positive that our continued investment in our business infrastructure as well as the continuity of our team will sit well with institutional allocators. Collaborating with CITE on conveying our refreshed story with renewed focus on Frontier Markets comes at a time when we both believe that these markets will see a strong rebound,” says Don LaGuardia, Founder and CEO LR Managers. “The timing for our engagement could not be better.”

“For CITE, teaming up with LR Managers was an obvious choice”, Anjelika Klamp, Global Head of Portfolio Management, CITE Investments confirms. “The team has significant history, strong legacy relationships in most, if not all, Frontier Markets and a portfolio management history that has demonstrated that they can manage significant assets in small but very nimble markets. We were impressed by their ability to select companies that one would not ordinarily find when allocating to mainstream groups.”


Press Release - CITE to work with Banque Bonhôte

Banque Bonhôte appoints CITE for their Corporate Governance & Due Diligence competence and mandates CITE to support its Acceleration Capital program

Click here for PDF-Press Release: Banque Bonhôte (Neuchâtel) and CITE Investments (London) have agreed to the terms of a Service Level Agreement that will allow both entities to collaborate on asset management company sourcing, due diligence and the provision of acceleration capital by Bonhôte Fund Solutions, a newly created entity at Banque Bonhôte.

Banque Bonhôte will use the relationship with CITE to strengthen its investor relations partnerships and uses CITE as an independent source in identifying asset management talent. It is proud to be an early adopter in asset management companies Corporate Governance, particularly in the hedge fund space.

“CITE has struck a chord with their approach to Hedge Fund Corporate Governance with our investors. For the past six months we have been evaluating our acceleration capital program with CITE and we believe it is beneficial for our clients to engage an experienced team with a strong background in asset allocation for the benefits of our clients. CITE’s sourcing capabilities of emerging asset manager’s fits with our wish to provide acceleration capital to great new talent”, says Steve Métrallet, Head of Bonhôte Fund Solutions. “We expect to engage with CITE across due diligence and corporate governance. Our Program comprises the Bank and a limited number of institutional partners (Private Banks, Family Offices, and Wealth Managers) that collectively manage over CHF20bn.”

“Banque Bonhôte has come up with a novel acceleration capital model. We are proud to have been appointed by such a prestigious bank to support their business development needs”, Sascha Klamp, CEO of CITE Investments confirms. “Banque Bonhôte will be able to build a first class asset manager program. It will be one of the first houses to endorse investor representation via a Corporate Governance code on a larger scale.”

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.

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.

Academic Contribution - Hedge Funds

"Networks feature prominently in the Hedge Fund industry. Recent ethnographic evidence suggests that a Hedge Fund is seldom an entity that confronts a market ‘on its own’"

We are grateful to Charles Baden-Fuller, Professor at Cass Business School to allow us to contribute to his research entitled “The Dark Side of Alternative Asset Markets: Networks, Performance and Risk Taking” which he jointly published with V.J. Torlo and S Ferriani.

From the abstract:

When actors invest in making strong network ties (relationships) with other actors, such ties can potentially influence behavior and subsequent financial performance, but the strength and direction of these effects is debated. Using original fine-grained data that documents the nature and extent of the relationships between Hedge Funds through their Prime Brokers (banks that provide leverage, issue credit lines and serve as bridges between Hedge Funds) we probe the social topology of Hedge Fund to Hedge Fund relationships that shapes this global alternative asset market. Contrasting much recent research that tends to stress the positive effects of network relationships, we find that investing in network relationships in this industry appears to have a “dark side” in terms of both performance and risk taking; where we probe various measures of both performance and risk in line with recent finance literature. We explore the reasons for these effects, and conclude that investing in Hedge Fund to Hedge Fund network ties can lead to inferior performance and increased risks that may not benefit the investor.