April 2015 FOR INSTITUTIONAL INVESTORS & ASSET MANAGERS · 2019-12-17 · Clearbell’s Manish Chande on commercial property funds and their sudden attraction AlphaQ April 2015

Backing bricks & mortarClearbell’s Manish Chande on commercial property funds and their sudden attraction

AlphaQApril 2015

www.AlphaQ.world

FOR INSTITUTIONAL INVESTORS & ASSET MANAGERS

FinanCial TeChnologyEurope dominates in Fintech growth

easyJeT enTrepreneursStart-ups take flight

european M&aWhere are we in the cycle?

esg FaCTorsSomething to aim

for or crucial?

end oF an eraAre institutions

leaving hedge funds behind?

inTo aFriCaInvestment

opportunities

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Ed itor ial

AlphaQ april 2015

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Contents

AlphaQ April 2015

Companies featured in this issue:• Accenture• AccessChina• ArabesquePartners• Barclays• Barings• BlackRock• CalPERS• ChinaMerchantsBank• ClearbellCapitalLLP• CMS• Derivitec• DeutscheBank• EQTPartners• Fidelity• FinTechInnovationLab

London• FoundationAsset

Management• Industrialand

CommercialBankofChina

• iShares• Intralinks• Level39• LGTCapitalPartners• LyxorAsset

Management• JPMorgan• Mercer• OldMutual• PantheonVentures• PermalGroup• PFZW• PingAnInsurance• Preqin• Rathbones• SEI• ShanghaiStock

Exchange• SLAdvisors• SyzAssetManagement• Unigestion

333005

Backing bricks & mortarClearbell’s Manish Chande on commercial property funds and their sudden attraction

AlphaQApril 2015

www.AlphaQ.world

FOR INSTITUTIONAL INVESTORS & ASSET MANAGERS

FinanCial TeChnologyEurope dominates in Fintech growth

easyJeT enTrepreneursStart-ups take flight

european M&aWhere are we in the cycle?

esg FaCTorsSomething to aim

for or crucial?

end oF an eraAre institutions

leaving hedge funds behind?

inTo aFriCaInvestment

opportunities

05 End of an era for hedge funds? JamesWilliamsexamineswhypension

fundmanagersareditchinghedgefunds

08 EasyJet entrepreneurs RandeepGrewallooksatthe

phenomenonoftheeasyJetentrepreneur(otherlowcostairlinesareavailable)andwhystart-upsaretakingflight

11 The rise and rise of Fintech BeverlyChandlerreportsonAccenture’s

latestannualsurveyonthisfastgrowingsector

13 Backing bricks & mortar Clearbell’sManishChandetellsBeverly

Chandlerwhycommercialpropertyfundsarecurrentlyprovingattractivetoinstitutionalinvestorsaroundtheworld

14 Hedge fund outlook BarclaysStrategicConsultingteam

reportsontheoutlookforglobalhedgefunds,basedoninvestorsentiment

17 Plausible alternatives DeclanCanavan,JPMorganAsset

Management,describeshowinsurancecompaniesgeneratehigherreturnsfromdifferenttypesofalternatives

19 China A-Shares: too big to ignore TimNashofAccessChina,examines

whyChineseA-Sharesaresimplytoobiganopportunitytomiss

21 Challenging the illiquidity myth PatrickAdefuye,analysesthekey

findingsofarecentPreqinsurveyofassetmanagers

23 Bridging the gap MichaelRiakofPantheonVentures,

reportsontheUSretirementcrisisandhowprivateequitycanbridgethegap

25 Virtual real estate BeverlyChandlerinterviewsBlackRock’s

TomFeketeonhowthecompany’snewiSharesproductbringsilliquidpropertytothetradingtable

26 Social media for asset managers SEI’sLoriWhiteexplainshowsocial

mediaplatformssuchasTwitterandLinkedIncanhelpinvestmentmanagersmarkettheirbusinesses

29 The ESG phenomenon ESGisincreasinglyimportantfor

investorsandcompaniesalike,writesBeverlyChandler.NewresearchfromLGTCapitalPartnersandMercerconfirmsthatinvestorsarekeyinpushingthisforward

30 The spread of liquid alternatives ’40Actfundsareonlypartoftheliquid

alternativesnarrativesaysMichaelBernsteinofLyxorAssetManagement

33 A quantitative approach ArabesquePartners’OmarSelimmakes

thecaseforaquantitativeapproachtosustainableESGinvestment

35 Investing in Africa DianeRadleyofOldMutualInvestment

Group,examineshowtounlockthepotentialforprivatemarketinvestmentinAfrica

37 Cyber security: A multi-pillar approach Intralinks’ToddPartridgeadvisesa

multi-pillarapproachtoguardagainstcyberattack

40 Cloud derivatives JamesWilliamsmeetstheDerivitecteam

whoshowcasehowbesttomanagederivativesriskthroughthecloud

43 European M&A BeverlyChandlerdiscussesanewstudy

byCMSwithMartinMendelssohn,whichfindsprivatecompanyM&AinEuropeenjoyingamajoruplift

44 Building assets JamesWilliamsinterviewsEQTPartners

whohaveestablishedanewEuropeanrealestateplatformtofocusonLondonandtheNordics



www.AlphaQ.world | 5AlphaQ April 2015

Hedge Funds

since September, CalPErS, and

more recently Dutch pension

fund PFZW, have divested their

hedge fund allocations. CalPErS said

it spent USD135 million in hedge fund

fees in its last fiscal year and USD115

million the year before.

Fees were clearly an issue, as was

the complexity of categorising their

hedge fund investments, but the

question is: Are these outlier events

or the early symptoms of a more

serious problem facing the hedge fund

industry. Just how much value do

they really offer institutions at a time

when fees and performance are under

greater scrutiny than ever, especially

as more cost-efficient liquid alternative

products continue to blossom?

“The news came as a surprise to the

industry. For us, generally speaking,

at Lyxor, we viewed the two stories

as specific ‘outlier’ events rather than

representing a symptom of a wider

trend. When speaking to our investors

and prospects in the market we do

not get a sense that this is the start

of a new trend; quite the opposite.

These were very specific cases to those

two pension funds,” comments Jean-

Marc Stenger, CIO, Lyxor Alternative

Investments.

recent reports seem to suggest that

institutions are choosing to keep the

faith. In Preqin’s February Hedge Fund

Spotlight report, a monthly publication,

it revealed that 26 per cent of investors

plan to increase their allocation to hedge

funds in 2015, whilst 58 per cent intend

to maintain their current allocation.

Furthermore, Deutsche Bank’s 13th

annual Alternative Investment Survey

forecasts that global hedge fund assets

are set to surpass USD3 trillion by

year-end and grow a further 7 per cent.

The report writes: “Institutional

investment in hedge funds is set to

increase, with 39 per cent of these

investors planning to increase their

allocation to hedge funds in 2015.”

“We do expect to see more global

public pension fund money flowing in

to the industry,” says Bensted. “Both

managers and investors that we spoke

to when producing the report didn’t

think the CalPErS decision would lead

to large-scale outflows. We think it’s

going to be the opposite, with more

money coming in.”

Not everyone is ebullient on the

prospects of hedge funds. There are

some who believe that the sheer size

of the hedge fund industry, which now

totals more than 8,000 hedge funds, is

overcapitalised, making it harder for

institutions to generate outperformance

from their hedge fund portfolios. Simon

Lack, founder of SL Advisors, was

quoted by the Financial Times last

September as saying that he wasn’t

surprised by CalPErS’ decision. In

his opinion, institutional investors are

mistaken in assuming that hedge fund

managers will be able to deliver alpha

when the industry has grown fourfold.

That is, there are too many

managers chasing the same trades.

Finding new sources of alpha has

become hugely challenging.

As a result, manager selection is

more critical than ever. Separating the

wheat from the chaff is a tall order

and even though the largest, most

sophisticated institutions are building

in-house capabilities to run direct

hedge fund programmes, the majority

still rely on third party consultants and

multi-managers.

Shane Clifford is head of global

business development at Permal Group,

one of the industry’s leading FoHF

managers. He notes that institutions

are becoming more mature in the way

they allocate. Many have gone through

one or two investment cycles and are

gaining a deeper understanding of the

value hedge funds can bring to their

overall portfolio.

End of an era for hedge funds?JamesWilliamsexamineswhypensionfundmanagersareditchinghedgefunds.

“When speaking to our investors and prospects in the market we do not get a sense that this is the start of a new trend;

quite the opposite.”Jean-Marc Stenger,

Lyxor Alternative Investments



Hedge Funds

bring something meaningful to the portfolio. I

think that’s partly why CalPErS divested their

allocations, they probably weren’t ready to

make that move.

“Second, when simple, more straightforward

strategies are used, it should allow investors

to avoid paying the usual 2/20 fees. If it’s a

long/short equity fund sitting with the overall

equities allocation, there is going to be a certain

amount of market beta – is it traditional beta or

alternative beta? – and as such, the fees should

come down. For these types of strategies,

investors should be paying 1.5 per cent and

anywhere between 0 per cent and 15 per cent

in performance fees because there is a clear

rationale for doing so.

“Both investors and, importantly, managers

are becoming more understanding of that,”

states Stenger.

Nicolas rousselet is Managing Director and

Head of Hedge Funds at Unigestion. In his

opinion, it’s not just “raw” underperformance

but a combination of underperformance and

fees that is leading investors to ask, “Why do I

pay so much to receive so little?”

“This is slightly misguided however. Investors

have to understand what their ultimate objectives

are. If they are looking to beat a strongly

performing market, they should not be looking

at hedge funds, whose aim is to generate non-

correlated returns without the long-term support

of the markets, but rather ultra-risky speculative

levered directional funds,” says rousselet.

Over the last few years, central bank

intervention and a low rate environment has

created a situation where hedge funds cannot

expect to outrun the markets. Consequently,

this magnifies the fees, creating a perfect storm

of low performance and high costs.

Firms like Unigestion are making strides in

negotiating fees that are more aligned to the

investor and which incentivise the manager to

perform, not just sit on the management fee

and gather assets.

“The fee should be paid by investors

when performance is good, not all the time.

Transformation of fees is something we

increasingly see. Managers who operate in the

true spirit of what a hedge fund is are happy

to look at this,” says rousselet. “What we

recommend, and have had some success in

doing, is a fee structure that rewards managers

when they do well, and doesn’t reward them

when they don’t do well.”

“Should it be a separate allocation or should

it be split up across asset classes? That’s a

broad conversation that investors are having

today, as opposed to one of, ‘Are we committed

to hedge funds?’

“A lot of the money being allocated to us

is coming from the fixed income portion of

investors’ portfolios. I think the more interesting

question to be asked is whether institutions view

hedge funds as a separate and distinct allocation

or not, and if so, why?” says Clifford.

Indeed, 10 years ago, when institutional

investors like CalPErS started to seriously

invest in hedge funds, the typical approach was

to work with consultants, do their research

and would ultimately end up allocating 5 or

6 per cent to a handful of strategies to bring

decorrelation benefits; hedge funds were viewed

as a completely separate asset class.

The problem with that approach is that

it does not necessarily give investors a full

picture of how hedge funds can actually work

symbiotically with traditional investments

across equities and fixed income. But as

Stenger observes, institutions are beginning to

migrate away from this limited use of hedge

fund strategies, which should help them gain

better long-term insights into the value these

strategies are generating.

“They are starting to integrate hedge funds

into their wider portfolios,” says Stenger,

“and this can achieve two things: First, you

“I think the more interesting question to be asked is whether institutions view hedge funds as a separate and distinct allocation or not, and if so, why?”Shane Clifford, Permal Group



Hedge Funds

One of the big developments seen in the last five years is

the range of options available to institutions to gain exposure

to hedge funds. In times past, the only choice they had was

to invest in the manager’s commingled flagship fund offshore.

They would typically receive a monthly performance update,

the odd newsletter or two, but by and large they were kept in

the dark.

Today, the situation is far different. Institutions can choose

to have funds-of-one, commingled managed accounts, separate

managed accounts, they can choose between offshore funds

and regulated AIFs under the AIFMD, or liquid alternatives

(UCITS and ’40 Act funds). All of these offer something

slightly different, and this is good news for institutions as they

progress through their investment lifecycle.

“We work with a wide spectrum of clients, in terms of

their knowledge and experience of hedge fund investing. We

get some that are highly sophisticated and work with us to

construct, let’s say, an event driven mandate containing five

managers. On the other hand we still have clients who are

dipping their toe in for the first time. You see these headline

statements that make sweeping generalisations (about

investor disillusionment with hedge funds), but things are

never black and white,” comments Clifford.

One interesting point that Clifford makes is that

the majority of Permal Group’s clients run both direct

programmes and multi-manager programmes. Institutions

are still some way away from having the in-house capabilities

to take on hedge fund investment programmes on their own;

this is especially true of insurance companies who now find

themselves needing to respond to Solvency II. Transparency

is critical, not just in hedge fund allocations but across

their entire investment portfolio, coupled with industrial

strength reporting.

The best way to achieve this is via a managed account

platform rather than relying on offshore funds.

“We have a managed account platform (PMAP) and the

transparency and preferential liquidity terms that we’ve

managed to achieve is something that institutions have really

bought in to.

“What we say to all of our clients is that we are vehicle

agnostic. The first objective is to understand what the

client is trying to achieve by investing in hedge funds. The

vehicle – whether it’s a commingled fund, a fund-of-one – is

a secondary consideration,” says Clifford.

This increased focus among multi-managers to deliver

customised, outcome-driven solutions to investors has made

a big difference to the way institutions view hedge funds.

Moreover, the fact that managers are also paying heed to the

fact that they need to communicate more efficiently, and

regularly, is helping institutions to get a deeper feel for how

these investments work.

“It’s hard to generalise what today’s preferred route

should be. A sovereign wealth fund might come to us and

say, “We want a systematic macro programme containing

10 managers”, compared to a public fund who may come to

us and say “We like the track record of your multi-strategy

credit fund but we want you to give us that in a fund-of-one

structure”.

“In today’s world, one has to be relevant to an insurance

company, a pension fund, an SWF, a multi family office, etc,”

adds Clifford.

Over the coming years, institutions will effectively have no

choice but to invest in hedge funds. Since the global financial

crisis, investors have enjoyed a golden period as equity

markets have rocketed and bond yields have dropped to

record lows. The fact is, that is not a sustainable environment.

Traditional asset classes will not deliver that same level of

performance moving forward so investors have to make

contingency plans; and hedge funds are the best choice.

Michaël Malquarti is co-head of alternative investments at

Syz Asset Management. He comments: “Without wanting to

sound too dramatic, over a longer horizon the performance

of a balanced portfolio, not only in nominal terms but also

in real terms, is likely to be lower than what we have gotten

used to.”

“The whole asset management industry has to realise that

we are coming to the end of a generation where bonds and

equities enjoyed boosted returns. In that context, getting

between 4 and 6 per cent by investing in hedge funds is

becoming increasingly attractive,” says Alexandre rampa,

co-head of alternative investments at Syz Asset Management,

adding: “We are more optimistic about investing in hedge

funds in 2015 than we have been for the last few years. A lot

of markets are “toppish”. It’s difficult to call the end of the

rally but equally it’s difficult to see the US markets get much

higher than they are now. The environment is moving away

from one of holding long, in the wake of liquidity injections,

to one where it will favour stock pickers and thematic

allocators.”

In conclusion, Lyxor’s Stenger believes that what is now

emerging as a clear trend is one of hedge funds becoming

more mainstream: “If the hedge fund industry evolves its fee

structure and offers new ways to access strategies, as a result

of regulation, there’s every reason to be optimistic on the

future growth of the asset class.” n

“If investors are looking to beat a strongly performing market, they should not be looking at hedge funds, but rather ultra-risky

speculative levered directional funds.”Nicolas Rousselet, Unigestion



F inAnciAl TecHnology

Dear, dear Europe,

Poor slow, dying decaying Europe,

What will the future bring?

A spiral of misery,

Lacking the dynamism of America,

Missing the growth of Asia,

Will Europe soon be the forgotten continent?

it does not take much reading of the financial

press, bank research or, heaven forbid, the

blogosphere, to come to the conclusion that

Europe is the continent destined to perpetual

misery. The ‘soon to be forgotten’ continent;

the Dowager aunt who is invited to every family

occasion and who continually surprises by

simply still being alive.

However I am beginning to wonder if reports

of Europe’s death are greatly exaggerated; and

(whisper this quietly) the spark of future growth

might be driven by the fundamental precepts of

the European Union.

Earlier this week I spent a day in Shoreditch

with a friend at his start-up – 30 staff and

profitability in a year. The day started in a local

café with a breakfast meeting with the back-end

server team – approximately 16 people. Around

the table were Greeks, Irish, Italians, Poles –

frankly nationalities from all across Europe.

EasyJet entrepreneurs….RandeepGrewallooksatthephenomenonoftheeasyJetentrepreneur(otherlowcostairlinesareavailable)andwhystart-upsaretakingflight.




also provide some of the mentoring that some

start-ups have lacked. Combine this with some

entrepreneurs who have had successful exits

and I am beginning to sense that over the next

ten years more money will circulate within the

start-up community in Europe.

Europe historically has had a glass half

empty attitude. However in a number of

areas Europe, or at least parts of it, are

becoming world leaders. For instance it is

almost impossible to attend a start-up event in

London these days where crowd funding is not

mentioned. Additionally various government

projects are also encouraging a ‘can-do’ attitude.

I have never met an entrepreneur who thought

fund raising was easy; but having seen start-

ups for rather a long time I am beginning to

feel that the path to raising A and B rounds is

becoming more established in Europe.

Obviously the basic right of ‘freedom

of movement’ was enshrined in the EU

constitution. However, perhaps the true

genius of this ‘right’ is only now becoming

obvious. What strikes me about these easyJet

entrepreneurs and developers is that they

are relaxed and comfortable in each other’s

company. They are not economic refugees but

rather talented people looking for the best place

to do business. They are the dynamism that

drives any society forward.

Currently their favourite locations are

London, Berlin, Stockholm and Warsaw2. In

a bygone age the merchant entrepreneurs of

the era would have travelled from London to

Birmingham or Manchester or the Yorkshire

mills. The present generation happily jump on

easyJet to pop to Barcelona or Milan or Croatia

for a few hours or a couple of days.

Furthermore several of the companies

have 24x7 pan-European chat rooms running

In fact the biggest complaint of my friend is

the lack of heavy software engineering skills

available in native Brits. Interestingly the ‘front-

end’ team of user interface and graphics design

was more heavily skewed with Brits.

Later in the week I visited Level39, which

is Europe’s biggest Fintech incubator (160 plus

start-ups and counting). I mentor or advise

a number of companies there. And again

the profusion of European nationalities is

astonishing. But not just European, a couple of

my favourite teams have members from India,

Canada, New Zealand or Australia.

And during the week I had dinner with the

CEO of a UK Adtech start-up. The company

has developers and data scientists in Poland,

Belarus and Spain (as well as the UK).

It appears that young entrepreneurs, young

developers and young companies, rather than

allow themselves to be restrained by local rules

and regulations, are simply getting on easyJet1

flights and flying to wherever regulations are

easiest to start up a business or to find developers.

Let me also let you in on a little secret: many

of these entrepreneurs and developers are as

talented and as technically adept as equivalent

entrepreneurs and developers in Silicon Valley

or elsewhere. What they do sometimes lack is

experience or mentors/advisors with experience

around them. But give them a chance and, in

some cases, a couple of burnt fingers in their

first and second start up and they are going to

be good – in fact extremely good.

Their attitudes and understanding of

business has also changed. Call it the ‘ADD’

(‘Apprentice’ and ‘Dragons Den’) generation

but many have started absorbing the concept

of entrepreneurship, pitching and profit and

loss from an early age. The first episode of The

Apprentice aired on the BBC on 16 February

2005, whilst Dragons’ Den premiered in the UK

on the BBC on 4 January 2005. The history

of Dragons’ Den is interesting – the original

Japanese show (‘Manê no Tora’ (Money Tiger))

only ran for three years (2001 – 2004) whilst

in the UK it is in the vocabulary of many

teenagers. Indeed some schools run their own

Dragons’ Den competitions.

Another issue always raised in Europe is the

lack of funding for the critical A and B rounds

– Europe seems to be able to fund seed rounds

but there is often a gap after that. However I am

seeing more and more US venture capitalists

setting up shop in London. Perhaps this will

“Young entrepreneurs, young developers and young companies, rather than allow themselves to be restrained by local rules and regulations, are simply getting on easyJet flights and flying to wherever regulations are easiest.”Randeep Grewal




aerospace industry without recognising Airbus

or rolls royce.

Though Tesla might be gaining the headlines,

any analysis of the global industry has to include

Volkswagen, Mercedes and BMW. But that is not

all, the renaissance of the British motor industry

– with rolls-royce (owned by BMW), Bentley

(VW) and JLr (Jaguar Land-rover – a unit of

Tata) shows that the revival is deeper than one

might expect. More interesting in some ways are

two of the ‘forgotten’ motor companies in Europe

– renault with its alliance with Nissan, and Fiat

with its merger with Chrysler.

Similar global champions and forgotten

global giants can be found in numerous other

industries in Europe. The new Apple watch

may be getting attention – but this is perhaps

a reminder that the European (mainly Swiss)

watch industry has dominated the luxury watch

segment for decades. In technology Silicon

Valley might get attention but most phones are

powered by chips from ArM, and contain chips

from a variety of other European companies. In

business software one has to assume that SAP

may just possibly have been doing something

right to become the global giant it is.

Travel on any low cost airline (or ‘peanut

airline’ as they used to be called) across Europe

during a weekday and you will see people in

business attire flying to meetings. Numerous

supply chains across Europe are not restricted

to national boundaries. These supply chains

include those linked to the capital markets. A

Spanish entrepreneur can as easily hire a Swiss

bank in London to raise money from German

investors as from local sources of capital.

Meeting both listed and unlisted businesses,

it has become increasingly clear over the

last few years that more and more European

companies have a changing attitude – and are

gaining the dynamism and attitude that drives

prosperity. Part of this is simply by travelling,

and being exposed to investors across Europe

(and indeed the US), companies are becoming

more savvy. But also hiring staff from across

Europe changes attitudes within companies.

The job of an investor is to appreciate these

opportunities early and invest as the attitude

change leads to increased dynamism, growth

and prosperity. The macro environment

dominates the headlines but an attitude change

is a once in a generation opportunity to find

investment opportunities…

… and long live peanut airlines. n

on Skype via which they coordinate their

teams. Interestingly it does not occur to many

of the entrepreneurs that they are building

multinational companies on day one – indeed

many have not known anything but the EU

for their whole adult lives and it does not

even occur to them that they are jumping

international borders, customs or regulations.

And increasingly every EU politician and

every EU state will have to ask themselves

the simple question – ‘if growth depends on

young entrepreneurs how do we change our

regulations and environment to attract them?’

The simplicity of the question belies

the implications. If you, as a country, or a

state/province or city, put up cumbersome

restrictions and regulations the entrepreneurs

will simply jump on a plane and go to London

or Berlin or elsewhere in the EU. Frankly, the

implication gives me great hope for the future.

An entrepreneur or a developer moving, for

example from a southern European country to

London, even if for a few years before returning

home, is also important for the social attitudes

he takes back home. If he has been able to

start a business without red tape or hindrance

in London he is surely going to challenge why

he cannot do the same in Milan, or Athens or

Barcelona. And the movement of entrepreneurs

is indeed in both directions. A few years ago

I met a young Spanish entrepreneur who was

using his apartment in London as the base of a

start-up. An enthusiastic team of half a dozen

were busy poring over their screens in the

lounge. More recently he has moved back to

Spain – will he tolerate local regulations that

stop him there?

The unlisted start-up sector is possibly a

‘canary’ that is reflecting what is happening

more generally in European commerce.

A decade ago if I wanted to meet smaller

listed companies in Europe I would struggle.

Sometimes I would meet companies that had

not met non-local investors for a period of time.

On one memorable occasion I met a company

(a leader in its field across Europe) that had not

met ANY investor for five years.

Now however listed businesses are also more

confident to undertake roadshows in London,

Frankfurt, Paris, Madrid or Stockholm. And

the engineering first (as opposed to marketing-

led) approach of many European companies

has created some global champions. For

instance it is impossible to consider the global

Footnotes:1. Other low cost airlines

are also available but easyJet appears to be the Entrepreneur’s choice.

2. There are also a number of other ‘hot’ locations but some of the companies that I speak to regularly are keen that I do not give away their favourite places to find highly skilled technical staff.




Ventures based in the financial technology

sector (Fintech) saw huge growth

globally over 2014, according to a new

survey from Accenture entitled The Future of

Fintech and Banking.

Global investment in Fintech ventures tripled

from USD4.05 billion in 2013 to USD12.2 billion

in 2014, with Europe being the fastest growing

region in the world. The report found that last

year, Fintech investment increased at more

than three times the rate of overall venture

capital investment.

The US dominates the Fintech universe but

Europe experienced the highest growth rate,

with an increase of 215 per cent to USD1.48

billion in 2014. The UK and Ireland accounted

for more than 42 per cent of the European total,

as investment in the region rose from USD264

The rise and rise of Fintech

BeverlyChandlerreportsonAccenture’slatestannualsurveyonthisfastgrowingsector.




million in 2013 to USD623 million

in 2014.

In the rest of Europe, the regions

that experienced the most significant

levels of investment in 2014 were the

Nordic countries at USD345 million,

the Netherlands at USD306 million and

Germany at USD82 million.

“The massive investment in Fintech

shows that the digital revolution is well

advanced in financial services, and it

is both a threat and an opportunity for

banks,” says Julian Skan, Accenture

managing director overseeing the

FinTech Innovation Lab London.

“Fintech is empowering new

competitors and start-ups to move

into parts of the banking business but,

paradoxically, it is also helping banks

to create better, more convenient

products and services for their

clients. It is also leading to increased

cooperation between traditional

banks and innovative start-ups and

technology businesses in a way that

can result in totally new business

models and revenue streams.”

More worrying is the finding that

many banks are not dealing with

the Fintech revolution head on. The

survey found that of 25 senior banking

executives involved in technology

innovation, 72 per cent of the

respondents felt their banks have a

fragmented or opportunistic approach to

dealing with digital innovation, and 40

per cent thought the time it took their

organisation to deploy new technology

is too slow, either negatively impacting

their ability to realise value or providing

no net benefit at all.

The vast majority also believed that

they lack the skills and culture needed

to succeed in the digital age. Among

respondents, four out of five said that

when it came to skills and culture,

their banks are only “somewhat” or

“minimally” equipped for the digital age.

In addition, although 80 per cent see

working with start-ups as a valuable way

to bring new ideas to their business, 56

per cent claim that their organisational

cultures need to change in order to

work effectively with start-ups.

Of the banking executives

interviewed, 44 per claimed that

their banks did not invest enough in

innovative technologies, and while all

of the respondents believed that legacy

technology presents an issue to their

organisations, only half said their bank

had a strategic approach to replacing

its old technology.

However, looking forward three-

fifths of survey respondents believed

that banks and new competitors will

coexist by providing differentiated

offerings, or the established banks will

acquire the new players.

A majority of respondents (72 per

cent) expected their banks to increase

investment in technology innovation

over the next two years. Some 56 per

cent said their banks would explore

open innovation, such as opening up

their intellectual property, assets and

expertise to outside innovators to help

generate new ideas and discover new

areas for growth. Within the next two

years, 32 per cent say their banks will

create a corporate venture arm.

The report shows that banks are

also open to collaboration with their

peers and with organisations outside

of their industry, to more effectively

adopt innovative technologies, with

all survey respondents saying they are

willing to do so. Furthermore, 60 per

cent of respondents say they are open

to sacrificing current revenue in order

to move to new business models.

The Accenture report was launched

at the FinTech Innovation Lab

London, established by Accenture

in 2012, which is a collaboration

between Accenture and financial

institutions, and is supported by the

Mayor of London, the City of London

Corporation and Innovate UK.

It is designed to nurture early-stage

companies from the UK, Europe and

elsewhere that are developing new

technologies for the financial services

sector. Since the launch of the FinTech

Innovation Lab London, the 14

companies that have passed through

the programme have raised more than

USD35 million in new investment,

signed nearly 50 contracts to do

business with banks and increased

revenues by 170 per cent.

The 2015 Lab participants are:

Atsora, Cytora, Duco, Pontus Networks,

ripjar, Torusware, and xWare42. Their

innovations include a web-based

programme for real time geopolitical

risk assessment, solutions that help

small business owners manage their

finances, and faster data exchange and

reconciliation technologies.

The FinTech Innovation Lab London

is modelled on a similar programme

that was co-founded by Accenture and

the Partnership Fund for New York

City in 2010. The Partnership Fund for

New York City is the USD110 million

investment arm of the Partnership

for New York City (www.pfnyc.org).

In 2014, Accenture also launched the

FinTech Innovation Lab Asia-Pacific in

Hong Kong and the FinTech Innovation

Lab Dublin in Ireland. n

“The massive investment in Fintech shows that the digital revolution is well advanced in

financial services, and it is both a threat and an opportunity for banks.”

Julian Skan, Accenture

http://www.pfnyc.org



ReAl esTATe

The recent launch of a UK centric real estate fund from

Clearbell Capital LLP saw it reach its hard cap and

be oversubscribed, raising a total of GPB400 million

in equity plus GBP100 million in co-invest. Manish Chande,

senior partner at Clearbell Capital LLP, explains that the

investors were mostly pension funds, endowments and high

net worth individuals attracted by Clearbell’s gross target

rate of return of 18 to 20 per cent and 1.8 x to 2 x multiple.

Apart from the demand, Chande reports that the other

interesting thing about the launch was the spread of

investors who came in from the US, Australia, South Africa,

mainland Europe, as well as the UK.

Clearbell’s recent experience simply highlights a new

phenomenon – institutional investors globally are focusing

on real estate at the moment. Chande says: “It’s mainly

because institutional investors are quite picky about where

they invest, so as a result they generally favour experienced

fund managers with a long track record.”

He also feels that investors have more capital to commit

because they are beginning to see distributions come

through from earlier funds now that many of the problems

caused by the financial crisis have been absorbed. Low

interest rates and low returns from other asset classes

makes real estate an attractive investment class as well,

Chande says.

Other drivers come from quirky events which have

caused change, such as regulation change. The requirement

for Australian workers to put aside more of their income into

their pensions has meant the Aussie superannuation funds

are flush with capital.

There has also been a wider dispersion of investor groups

than before. “You are getting in a much wider, diverse base

of investors than before,” says Chande. Formerly the US

dominated but Asia-Pacific investors are now arriving at

the table.

real estate is also benefiting from the drop in returns

from hedge funds over the last few years as investors realise

that real estate returns have been improving.

“Also, fund managers are offering more products and

are more flexible in the products they offer” Chande

says. “There are not just closed-end funds but also

separate accounts, or co-investment alongside other fund

commitments and that has attracted more investors as well.”

Fund managers provide investors with a decent and

personal service, Chande feels, which is crucial for investors

who don’t have the expertise to source and manage real

estate investments.

He has also observed that pension fund investors have to

make up the shortfall from previous years around the global

financial crisis so they are prepared to look a little further

up the risk curve. “real estate is a good way of doing that,”

says Chande. n

Backing bricks & mortarClearbell’sManishChandetellsBeverlyChandlerwhycommercialpropertyfundsarecurrentlyprovingattractivetoinstitutionalinvestorsaroundtheworld.

“Institutional investors are quite picky about where they invest, so as a result they generally favour experienced fund managers with a long track record.”Manish Chande, Clearbell



Hedge Funds

The hedge fund industry, in general, has had a difficult

few years since the financial crisis. Performance

has been challenging, assets are harder to raise and

retain, and the regulatory bar continues to rise. Additionally,

investors are more sophisticated and, as a result, more

demanding.

The Barclays Strategic Consulting team published in

February an annual Outlook report, entitled What Lies

Beneath, that analysed major developments in the hedge

fund industry to assess the evolving value proposition of

hedge funds, key investor themes, and the asset raising

landscape for 2015.

The following excerpt looks at the investor allocation

preferences / outlook aspect of this content piece.

The analysis is based off a survey of ~450 investors with

~USD6 trillion in total AUM, as well as in-depth, one-on-

one interviews with ~30 investors. In total these investors

represent about USD1 trillion in hedge fund AUM, or about

a third of the hedge fund industry. Nearly half (46 per

cent) of the investors were institutional, i.e., Pensions,

Endowments & Foundations (E&Fs), Insurance Companies,

Sovereign Wealth Funds (SWFs), and their investment

consultants / advisors. Just over one-quarter (26 per cent) of

the sample consisted of Fund of Hedge Funds (FoHFs), and

the remainder (28 per cent) were private investors (Family

Offices and Private Banks / Wealth Managers).

Investor trends – planned changes to hedge fund

allocations

In order to get an understanding of investors’ sentiment

toward hedge funds in the coming year, we asked them

how they planned to adjust their hedge fund allocation as a

percentage of their portfolios in the coming year. As can be

seen in Figure 1, while the overall sentiment toward hedge

funds remains bullish (2.5x more investors are looking to

grow allocations than the ones looking to reduce them),

there is definitely some cooling off of sentiment toward

hedge funds, since this ratio was 6.5x in our 2013 survey and

5x in 2012.

When looking at investor responses by investor channel

in Figure 1, there seems to be a consensus around keeping

allocations largely the same, as only Family Offices and

Private Banks in our sample indicated they might make a

meaningful change in their allocations – this suggests that

2015 may be a year of keeping the ‘status quo’ on hedge

fund allocations. Insurance companies appear to be the least

motivated to change current allocation levels.

Investors’ hedge fund strategy preferences

We asked the investors in our sample to tell us which hedge

fund strategies they planned to grow, reduce or hold their

allocations steady to. Figure 2 shows the list of strategies that

appear to be the most in favour based on the net difference

Hedge fund outlook BarclaysStrategicConsultingteamreportsontheoutlookforglobalhedgefunds,basedoninvestorsentiment.

Source: All figures refer to Barclays Strategic Consulting survey results only

13% plan to

decrease

31% plan to increase

~2.5X

7% plan to

decrease

45% plan to increase

~6.5X

2015 2014

9%

57%

20%

9%

3% 6%

83%

17%

1%

3%

9%

56%

18%

7%

50%

50%

7%

51%

16%

8%

10%

63%

9%

1%

7%

14%

49%

29%

6%

3%

13%

2%

7%

3%

6%

Privatebank

Privatepension

Publicpension

Familyoffice E&F Insurance Average

Increase >5%

Increase 3-5%

Increase 0-2%

Stay the same

Decrease 0-2%

Decrease 3-5%

Decrease >5%

Figure 1: Investor trends – 2015 planned changes to HF allocations by investor type



Hedge Funds

(for each strategy) between the percentage of investors

planning to grow allocations and those looking to reduce

them. Event Driven – Equity, Global Macro, and Equity Low

Net / Market Neutral are the three strategies that seem to

have the strongest investor interest. These strategies were

at or near the top of the list based on investor sentiment in

2014 as well and have more interest in 2015 from private

investors than from institutional investors (not shown).

Additionally, private investors are more bullish across

all strategies on this page than institutional investors. Only

Direct Lending and Fixed Income relative Value had more

interest from institutional investors than from private

investors (not shown). Finally, although all these strategies

appear to have a relatively high level of net interest,

there are three strategies in Figure 2 where a significant

percentage of investors are looking to reduce allocations.

These happen to be the three that are the most broad-based

on this page – Multi-strategy, Equity Long / Short and Global

Macro, suggesting some investors are inclined to believe they

are over-allocated to them.

Figure 3 shows a list of hedge fund strategies that

are likely to see relatively less support in 2015 from the

investors in our sample. That said, Credit – Long / Short,

Credit – Distressed and Equity Sector-focused strategies

all seem to have a significant percentage of allocators

looking to grow allocations (16 per cent+). Similarly, when

looking across the broad investor categories, there were two

strategies where there is some misalignment: Structured

Credit is much more in favour with institutional investors

while Equity Sector-focused is much more in favour with

private investors. From another lens, it appears the larger

investors in our sample (>USD3 billion in hedge fund AUM)

are more bullish on Managed Futures, Quant Equities, and

Quant Macro than smaller investors (not shown), likely due

to benefits of these strategies as diversifiers.

Projected 2015 flows by investor type

The Strategic Consulting Market Model, which is based on

all the inputs described so far in this study, suggests that in

2015 the HF industry will receive ~USD40 billion in net new

flows, with a range of USD20 – USD60 billion (Figure 4). Our

estimate for net new flows in 2015 is about 50 per cent less

than the 2014 flows of ~USD76.4 billion*. The USD40 billion

estimate is ~1 per cent of 2014YE AUM, which means that

this would be the lowest level of net flows into the hedge

fund industry since 2009.

We anticipate institutional investors, primarily pensions,

will be responsible for ~55 per cent of the industry’s net

flows in 2015. The balance (USD18 billion) is expected to

come from private investors, led by Private Banks / HNW

individuals. Notably, we expect that the largest inflows will

come from Private Banks / HNW – making this year the first

since before the financial crisis in which pensions have not

been the largest source of net new money into the industry.

Projected 2015 ‘money-in-play’ by HF strategy

Although our projections for net flows in 2015 are lower

than net flows in 2014, there is still a significant opportunity

available to hedge fund managers to grow their asset base.

This is due to our expectation, consistent with previous

years, that most of the asset raising opportunity in 2015 is

likely to continue to emanate from reallocation of assets

from one manager to another versus new flows into the

industry.

Figure 5 shows our projection of the total ‘money-in-

play’ (e.g., the total asset pool available to hedge fund

managers looking to grow their AUM) of USD400 billion,

of which USD360 billion (~90 per cent) is likely to come

from reallocations. This is higher than our 2014 projected

reallocations of USD285 billion and the main driver for the

increase is an uptick in projected annual investor portfolio

turnover (from 11 per cent to 13 per cent). Figure 5 also

Net Inc. / Dec.

18%

18%

16%

14%

13%

13%

13%

12%

12%

11%

11%

-7% 25%

Event Driven - Equity -5% 23%

Equity Low Net / Mkt Neutral

-5%

Increase

Fixed Income Relative Value

Decrease

16%

-3%

17%

14%

Credit – Direct lending

-5% Event Driven - Credit

Global Macro

-4%

-3%

16%

15%

-3%

Systematic - CTAs

Multi-Strategy -9% 22%

18%

-9%

Event Driven - Activism

22% Equity Long/Short

19%

-3%

Emerging Markets

Hig

hest

Inve

stor

Inte

rest


Figure 2: Investors’ HF strategy preferences

-2%

-12% 13%

Credit – Convertible Arbitrage

Increase

Equity Long-biased

4%

Equity Short-biased -2% 4%

Commodity

Decrease

-6% 9%

Systematic - Quant. Equities -3% 7%

Systematic - Quant. Macro -3% 7%

Credit – Structured -7% 12%

Tail-Risk Protection 0% 6%

Systematic - Managed Futures -3% 11%

Systematic - Volatility Trading -2% 10%

Credit – Distressed -8% 17%

Equity Sector-focused -6% 16%

Credit – Long/Short -8% 18%

Net Inc/Dec

10%

10%

9%

8%

8%

6%

5%

4%

4%

3%

2%

2%

1%

Low

est in

vest

or in

tere

st


Figure 3: Investors’ HF strategy preferences

*Source: Hedge Fund Research



Hedge Funds

shows how the total ‘money-in-play’ is

likely to be distributed by hedge fund

strategy, based on the sub-strategy

level investor preferences described

earlier. Some highlights:

• EquityHedgeisexpectedtoreceive

USD14 billion or 35 per cent of net

flows, compared to 63 per cent in

2014.

• EventDrivenandMulti-strategyare

projected to receive USD7 billion

each in new flows.

• Investorsarestillinterestedin

Global Macro for its diversification

benefits.

• Credit,FIRV,andsystematic

strategies should be prepared to

fight for reallocations (~USD7 billion

in cumulative new flows). In this

last category, CTAs are likely to see

renewed investor interest due to

their recent strong performance.

Across all of the strategies, those with

a fundamental approach appear to

be more in favour than those with a

systematic approach.

The Barclays Strategic Consulting

team develops industry-leading

content, driven by primary analysis,

on the HF industry and its participants

(e.g., HF and FoHF managers,

institutional investors, investment

consultants). It also provides

management consulting services to HFs

and asset managers on business topics

such as the launch of a new strategy,

marketing effectiveness, product

development and organisational

efficiency. n

Source: Projections are based on Barclays Strategic Consulting 2014 Market Sizing Model ; 1. Historical data is from HFR ; 2. Private Bank/HNW includes prop capital from HF managers 3. According to HFR

Private Bank / HNW2

E&F

Private Pension

Family Office

noisneP cilbuP/ SWF

Insurance

2015 Expected Flows by Investor Type ($bn)Net Flows (’07 – ’15E)1

2015E

20

40

2014

76

2013

64

2012

34

2011

71

-154

2009

55

2010 2008

195

2007

-131

% of Prior Yr HF AUM

13% -8% -9% 3% 4% 2% 3% 3% 1%

60

11 9

6 5

15

7

12

6

10

6

8

4

7

3 2 0

Figure 4: Projected 2015 flows by investor type

Projected ‘Money In Play’1 by Investor Type ($bn)

Event Driven Average

Fixed Income RV

Equity Hedge Multi-strategy

Systematic / CTA / Volatility

Source: Barclays Strategic Consulting 2014 Market Sizing Model ; 1. The strategy flow projection model was based on variables the team took into account including the sample’s responses towards 2014 allocation / strategy preferences, estimated turnover, overall strategy breakdown and total industry HF Assets

Credit Global Macro

40 400 360

Reallocated New Total ‘In Play’

14 140 125

43 7 50 53 7 60

40 5 45 61 4 65

18 2 20 19 1 20








~120

~160

~40

~60 ~50

~70

~15

~25

~15

~25 ~55

~75

~35

~55

Figure 5: Projected 2015 ‘money-in-play’ by HF strategy



insuRAnce

As bond yields remain at record lows,

more and more insurance companies

are considering how to change their

investment allocations to improve general

account returns. Constrained by fiduciary duties

and strict regulation, insurers have to find

ways to boost portfolio returns without taking

on significantly more beta exposure or risk.

Alternative investments seem in many respects

to constitute, for lack of a better term, the best

alternative for insurance portfolios today.

Alternatives have the potential to deliver

idiosyncratic alpha in an environment where

the outlook for traditional asset classes is

uninspiring. Indeed, the increased interest

in asset classes such as infrastructure debt

and private credit by insurance companies is

testament to this hunt for yield, despite the

fact that investing in such asset classes requires

greater scrutiny and analysis – evidently an

exercise insurance companies are willing to

undertake.

A few reasons why insurance companies

might want to consider reassessing their

alternative allocations include:

• Muchofalternatives’returnderives

from their liquidity premium. Insurance

companies, with their relatively predictable

cash flows and generally ample liquid

reserves, are well positioned to earn it;

• Asmallallocationtoalternativescandeliver

large diversification benefits to portfolios

heavily concentrated in traditional fixed

income.

Capitalising on alternatives’ potential, however,

demands a recognition of alpha’s constantly

evolving nature and disciplined due diligence

that identifies those managers most skilled at

capturing it. Consistently and patiently applied,

such due diligence can drive returns well above

a company’s cost of capital. Less rigorously

executed, it can expose the insurance investor

to the underperformance always implicit in the

pursuit of high alpha.

How much is enough?

Historically, a relatively small investment in

alternatives has had a disproportionate effect

on insurance portfolio returns. regulation

and the industry’s fiduciary responsibilities

have combined to concentrate insurance

investments in the least volatile and most liquid

asset classes. So an incremental allocation to

illiquid assets like alternatives may consume an

outsized portion of an insurer’s total adjusted

capital – capital available to cover unexpected

losses – but it can also deliver comparably large

diversification benefits and a hefty premium for

liquidity.

A business argument reinforces the logical

argument of complementing a liquid portfolio

core with an allocation to illiquid alternatives.

Many alternative investments generate much

of their alpha over lengthy holding periods.

With their long-dated liabilities, life insurers

in particular have an institutional capacity for

the patience required for an investment of that

nature to pay off. The long view gives them the

flexibility to rebalance alternatives distributions

according to market conditions, creating a

steady source of value over time. Moreover, by

consistently investing surplus premium income

through rising and volatile markets, alternatives’

good years can offset weaker years.

The trade-off: liquidity in the balance

Liquidity is the public insurance company’s

proverbial double-edged sword. For the

policyholder, the risk lies in not having enough.

The opportunity cost of excess liquidity is

potential portfolio returns foregone from not

investing in illiquid higher returning assets.

Following the credit crisis, the balance of

liquidity shifted toward policyholders. Life

insurers and Property & Casualty companies

(P&C) have provisioned in excess of the most

extreme annuity redemptions and catastrophic

losses in recent history. The Geneva

Association, an industry think tank, reports

Plausible alternativesDeclanCanavan,JPMorganAssetManagement,describeshowinsurancecompaniesgeneratehigherreturnsfromdifferenttypesofalternativesduringthisperiodoflowyields.

Declan Canavan, managing director and client portfolio manager for alternatives EMEA at JP Morgan Asset Management



insuRAnce

that life insurers remained cash flow positive despite the

surrenders caused by the financial crisis.

Likewise, the stresses of the hurricane year of 2005,

and 2013, in the aftermath of Superstorm Sandy, did not

challenge robust P&C liquidity. Even as they maintain

this liquidity cushion, however, a persistent low yield

environment challenges public companies to preserve their

dividend, and a rallying stock market raises expectations

that they will increase it.

Caveat venator: hunter beware

The compelling potential of alternative investments for the

insurance investor comes packaged with a warning label; the

potential is compelling only for the top managers. Indeed,

effective alternative investing adds a fourth leg to the classic

strategic triangle. Besides the three basics of sound traditional

investing – formulating a coherent strategy, diversifying

effectively through the business cycle and rebalancing

rigorously – adding alternative assets to an insurance portfolio

requires access to the top managers. Conventional wisdom

holds that the supply of attractive deals is the limiting

dynamic in alternative investing. Contrary to this we have

found that the supply of capable managers is a more relevant

factor. A vibrant economy will always generate attractive

deals, and their sources will always vary. The ability to hunt

down these attractive deals and the foresight to recognise

them will always be the scarce resource.

In other words, manager selection when allocating to

alternatives is critical because the dispersion between top

and bottom quartile managers in alternatives is significantly

more pronounced than public markets. Figure 1 shows the

spread of returns between top and bottom performers across

various hedge fund styles, private equity and US real estate as

compared to the tight spread of returns in US long only equity

funds. In some instances, returns between top performing and

worst performing managers differ by as much as 20 per cent,

making median performance less important than individual

track records and underscoring the importance of state of the

art due diligence.

Private equity: a tale of dispersion

Looking more closely at private equity investing, we

can see not only that there is a wide dispersion between

managers but also depending on the market segment there is

identifiable dispersion trends.

As we can see from Figure 2 (looking at vintage years

from 2006-2012) the average return of lower/middle market

private equity funds has generated higher average returns

than upper middle market funds. However, the lower market

funds exhibit greater return dispersion and have significantly

more adverse manager selection risk.

The implications for PE investors are clear:

• Investmentobjectivesintermsofreturnandrisktolerance

should be clearly mapped to market segment at the outset;

• Managerselectionisalwaysimportantbutevenmoreso

at the small/mid end of the market where there is less

transparency and less public data;

• Sub-optimalmanagerselectionwilloverthelongrun

erode the portfolio benefits of allocation to alternatives;

• Forinsurancecompanieswhodonothavetheprimary

in-house research and due diligence expertise in investing

in PE, a strategic partner to screen the available manager

universe is critically important.

The right fit

The upside of alternative investment is clear, but it calls for

careful attention to the downside. Alpha itself is transient,

and its pursuit calls for superior manager skills and acute

investor vigilance. Capturing it consistently demands insight

and flexibility. Insurers have the resources to identify

and retain the top talent and the scale to spread their

positions effectively across the spectrum of alternatives.

With discipline and methodical persistence in finding and

monitoring their investment partners, they can make the

most of their allocations. n

Source: JP Morgan Asset Management . HF manager returns are taken from Bloomberg as of Sep 17 2014. PE and Real Estate historical quartile returns are taken from Cambridge Associates data as of March 31 2014

5.25% 6.00% 4.50% 4.75% 5.00%

7.75% 6.00%

-10%

-5%

0%

5%

10%

15%

20%

25%

Equityhedged

Eventdriven

Diversified Macro Relativevalue

PE/Buyout

US realestate

25th %ile Median 75th %ile 2015 Equilibrium Assumption

Figure 1: Expected long term dispersion of manager returns

4.7%

6.6% 7.5% 7.0%

11.0% 12.0%

10.0% 9.3%

17.2% 16.9% 16.2%

12.9%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

Lower/middlemarket

Middle market Upper middlemarket

Mega funds

Dispersion between top and bottom quartiles

1,250 bps 1,030 bps 870 bps 590 bps

First Quartile Median Third Quartile

Source: TA Associates and Preqin Performance Analyst as of 12/31/2014. Represents North American and European buyout, growth and turnaround funds. Lower / middle market is defined as $500 million or less; middle market defined as $500 - $2,000 million; upper middle market defined as $2,000-$5,000 million; mega funds defined as $5,000+ million

Figure 2: 2006-2012 vintage year performanceby fund size



cHinA

in November last year, the Shanghai Stock Exchange

opened up to foreign retail investors for the first time,

creating an opportunity for fund managers that Goldman

Sachs called ‘simply too big to ignore’.

With nearly 1000 listings in Shanghai and over 1600

listings in Hong Kong, the two stock exchanges individually

rank sixth and seventh globally. However, the historic

connection made between them on 17 November 2014 has

effectively created a mega-bourse that is second only to New

York in terms of market capitalisation.

Whilst stocks on Hong Kong’s exchange (H-shares)

have always been available to global investors, stocks

denominated in Chinese yuan (CNY) on the exchanges in

Shanghai and Shenzhen (A-shares) had been restricted

to mainland Chinese citizens and a limited number of

‘Qualified Foreign Institutional Investors.’ The Shanghai-

Hong Kong Stock Connect programme has now created a

‘through train’ that allows retail investors to buy A-shares

through Hong Kong, and vice versa.

There is clearly a considerable way still to go. For now,

there is a cap on purchases of A-shares through Hong Kong

of CNY13 billion per day and CNY300 billion in total , and

corresponding limits on purchases of H-Shares through

Shanghai of CNY250 billion in total and CNY10.5 billion

per day. So far, only 70 per cent of the companies listed in

Shanghai and 15 per cent of those listed in Hong Kong have

been approved for the programme. And, until the Chinese

markets are included in global indices like the FTSE,

A-shares will not be an option for funds like global index

trackers and global actives which use those indices as a

benchmark.

This is not a short-term opportunity. As Michael Liang,

chief investment officer of Foundation Asset Management,

puts it: “People should not expect to make a killing

overnight.” The young market is notoriously volatile:

northbound traffic through Hong Kong to Shanghai hit the

daily cap when Connect launched, but dropped to CNY2.6

billion two days later. The last month has seen both the

biggest fall in the A-shares market since 2009 – a drop of 5.4

per cent in a single day – and a 3 year record, with a 15 per

cent gain in just ten days.

Opportunities

Yet, despite such short-term swings, there are good reasons

to be positive about the outlook over the mid to long-term.

“These swings offer interesting opportunities for fundamental

stock pickers to buy companies with solid fundamentals

that have been indiscriminately sold off,” says Dale Nicholls,

portfolio manager of the Fidelity Special Situations Fund.

“Looking forward, the development of domestic mutual

funds and increased foreign investor buying, as the

Chinese government introduces more reform to open up

its capital markets, will mean higher participation in the

A-share market.”

A-shares are already the largest component of China’s

equity market. They have historically outperformed

H-shares, and since the start of 2014 they have seen an

overall increase of 37 per cent.

Chinese wealth per capita is expected to double over the

next ten years and its economic growth rate has settled at a

sustainable 7-8 per cent which is almost unrivalled by any

other market. Shanghai listings already include household

China A-Shares: Too big to ignoreTimNash,foundingdirectorofAccessChina,examineswhyChineseA-Sharesaresimplytoobiganopportunitytomiss.

Tim Nash



cHinA

developed markets, and Chinese companies

have had to adjust to lowering rates of national

economic growth over the last couple of years.

Only about 6 per cent of the companies

listed in Hong Kong are foreign. The vast

majority are businesses incorporated in either

mainland China or Hong Kong in roughly

equal measure. Many of the companies listed

in Shanghai are also listed in Hong Kong but

A-shares and H-shares rarely trade at the same

level, so Connect provides opportunities for

arbitrage.

The Chinese markets have rallied since mid-

November, but not because of large new inflows

of capital through the Connect programme.

The increase in investors’ appetite for risk is a

result of: the Central Government taking steps

to address issues around property and local

government debt recalls; and the Central Bank

injecting liquidity into the economic system.

In other words, the real value of A-shares lies

not in any immediate activity (or lack of it) in

the market, but rather in the broader trajectory

of the Chinese economy. In that context,

ronald Wan, managing director at China

Merchants Securities, says that the Connect

programme is: “A key step in the Beijing

government’s plan to reform the country’s

capital market and financial system, and a

crucial part of China’s broader and structural

economic reform.”

For 2015, Ke says: “We anticipate the

operational costs of Chinese companies to come

down and their profitability to increase as the

Central Bank makes several more interest rate

cuts and the price of oil and other commodities

falls. In addition, the economic slowdown is

putting pressure on smaller players, presenting

leading firms with an opportunity to grow their

market share.”

Many of the A-share companies are State-

Owned Enterprises (SOEs), which according to

HSBC have a high average debt to asset ratio of

65%. The continued reforms and privatisation

of SOEs are thus expected to have a positive

impact on the value of the Chinese markets.

Now is a time for stocktaking with a view to

longer term returns. As Mona Shah, Portfolio

Manager at rathbone Multi-Asset Portfolios,

concludes: “A combination of China’s out of

favour status and willingness to drive an open

economy could make this an interesting entry

point for those with a long-term investment

horizon and a stronger appetite for risk.” n

names like Ping An Insurance, China Merchants

Bank, and Industrial and Commercial Bank of

China. A-shares offer investors an opportunity

to acquire a stake in companies like these

that have exceptional medium to long-term

prospects.

Winston Ke, manager of Baring’s China

Asia Fund, points out that foreign investments

in China have so far been concentrated

on a handful of targets such as the Daqin

railway (a 650 mile link between China’s

leading coal mining centre, the Capital City

and North China’s largest port) and Guizhou

Maotai (producers of the distilled liquor that

China uses at state occasions). “This reflects

foreign investors’ limited understanding of the

China-Asia market,” Ke says. Vast numbers of

attractive stocks remain to be discovered as

that understanding develops.

Furthermore, A-shares are now the cheapest

they’ve been since the 2008 financial crisis.

The low valuations are a result of China shares

historically underperforming compared to more

Shanghai Stock Exchange



secondARies

2014 was not only a record year for

secondaries transaction volume, but has

also been recognised as a record year for

secondaries fundraising; an aggregate USD29

billion was secured by the 27 secondaries funds

that reached a final close during the year, the

highest ever annual amount of capital secured.

As a result, two-thirds of secondary fund of

funds managers surveyed expect to deploy more

capital in the asset class in 2015 compared

to the previous year (see Figure 1). A further

27 per cent indicated that they expected to

maintain their level of spend in 2015.

Pricing

It is clear that the secondary market is awash

with capital, from the managers of secondaries

funds, fund of funds vehicles with allocations

to the secondary market and opportunistic

institutional investors that are capable of

gaining exposure to it. Inevitably, pricing is

impacted by this strong demand for funds on

the secondary market. Survey respondents

indicated that the average price paid for buyout

funds purchased on the secondary market was

90 per cent of NAV, although this can be as low

as 70 per cent of NAV for mature assets.

In 2015, 45 per cent of respondents

indicated that they expect the price paid for

buyout funds on the secondary market to

increase (discount to narrow), while 48 per

cent expect it to remain the same. Given the

expected increase in spend from the majority

of respondents, strong pricing does not appear

to be deterring buyers. Not only is there capital

available to pay more (on a dollar basis, as

well as on a percentage to NAV basis given

that NAVs are also rising), there is also the

willingness to do so, as the sentiment towards

private equity and particularly buyout funds is

positive given the strong environment for exits

and distributions.

Challenging the illiquidity mythPreqinrecentlysurveyedover50managersofdedicatedsecondariesassetstofindoutabouttheiractivityin2014andtoassesstheiroutlookfor2015.PatrickAdefuyeanalysesthekeyfindingsfromtheseresults.

Figure 1: Expectations for the amount of capital to bedeployed in the secondary market in 2015 comparedto 2014

67%

27%

6%

More capital in 2015 compared to 2014

Same amount of capital in 2015 as in 2014

Less capital in 2015 compared to 2014

Source: Preqin Secondary Fund Manager Survey, February 2015

Patrick Adefuye, manager – funds of

funds & secondaries at Preqin



secondARies

Secondary market sellers

Managers of secondaries funds were asked

to indicate which groups of investors would

be selling funds in 2015, with pension funds

cited by 42 per cent of respondents, as shown

in Figure 2. Pension funds have become

increasingly comfortable using the secondary

market in recent years in order to achieve

their desired portfolios. Banks and insurance

companies (cited by 36 per cent and 29 per cent

of respondents respectively) are also expected to

be prominent sellers in the year ahead, both for

regulatory reasons. Preqin’s research team is in

daily contact with institutional investors in order

to identify new sellers and update the investment

plans of existing investors. Sellers are classified

into two groups:

• Likelyandopportunisticsellersthathave

pro-actively begun a process to sell funds

or are generally open to approaches from

buyers (and frequently have sold stakes

before) and;

• Possiblesellers,whichareinvestorsthatare

either over-allocated to a particular asset

class and could consider the secondary

market to rectify this, or investors that have

put new investments on hold and therefore

may be reviewing one or more of their

manager relationships.

Analysis of the portfolios (specifically private

equity) of likely and opportunistic sellers show

interesting results that further illustrate their

motivations for considering the secondary

market. Figure 3 shows the vintage year spread

of the portfolios of likely and opportunistic

sellers profiled on Secondary Market Monitor

and shows that these investors are most

exposed to funds that are 7-10 years old,

accounting for 41 per cent of all funds held by

these investors.

Funds of vintage years 2005-2008 are

considered the sweet spot for most secondary

buyers, as funds of this age are typically at

their realisation phase returning capital to

investors. Interestingly, likely and opportunistic

sellers have significant exposure to funds

that are 10 years old or more, representing

38 per cent of funds held by these investors

and therefore, in most cases, past their pre-

agreed life-time. Collectively, these funds have

a total of over USD100 billion in remaining,

unrealised value. n

This is an extract from the Preqin Private

Equity Spotlight, March 2015.

Leverage

One concern regarding the higher prices being

paid for assets is the impact this may have on

returns and that returns for assets bought on

the secondary market in this current climate

are likely to be lower than previous years.

Anecdotally, it appears that secondary market

buyers have turned increasingly to leverage to

improve returns.

While the majority of fund managers that we

spoke to did not use debt for acquiring funds (81

per cent) or in funding a drawdown (89 per cent)

in 2014, debt is likely to play a bigger part in the

secondary market in 2015. Thirty-four percent

of respondents expect debt usage to increase in

2015, while the remaining 66 per cent predict it

will remain the same. No respondents expect the

level of debt usage to decrease in the coming year.

Figure 2: Managers of secondaries funds’ expectations for the amount of debt usage in thesecondary market in 2015

Source: Preqin Secondary Fund Manager Survey, February 2015

34%

66%

0%Increase in debt usage in 2015 compared to 2014

Same amount of debt usage in 2015 as in 2014

Decrease in debt usage in 2015 compared to 2014

Figure 3: Breakdown of likely and opportunistic secondary market sellers’ portfolios by vintage year

Source: Preqin Secondary Market Monitor

2%

17%19%

41%

16%

6%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Pre-1997 1997-2000 2001-2004 2005-2008 2009-2012 Post-2012

Vintage year

Pro

portio

n of

fun

ds



PR iVATe eQuiTy

Much has been written on

the issue that Americans

are not saving enough for

retirement and what that may mean for

the quality of life of millions of Baby

Boomers, and succeeding generations,

as they enter retirement. rightfully

so, this has been raised to the level of

a national debate with even President

Obama weighing in1.

The problem, however, has layers

of complexity. It is not just how

much money is being saved but the

behaviours that stand in the way

of achieving adequate saving levels.

And it is not just what plan sponsors,

amongst others, may need to do to

educate and encourage people to save

more. The problem is also obtaining

adequate returns, cost-effectively, in

retirement accounts. The deepest layer

of this problem therefore is not how

much is saved but are we doing enough

to optimise the potential for portfolio

performance?

The evidence suggests we are not.

A performance gap exists between the

two major forms of retirement savings:

defined benefit, where the employer

manages the assets and assumes

responsibility for investment decision

making, and defined contribution, or

401(k) plans, where that responsibility

rests with the plan participant.

The data shows that defined

benefit (DB) plans have historically

outperformed their defined

contribution (DC) peers. In our view,

a contributory factor is that for many

years DB plans have, in contrast to

DC plans, incorporated ‘alternatives’,

including private equity, within their

portfolios with a targeted objective

of generating alpha. We believe that

introducing alternative investments

such as private equity to 401(k)

plans could be one of the answers

to bridging the performance gap and

addressing the shortfall in retirement

incomes.

Pension funds in the US allocate a

significant portion of assets to equities.

Understanding the risk-return impact

of private equity to a diversified

portfolio is crucial to the investment

strategy of multi-asset fund managers.

research2 published recently by

Pantheon’s Quantitative research

Team into this topic found that, based

on the historical dataset employed,

private equity would have added

potential significant alpha – 3.16 per

cent annualised – and diversification

benefits when added to a portfolio

of public equities during the sample

period (1992 to 2014).

The saving crisis

The vast majority of people in the

US, 86 per cent in fact, believe the

American nation faces a retirement

crisis, according to a report from

the National Institute on retirement

Security (NIrS)3.

The NIrS study also revealed that

75 per cent of Americans are highly

anxious about their retirement outlook.

Further, NIrS findings calculated

that 92 per cent of households are

financially unprepared for retirement4,

and that nationally there’s a retirement

savings gap in the range of USD6.8

trillion to USD14 trillion between

what those individuals have saved and

what they will need in order to retire.

For those on the eve of retirement –

ages 55 to 64 – the shortfall comes to

USD113,000 per household5.

Future retirees cannot confidently

rely on their personal savings, such

as 401(k) plans or IrA accounts, to

maintain their standard of living in

retirement. Last fall, the Center for

retirement research at Boston College6

reported that households nearest

to retirement had lower 401(k)/IrA

balances in 2013 than 2010.

The Federal reserve’s 2013 Survey

of Consumer Finances reported

that the typical working household

Bridging the gapMichaelRiak,headofUSdefinedcontributionatPantheonVentures,reportsontheUSretirementcrisisandhowprivateequitycanbridgethegap.

“The vast majority of people in the US, 86

per cent in fact, believe the American nation faces a retirement

crisis, according to a report from the National Institute on Retirement

Security.”Michael Riak, Pantheon Ventures



PR iVATe eQuiTy

approaching retirement (ages 55 to

64) had USD111,000 in 401(k)/IrA

balances compared to USD120,000 in

2010. Furthermore, only approaching

half of US households have 401(k)/IrA

balances at all.

Additionally, Boston College

research reveals that more than half

of US households do not have enough

retirement income to maintain their

standard of living even if they work

longer than the average retirement age

of 65. When you factor in households

further away from retirement, future

US retirees have some way to go to

build up adequate balances to enable

them to maintain their retirement.

The defined benefit experience and

the performance gap

For many years defined benefit plan

sponsors have incorporated alternatives

such as private equity, infrastructure

and real assets within their portfolios.

Indeed, a typical US DB public pension

plan may allocate roughly 9 per

cent of their plan assets to private

equity, according to research from

The Private Equity Growth Capital

Council7. The performance advantages

measured on a historical basis stand

out: the private equity component8

of those plans returned 13.7 per

cent against 7.8 per cent from public

equity component9, based on median

ten year annualised returns as of

June 30, 201410.

It’s a different performance picture

with defined contribution plans. CEM

Benchmarking Inc looked at that

differential and found that DB plan

annualised performance was ahead of

DC plan returns by 1.1 per cent11 over

the 17-year period ended 2013.

This gap can make quite a difference

when compounded over a multi-year

period. Pantheon compounded this

differential over a 35-year time period

to reflect the lifecycle of a typical

retirement plan and calculated that

this amounted to a pension pot worth

nearly 30 per cent less for an investor

with a DC plan than for his peer with

access to a defined benefit pension

plan (This calculation assumed that

$5,000 is invested per annum over

a period of 35 years, returning on

average 7.9 per cent per annum for

a DB plan versus a 6.8 per cent per

annum for a DC plan).

Bridging the gap

Managers with long-standing

experience of investing in private

markets have been exploring how to

bring alternative asset classes like

private equity to 401(k) plans. In

our view, making it happen will rest

on solving some key principles – fair

treatment of all participants and

preserving their ability to make plan

choices on a daily basis.

In regard to the first, plan

participants in a private equity DC

programme will invest at different

times, unlike a DB investor who

makes a capital commitment at

the beginning of a fund’s life and,

typically, stays invested through to

its maturity. The amount of fees and

the investment profile for a later plan

participant investor will therefore

be different to those of an earlier

investor. Additionally, maintaining a

plan participant’s ability to make daily

choices so that he is not disadvantaged

by making an investment into illiquid

assets is a key concern.

Also important is the incorporation

of the facility for investors to switch

daily within a private equity DC

solution, and for this, of course,

accurate daily pricing is required.

These matters may not be legally

enshrined, but are nonetheless, in our

view, important to address. Creating

transparent and auditable operational

processes is the final piece of the

jigsaw. Opening up private equity

investing to DC plans requires systems

and processes that are transparent

and auditable to the very highest

standards.

What to expect going forward?

We believe there will be a gradual shift

by DC over time towards allocating

capital to alternatives, including private

equity, in retirement vehicles such as

401(k) plans. In our view, if private

equity makes sense for DB pension

plans, surely it has to make sense in

DC and IrA savings products, too.

With the help of advisers,

appropriate structures to incorporate

private equity options within DC plans

can be selected that can potentially

provide plan participants with access to

the asset class’ attractive returns.

Everyone is going to retire at some

point. It doesn’t seem logical that

one group gets access to a different

allocation mix that appears to be

returning roughly 30 per cent more at

retirement than a portfolio managed

directly by their neighbour who

doesn’t have the choice of accessing

the same mix. In our view, getting

alpha-generating returns into DC

plans offers potential significant alpha

and diversification benefits that may

make a perceptible difference to the

quality of retirement for millions of

Americans. n

Sources:1 President Obama speech at AARP Washington

DC headquarters, February 23, 2015.2 For the full methodology of the Pantheon

InFocus, “Should an Investor’s Portfolio Contain Private Equity?”, March 2015, please visit www.pantheon.com.

3 National Institute on Retirement Security, “Retirement Security 2015: Roadmap for Policy Makers – Americans’ Views of the Retirement Crisis”, March 2015.

4 National Institute on Retirement Security, “The Retirement Savings Crisis: Is it worse than we think?”, June 2013.

5 The Huffington Post, “Americans are $6.8 trillion short on retirement savings”, December 29, 2013.

6 “401(k)/IRA Holdings in 2013: An Update from the SCF”, Center for Retirement Research at Boston College, September 2014.

7 The Private Equity Growth Capital Council: Public Pension Fund Analysis, October 2014.

8 Pension fund private equity investments are reported as time-weighted returns and, typically, net of management fees and carry.

9 As measured by the S&P 500 Index Total Return.

10 Private Equity Growth Capital Council, “Private Equity Performance Update”, returns as reported through June 2014. Pension funds included in the PEGCC report are among the top 50 largest pension funds in the US. These pension funds do not fully represent the performance of private equity investments in the entire universe of pension funds.

11 CEM Benchmarking Inc 17 years ending 2013. Returns are the compound average of annual averages. There were 3,037 US DB plan and 2,020 US DC plan observations.

http://www.pantheon.com



ReAl esTATe

Blackrock’s iShares has made a

bold stab at creating real estate

funds that are an effective

substitute for buying physical real

estate with the launch of the iShares

MSCI Target US real Estate UCITS ETF

and the iShares MSCI Target UK real

Estate UCITS ETF.

The names might not trip off the

tongue, but they are indicative of the

underlying structure of the funds that

allow the investor to achieve the risk

and return profile similar to a physical

real estate fund, with the liquidity and

ease of a UCITs-compliant ETF.

Tom Fekete, head of product for

iShares in EMEA explains: “The

objective is to help investors invest in

physical real estate. Clients like to have

one part of their asset allocation in real

estate but there has been no investable

benchmark.”

The IPD Index allows some degree

of access to real estate but you can’t

buy the underlying properties. The

other tried and tested route has been

through rEITs.

“rEITs are very correlated with

equities, because they are equities,”

Fekete says. “They move in tandem

with equities, and the volatility is like

equities.”

To address this problem, the team

at iShares realised that on the balance

sheet of most rEITs there is property

on one side and equity/debt exposure

on the other.

Fekete says: “If I invest in a rEITs

equity and debt, the performance of

my portfolio over time should be the

same as if I had bought the property.”

The first step is to screen for rEITs

that hold physical real estate and

then address two objectives: reducing

volatility, and reducing the correlation

to equities. This is achieved by

screening the portfolio of rEITs, giving

higher weighting to the least volatile

stocks. The debt-to-equity ratio in the

resulting portfolio is then calculated to

determine the average proportion of

debt across the rEITs portfolio.

Fekete and his team saw that the

typical debt instrument in a rEIT is

low duration debt. To mimic that, they

looked at the corporate bond space

but, while it might be possible to use

it, it introduced credit risk into the

portfolio which was not appropriate.

So they use short-term inflation-linked

government bonds.

The final index, designed to reflect

the portfolio, is used for the ETF. In

this case, the MSCI physical real estate

benchmarks are rebalanced every six

months to update the volatility and

debt-to-equity characteristics of the

portfolio.

The MSCI index data for these

strategies is available as far back as

2001. Over that period, the volatility

of rEITs was 24 per cent while the

volatility in this portfolio was 12 per

cent. The iShares US real estate ETF

has a beta-to-equities ratio of 41

compared with equities, while a pure

rEITs exposure would be 94. For the

UK product, the beta-to-equities ratio

is 48, compared with 111 for rEITs.

“The resulting ETFs have a much lower

correlation to equities, which brings

diversification,” Fekete says.

The new product is aimed at four

types of investors: individuals who

want exposure to property but only

have a small amount of capital to

invest; private banks and multi-asset

fund managers, who previously had

few liquid ways to access real estate in

portfolios; closed-end real estate funds

who keep a cash reserve to deploy for

the next opportunity; and institutional

investors such as pension funds and

insurance companies who may invest

in physical property but also require a

degree of liquidity.

Fekete says: “There is nothing like

these funds on the market today and

we see potential to expand the range to

other regional property markets.” n

Virtual real estateBeverlyChandlerinterviewsBlackRock’sTomFeketeonhowthecompany’snewiSharesproductbringsilliquidpropertytothetradingtable.

“REITs are very correlated with equities,

because they are equities. They move in tandem with equities,

and the volatility is like equities.”

Tom Fekete, BlackRock



sociAl MediA

The rise of social media platforms

like LinkedIn and Twitter has been

unprecedented over the last couple of

years. LinkedIn now has some 313 million users

and in Q2 2014 its revenues rose by 47 per

cent to USD534 million reported the Wall Street

Journal on July 31 2014.

McKinsey estimates that there is a GBP772

billion opportunity for business to use

social media.

All of us use social media in one form or

another but when it comes to applying it to the

workplace, the asset management industry has

remained largely apathetic. This would appear

to stem from a fear of falling foul of compliance

in what has become a tightly regulated market.

One of the pillars of any asset manager’s

marketing strategy today should include

social media but it’s important to understand

the potential roadblocks. This prompted SEI

recently to publish a brief on the subject

entitled Stepping in to Social Media, in which

eight tips and considerations are presented for

investment managers.

“I think it’s true to say that all asset

managers have been reluctant to get into

social media. From a compliance perspective,

there’s a lot less control over the way

information is broadcast and who you, as

a firm, are communicating with,” says Lori

White, marketing regulation counsel, SEI. “The

reluctance has largely been from compliance

officers as they look to get comfortable

complying with existing regulation.”

The Financial Industry regulatory Authority,

Inc. (FINrA) published more substantial

guidance recently and the Financial Conduct

Authority (FCA) in August this year established

the Social Media Charter in light of the fact that

71 per cent of employees at financial firms had

breached their firms’ social media policies.

Choose the right format and platform

Platforms like Twitter are publicly accessible

and free for anyone to use. As a result, any

communications on Twitter are regarded

as “retail communications” and should be

carefully vetted to ensure their appropriateness.

LinkedIn, by contrast, offers the end-user more

control. They can establish a group and invite a

select audience, screening members to confirm

their suitability. Such a channel might be used

to convey information about corporate events,

seminars, share market insights, distribution

of white papers. And indeed, provided an

employee has a professional – not public –

Twitter account, these announcements can also

be shared effectively.

“From a compliance perspective it’s very

important as to which channel is being used.

The way the rules are written, the audience is

critical in terms of what level of information and

disclosure is required. There are very distinct

differences made for an institutional audience,

an intermediary and financial professional

audience, as opposed to a “Mom and Pop”

investor audience. You may not be intending to

reach a retail audience but the regulator will ask

“Is this clear and balanced as a message that

could reach retirees, widows and orphans?”

“That’s where different channels make a

difference. With a LinkedIn group you can

control your audience and invite only those that

you want to reach. That makes a big difference

from a compliance and review perspective,”

explains White.

Large asset managers have a well-developed

social media presence. They often have a

Social media for asset managersSEI’sLoriWhiteexplainshowsocialmediaplatformssuchasTwitterandLinkedIncanhelpinvestmentmanagersmarkettheirbusiness.

Lori White, marketing regulation counsel, SEI



sociAl MediA

huge retail investor base so the way

they approach a social media strategy

is going to differ markedly to more

institutional-focused private asset

managers; for these managers, they

need to weigh up the pros and cons of

using Facebook, LinkedIn etc; what

will the potential rewards be versus

the potential risks of running a social

media strategy?

Ultimately, it depends on who the

manager’s end investors are as to how

far they embrace social media.

“Here in the US, firms like Vanguard

or Fidelity, which are much more

retail-oriented, have a strong Facebook

presence. But I think it’s more brand-

oriented than product-specific,”

adds White.

Categorise your content

Question marks remain over how much

information a private fund manager will

want to put out to the world at large.

One mistake and all of a sudden a

manager’s reputation is ruined.

“Private equity and hedge fund

managers might only want to use

Facebook for corporate branding

and culture, philanthropy, that kind

of thing. The messaging should

have nothing at all to do with fund

performance, strategies etc,” comments

ross Ellis, Vice President and Managing

Director of the Knowledge Partnership

in the Investment Manager Services

division at SEI.

This is a useful rule of thumb when

thinking about tailoring content.

Social-driven platforms like FaceBook

are best used for building a corporate

identity. Business-driven platforms like

LinkedIn provide the opportunity to

take ownership of a particular market

strategy or investment style, building

content that is more authoritative and

thought leadership in tone and content.

It’s best to think about product

information on one hand versus high-

level information on the other.

“We see some portfolio managers

who are interested in social media

and who already have, say, 5,000

followers on Twitter. That seems to be

effective because they’ve got a captive

audience interested in their expertise.

They’ll talk about what’s happening

in the markets, related strategies that

they are employing for their fund. But

this doesn’t necessarily mean that

such information has to be filed with

FINrA,” says White, who continues:

“One strategy we’ve devised

in advising clients is making the

distinction between firms and products

and that helps differentiate content.

registered product-specific messaging

in the US has to be filed with FINrA.

Market-related content may be

regarded as high-level.”

If the social media channel is in the

name of the fund, for example, then all

of that information would be pulled in

to the offering and solicitation around

the fund. Whether they do general

market commentary or fund-specific

reporting, all of that is under the

purview of the SEC and FINrA.

“However, if the firm establishes

a portfolio manager as the Twitter

account holder, and they keep

messaging at a high level without

crossing over to promote the firm’s

funds, that simplifies the regulatory

oversight; nothing needs to be filed.

That’s one of the recommendations

we’ve been making to firms. It guards

against the specific advertising of their

product,” confirms White.

By and large, any fund-related

content that is shared by a firm will

need to be filed with FINrA. There is

a pre-approval and cost of filing that

comes with this. Each tweet covering

new fund launches, performance

figures – whatever it may be – will

add to the overall filing costs. In such

circumstances, firms might be better

off developing higher level messaging

that could perhaps be tied back to

other materials being produced;

presentations, surveys, white papers.

Create common sense guidelines

Creating social media guidelines

for all employees to follow is

critical.. Considerations about

non-public information, client-



sociAl MediA

sensitive information; these have

to be controlled to protect a firm’s

reputation. Therefore, it is important

to educate all employees on what is

personal versus what is considered

professional and business-related.

“When you cross that line, there

needs to be another level of policies

and procedures in place to have those

actively using social media for business

understand the parameters. The

guidance we’ve gotten from the SEC

and FINrA so far – the rules around

advertising and sales materials – are

being extended. It’s not unlike setting

up a website 10 years ago. There’s a

real reputation risk to firms for not

knowing what information is being

pushed out. Our guidelines here at

SEI are constantly evolving based on

the experiences we build from using

different social media channels,”

comments White.

White goes on to make an important

point when developing internal

guidelines. Compliance, legal and

corporate marketing executives should

come together to form a working

group to vet any issues that arise from

using social media and develop best

practices.

“It’s a balancing act. As a lawyer

I prefer not to be too constrictive

with specific rules but social media

guidelines remain a grey area. It’s

always a risk analysis of what makes

sense from a social media messaging

perspective, is it worth pursuing

something and what will the likely

impact be?”

Provide appropriate training

Training is critical in terms of satisfying

the regulators. Firms must show that

they’ve got the controls in place and

that employees have been educated

on how to communicate via different

channels.

“At the employee level, we’ve

created web-based training so

that everyone can have a basic

understanding of what’s personal versus

what’s business. Then as groups come

up with specific strategies to target

social media channels, we – and by

we I refer to the legal, compliance and

marketing group referred to earlier –

train those spokespeople who intend to

be the lead communicators.

“It makes sense to have a few key

individuals in place who are trained,

who understand the value and the risk,

and we constantly check back in with

those individuals,” confirms White.

“What we’ve found, in general, is

that people have Twitter accounts

both for personal and professional

purposes,” adds Ellis. “Sometimes they

will tweet something in a professional

capacity without having switched

accounts so they’re now speaking

as a representative of the firm even

though they’re still using their personal

account. You need to have mass

training for all employees but keep it

tight in terms of who the firm elects as

spokespeople. Our advice at this stage

is that it’s best to err on the side of

caution.”

Record keeping

record keeping is a fundamental

piece, from a compliance programme

perspective, that has to be put into

place before any social media strategy

is executed. A number of third party

firms have sprung up recently to

address the requirement of having

to capture and store all social media

content.

In the US, FINrA already has

an email retention requirement for

registered advisors whereby all of a

firm’s emails need to be captured for

record keeping. The same is now true

of social media content. Even if they

are being submitted and pre-approved,

there is still a separate requirement for

record keeping, says White.

“We use a third party vendor

whose system basically captures

everything. This allows compliance

to go in and review all social media

communications, including third party

content, generated by the firm. It all

needs to be available and accessible,

just like any other communication put

out by the asset manager,” says White.

Third party content

Although not unique to social media,

the SEC has nevertheless stated that

if someone redistributes third party

information then they have adopted

that content and must therefore

take responsibility for it. Any social

media strategy must therefore

have a careful vetting process and

be absolutely sure that copyright

infringements are not made. One

should also be mindful of the sources

of third party content.

“I like to look at who the

publications are: if it’s the Financial

Times, the Wall Street Journal, these

are credible sources. If it’s a blog that

we don’t know anything about then

we’ll need to do more research on that.

People have the misperception that

anything on the web is free to grab.

The reality is, any third party firm will

have terms and conditions for using

information; educational material is

fine, but in other cases there may be a

fees issue,” states White.

Another point to remember: a social

media user might have a subscription

to a particular source. However, if a

link to an article is tweeted, anyone

who is not a fellow subscriber to that

source will face a dead-end and be

prevented from accessing the content.

That isn’t a regulatory violation

but defeats the purpose of sharing

information via social media.

Asset managers today need to start

thinking about their social media

strategy and consider the above

points. Take care to establish sensible

guidelines, put the right protocols in

place and train relevant staff, establish

a record keeping function for all social

media content and tailor content

depending on the channel and the type

of investor being targeted.

“From a compliance perspective it’s

important to get the right individuals

together, to look at what guidance

there is, to see what other firms

are doing, and to take a practical

approach. It’s time for the financial

industry to look more closely at this,”

concludes White. n



enV iRonMenTAl, sociAl & goVeRnAnce

Research from LGT Capital Partners

and Mercer in March found that

most institutional investors believe

environmental, social and governance (ESG)

factors improve risk-adjusted returns and play

an important role in alternative investment

allocations.

The survey of 97 institutional investors

in 22 countries, also found that most believe

ESG improves risk-adjusted returns and is

an important aspect of risk and reputation

management. Entitled Global Insights on

ESG in Alternative Investing, the research

focused on why and how institutional investors

incorporate ESG considerations in alternative

asset classes.

The key conclusions included the fact that

ESG factors are actively considered by a large

majority of institutions investing in alternative

assets, with some 76 per cent using ESG criteria

when investing in alternative asset classes.

Some 57 per cent of respondents believed that

incorporating ESG criteria has a positive impact

on risk-adjusted returns, while only 9 per cent

believed that it lowers them.

There was strong support for issues that

have the potential to impact a company’s long-

term risk, reputation or overall performance.

Topics such as carbon intensity, controversial

weapons and bribery and corruption garnered

strong support, while exclusion criteria, such as

alcohol or tobacco, were rarely considered, by

those surveyed.

More than half, at 54 per cent, of

institutional investors who incorporated ESG

criteria into investment decision-making, had

done so for three years or less, which suggests

rising expectations for investment managers

over time. Greater clarity on techniques and

strategies for ESG incorporation would help

investors progress more quickly.

Different types of asset managers had

different views on ESG. Tycho Sneyers,

managing partner at LGT Capital Partners,

explains: “This is because different asset

managers invest in different asset classes. PE

managers typically buy a controlling ownership

in companies they own for four to six years, so

they have both the power and the investment

horizon to make ESG matter. Equity focused

hedge fund managers typically hold smaller

positions in companies and for shorter time

horizons, which makes ESG implementation

more difficult. And a hedge fund that purely

focuses on foreign exchange trading probably

can do very little on ESG at all.”

Looking forward, Sneyers believes that ESG

will become even more important. “There is

a clear trend that a growing number of asset

owners takes ESG into account,” he says. “A

vast number of large pension funds has become

a signatory to UN PrI.”

What is key is that investors are driving

the growing ESG incorporation. “Investors are

pushing asset managers to follow suit,” Sneyers

says. “When investors select managers these

days, most will enquire about a manager’s

ESG practices and take that into account

in awarding mandates. For alternatives, this

amounts to 75 per cent of the institutional

investors.” n

The ESG phenomenonESGisincreasinglyimportantforinvestorsandcompaniesalike,writesBeverlyChandler.NewresearchfromLGTCapitalPartnersandMercerconfirmsthatinvestorsarekeyinpushingthisphenomenonforward.

“When investors select managers these days, most will enquire about a manager’s ESG practices and take that into account in awarding mandates. For alternatives, this amounts to 75 per cent of the institutional investors.”Tycho Sneyers, LGT Capital Partners



l iQu id AlTeRnAT iVes

given the proliferation of news articles

and headlines on ’40 Act alternative

mutual funds in recent months, one

would be forgiven for assuming that the whole

debate surrounding ‘liquid alternatives’ was

unique to the US. Of course, nothing could be

further from the truth.

Firstly, Europe’s alternative UCITS market

has been growing year-on-year for the

past six years. Secondly, leading managed

account platform providers such as Lyxor

Asset Management have been offering

liquid alternatives to institutional investors

since 1998.

This is not a new phenomenon. And nor is

it reserved exclusively for ’40 Act funds. That

said, given the size and importance of the US

financial markets, it’s understandable that the

opportunity for retail investors to get access to

hedge fund strategies has become big news.

“We’ve been offering liquid alternatives

to the institutional marketplace for over 15

years,” says Michael Bernstein, head of North

American business development at Lyxor Asset

Management in New York. “Sometimes these

terms get conflated and people start to associate

the term liquid alternative exclusively with ’40

Act funds and retail investors.

“We want to make the point that lots of

different investors have an interest in liquid

alternatives and there are many different

vehicles that qualify, managed accounts being

one of them.”

Kunjal Shah is a senior investment

professional at Lyxor, having joined from Arden

Asset Management this September.

“Liquid alternatives has been part and parcel

of what we do from day one and we’ve now

started to extend our offering to include UCITS-

compliant managed accounts. Performance of

the three UCITS funds that we’ve established

year-to-date has been good. The plan is to grow

the UCITS offering methodically, bringing on

board quality managers with good risk-adjusted

returns,” confirms Shah.

Last February, just before ESMA published

its updated guidelines on ETFs and UCITS,

Lyxor launched the Lyxor/Tiedemann Arbitrage

Strategy Fund, a merger arbitrage strategy run

by TIG Advisors. It was a wise decision. In a

little over 12 months the strategy has grown to

approximately USD650 million. The version of

Winton Capital’s Diversified Program has more

than USD215 million and the Lyxor/Canyon

Credit Strategy Fund, a credit long/short

strategy, has assets north of USD190 million.

This shows that demand for liquid

alternatives is significant among institutional

investors, to whom Lyxor exclusively caters.

That three UCITS funds have garnered north of

USD1 billion alone is revealing.

“UCITS broadens the potential buyers for

the products that we have. There are certain

investors that are limited to investing only

in UCITS vehicles. We have the manager

relationships in place, so it’s actually rather

easy for us to provide this structure for that

sector of the market. It’s complementary in

many ways to offer UCITS funds alongside

our existing non-UCITS hedge fund managed

accounts,” comments Bernstein.

One might logically conclude that if US

hedge fund managers are offering UCITS-

compliant versions of their offshore strategies

in Europe, then surely it makes sense to launch

standalone ’40 Act funds to capture US retail

investors.

The argument for this, however, is far

more nuanced. The US mutual fund market is

enormous, highly complex and highly regulated.

One cannot draw many comparisons to UCITS,

other than the fact that both require managers

The spread of liquid alternatives’40ActfundsareonlypartoftheliquidalternativesnarrativesaysMichaelBernsteinofLyxorAssetManagement.




that falls on the shoulders of the investment

advisor,” says Shah.

According to a survey released by Deutsche

Bank in September 2014, From Alternatives to

Mainstream Part Two, total assets managed by

’40 Act mutual funds reached a record high of

USD257 billion by end-2013, representing over

60 per cent growth for the year. Through May

2014, that figure had grown a further 18 per

cent to over USD300 billion.

These are still small numbers within the

overall context of liquid alternatives. For

example, Lyxor’s managed account business has

an AuM of approximately USD12 billion.

To further extend the menu of options

to its institutional investors, last year Lyxor

introduced a new Institutional Share Class on

its platform; something that is now available

to approximately 40 per cent of the 80 or so

managers on the platform.

This new share class was created to

cater specifically to investors who didn’t

want to pay the weekly liquidity premium

on offer (alongside transparency and risk

oversight). Bernstein notes that the message

of transparency and risk oversight really

resonated with investors but that the weekly

liquidity proposition was something that most

institutions felt they didn’t need at the time.

“The rationale was, “You’re charging a

premium for these features of a managed

account but we don’t want to pay a premium

for weekly liquidity that we don’t plan on using.

Can you offer us the transparency and risk

oversight without charging us for the liquidity?”

“That led to us creating the institutional

share class, which basically charges nothing

over and above what the manager already

charges. The only way we make fees is by

negotiating a share of the fees with the

investment manager. The investor pays the

same amount yet as well as getting transparency

and risk oversight they still get monthly

liquidity; it just requires a larger minimum

investment of USD5-10 million,” confirms

Bernstein.

This is perfect for the mid-tier institution

that is not big enough to command its own fee

breaks with managers directly and wants the

additional benefits of transparency, etc, in a

managed account but who doesn’t want to pay a

weekly liquidity premium.

There can be little doubt that one of the

primary drivers for investors moving more in

to provide daily liquidity terms. What many US

hedge fund managers appear to be doing in the

’40 Act space is take on sub-advisory mandates,

in a managed account format, as part of a

wider multi-manager product overseen by an

investment advisor.

“There’s a huge difference between being a

sub-advisor to a multi-manager ’40 Act product

and establishing a standalone product. The

benefit of the former to a manager is that they

can tap into the growth of this market segment

without having to potentially cannibalise their

existing business. It’s not something an investor

can access directly. It’s a good introduction to

the ’40 Act space,” adds Bernstein.

Also, from a compliance perspective, the

strategy doesn’t need to be fully ’40 Act-

compliant even though the multi-manager

product as a whole has to be. That gives a little

more leeway to managers, says Shah, as it is the

investment advisor who has to handle all the

operational aspects.

“All the sub-advisor has is a managed

account with specific guidelines that they

must follow. The other important point is

that the manager doesn’t have to worry about

distribution. Like operational oversight,

“We want to make the point that lots of different investors have an interest in liquid alternatives and there are many different vehicles that qualify, managed accounts being one of them.”Michael Bernstein, Lyxor Asset Management




fund or UCITS could be a way for investors to

put excess cash to work for a higher return.

It depends on the investor’s investment

philosophy. What role do daily, weekly or

monthly liquidity structures play?” says Shah.

Bernstein says that institutions are

taking a barbell approach to building

alternative exposure.

To the right of the barbell, investors want

access to long-term investment strategies that

are more at the illiquid private equity-like end

of the spectrum i.e. distressed credit, special

situations strategies etc. Indeed, hybrid fund

structures, incorporating dual layers of liquidity,

have become increasingly popular for investors

happy to lock up part of their capital over a

longer time horizon to harvest the illiquidity

premium potentially on offer.

To the left of the barbell, they want exposure

to more liquid strategies that have historically

only been available in relatively illiquid

wrappers.

“That’s what’s under pressure here. These

liquid alternative strategies give investors

exposure to those hedge fund strategies but

with more liquidity. It’s becoming harder for

managers to defend their turf if they only offer

quarterly or semi-annually liquidity.

“What we are seeing is a push towards

this liquid end of the spectrum. However, as

you move towards there you are sometimes

giving up investment opportunities. You can’t

necessarily run a strategy in a daily liquidity

format that has historically been running

offshore in a semi-annual liquidity format.

Indeed, some strategies are just not suitable

to invest in for enhanced liquidity, such as

activist strategies.

“Expanding on Kunjal’s earlier comment,

at what point on the liquidity spectrum is the

right cost benefit for the investor? Institutions

are either going all the way to a daily liquidity

’40 Act vehicle or, in some cases, stopping

short of that and opting for a weekly or

monthly managed account, which should in

theory provide them with attractive richer

opportunity set.

“It’s now about deciding what degree of

liquidity the investor wants, and at what cost.

That’s the new analysis that investors are now

making. Daily, regulated fund structures are

attractive in theory but investors need to realise

that they may come at a cost of performance,”

concludes Bernstein. n

to liquid alternatives is the negative experience

of 2008 when many were impacted by ratings

and suspensions. Nobody wants to go through

that again.

Investors want to know that if they need

access to cash, they can get that access. “It

could also be a cash management reason.

Plenty of investors are sitting on cash and

liquid alternatives could be a good option to

get enhanced returns vis-à-vis money market

funds,” says Shah.

That there are so many products available

to investors today is a positive for the industry.

What’s interesting with ’40 Act funds in

particular is that many of these products can

collect assets without long track records. That

separates them from long-only ’40 Act funds

that absolutely rely on track records and a

certain degree of stability.

“There’s enough demand out there for

something new and different, such that people

are willing to take a punt on something that’s

not necessarily proven. However, what I foresee

is a situation where eventually there will be

more products than the market demands and

many of the products currently being launched

won’t be successful,” suggest Bernstein.

What seems to be emerging in the hedge

fund firmament is a richer, more diverse fund

ecosystem where investors can avail of different

liquidity terms. This is the effect that liquid

alternatives is having. Where once the decision

was binary – one either chose an illiquid

offshore structure or a liquid managed account

structure – there are now myriad options.

As Shah warns, however, investors have to

analyse fund structures on their own merits.

Are they being compensated for reduced

volatility or for greater illiquidity?

“There are funds out there that deliver good

risk-adjusted returns for low volatility and those

have a place in portfolio construction. Then at

the other end of the spectrum you have private

equity funds that offer more of an illiquidity

premium that investors can exploit.

“I think that’s where institutional investors

come into play; where do they need liquidity?

What level of returns do they need to achieve

based on the liquidity profile of different

investments? Then they can construct their

portfolio accordingly.

“There is a trade-off between liquidity and

returns. You could put your cash into money

markets yet get close to zero returns. A ’40 Act




london-based Arabesque Partners

was established by founder and

CEO, Omar Selim in June 2013.

It is one of the first asset managers to

bring a robust, quantitative approach

to sustainable investing to deliver

market outperformance to investors.

The Arabesque Systematic Fund

and Arabesque Prime Fund launched

in August 2014. To date, both have

outperformed the MSCI AC World Index

by 5.05 per cent and 2.88 per cent

respectively. This places Arabesque

within the current top 10 percent

of best performing European funds,

according to Morningstar analysis.

At the heart of the investment

philosophy is the ability to use

comprehensive ESG research in tandem

with active portfolio management and

as Selim is keen to stress: “We are not

using ESG data merely to please ethical

investors at the expense of performance.

We use ESG information to generate

outperformance. We are suitable for

all global investors, not just ESG

investors.”

There is substantial academic

expertise behind Arabesque, whose

advisory board is made up of CEOs

and leading academics in quantitative

finance and ESG research. Not that

this happened overnight.

The genesis of Arabesque dates back

to 2011 when Selim was working as the

Head of Global Markets for Institutional

Clients (EMEA and Eastern Europe) at

Barclays.

“One of our SWF clients approached

us and said, ‘I want you to research

how asset management in the future is

going to look. Go out there and think

about how five to 10 years from now

the industry will have likely changed’,”

says Selim. “A team of academics

and research staff was put together

from the universities of Oxford,

Cambridge, Stanford, Maastricht and

the German Fraunhofer Society for the

advancement of applied research.”

The project was split into three

themes: the first was asset allocation.

Looking ahead, the concept of fixed

income products – which make up

60 per cent of portfolios – delivering

a steady 7 per cent per annum is

unrealistic. The problem with fixed

income is that there is a theoretical

maximum price; once you hit rates of

zero per cent, there’s nowhere else to go.

“If you look at five-year German

bunds, you have to pay money to hold

them (yielding -0.06 per cent). It’s

one of the most underestimated issues

facing investors. The point is, things

will change. Institutions are going to

have to find a new home to invest and

global equity is the next best thing.

The idea we had was to construct

something as solid as possible to

capture that fixed income money,”

says Selim, and in effect, try to deliver

smooth, low-volatility returns akin to

fixed income.

The second theme was non-financial

information. There is plenty of public

information available on socially

responsible investing. This has led

some asset managers to build simplistic

funds that remove defence stocks,

tobacco stocks, etc, but as Selim points

out, “when you take optionality away

the quality of the portfolio falls and

performance is impacted”.

“We don’t want to use ESG

information to negatively impact

performance. On the contrary, what

our clients want us to do is use that

information specifically to drive

performance and reduce risk. In

collaboration with the University of

Oxford, we published a meta-study on

all the available research on ESG and

published that study in September

2014 – From the Stockholder to the

Stakeholder: How Sustainability Can

Drive Financial Outperformance.

“Our research was to try to

understand the impact of sustainable

investing on the portfolio – is it

positive, is it neutral, or is it negative?

We tried to analyse companies’

behaviour on a range of environmental

topics – water consumption, production

process, wastewater management and

so on. We analysed the governance

structure of the company, we analysed

the social aspect; how they treat their

employees. We found a correlation

between those parameters and

outperformance of the stock price,”

explains Selim.

This research took two years to

complete.

The third theme was instrument

selection. Futures and derivatives were

immediately ruled out.

To get the full benefits of an

ESG portfolio using non-financial

information requires true stock

ownership. But this is not about

individual stock picking and building

overweight positions in the top 10 most

A quantitative approachArabesquePartners’OmarSelimmakesthecaseforaquantitativeapproachtodeliveringoutperformancethroughsustainableESGinvestment.




favoured companies; rather, it is about

developing themes that provide access

to a broad, optimal range of stocks.

Come June 2013, Selim left

Barclays and in a management buy-out

established Arabesque Partners.

The two Arabesque funds are

based on rigorous systematic models,

the Arabesque team maintaining

its research links with the leading

academic institutions Selim worked

with whilst at Barclays. Professors from

Cambridge University did the validation

of the financial models, for example.

To highlight the quality of the

team, Anja Mikus is the CIO, having

previously worked as CIO for Union

Investment, Germany’s largest pension

fund (USD250 billion) for 14 years.

There are three levels to the

Arabesque Process.

Level one is the pre-selection

process. This involves systematic stock

selection across a universe of 77,000

stocks using 200 ESG indicators and

over 100 market criteria to create an

index of over 1,000 blue chip stocks.

This is known as the “Arabesque Prime

League”, the index on which both

funds are based.

Level two is fundamental analysis,

which has its roots in New York. The

fundamental stock selection process

was originally developed in 1999

by Professor John B Lightstone and

was employed to manage more than

USD1 billion for Morgan Stanley; this

company – 5 Star rated by Morningstar

– was acquired by Arabesque in 2014,

with Professor Lightstone now a

member of Arabesque’s Advisory Board.

The objective here is to identify the

300 best companies from the index,

the components of which go into the

Arabesque Prime Fund.

Various quantitative equity

screening filters are used in the model.

These include: liquidity, forensic

accounting, United Nations Global

Compact (UNGC) compliance, ESG,

balance sheet, and business-activity.

Level three is momentum

recognition. This is essentially

behavioural finance, where the model

works on the principals of what people

think companies should be worth

rather than what they are actually

worth. This approach, in conjunction

with Arabesque’s proprietary Adaptive

risk Technology – which dynamically

adjusts the exposure to equities

between 0 per cent and 100 per cent

depending on market concerns – brings

further refinement and selects 100

stocks with the objective of minimising

the portfolio’s risk.

This additional third level is used

in the Arabesque Systematic Fund.

Whilst the Arabesque Prime Fund

is rebalanced quarterly, the ArT

methodology means that cash and

equities are managed on a daily basis

in the Arabesque Systematic Fund.

“We use a conditional Var model

to manage risk in the portfolio and

we have no concentration risk. The

maximum allocation of any one name

is 1 per cent. We use no leverage and

we do not short. We never bet against a

company. Also, we use no FX overlay.

“At the end of the day what we give

you is a model that allocates between

whether you own the stocks or not;

the system allocates money according

to the overall best exposure. It’s about

finding the best combination of stocks

to deliver the best overall risk-adjusted

returns,” explains Selim.

The filter process that screens the

universe of 1,000 stocks to find the

best combination resembles that of an

Arabesque geometric motif; this, says

Selim, was the inspiration for the name

of the firm.

This is heavy duty research-

driven, systematic investing to deliver

outperformance in the most attractive,

well-governed stocks. What makes

Arabesque’s approach unique is that

when using ESG data, companies are

not merely singled out on the basis

of one aspect of ESG. rather, the

systematic model tries to find the best

ESG combination in stocks, says Selim:

“Companies like BP, for example,

have excellent governance but are

less good on safety. We have hundreds

of questions that we go through, and

the system then assigns each stock a

number. The higher that number is the

higher up the matrix it moves.”

Selim says that Arabesque currently

has accumulated investor interest of

more than USD1 billion, “which we

hope to close within 12 months”.

“The days of risk-free 7 per cent

fixed income returns are gone. What

we are trying to do at Arabesque

Partners is build equity in a way that

can capture a part of fixed income

by reducing risk. This is a new way

of investing, for all investors, not

just those who are looking for ESG

investments,” says Selim in conclusion.

Both funds offer daily liquidity. As

well as being UN Global Compact-

compliant they are also compliant

with UN Principals for responsible

Investment (PrI). Management fees

for the Arabesque Systematic Fund are

0.82 per cent and 0.32 per cent for the

Arabesque Prime Fund. n

“We are not using ESG data merely to

please ethical investors at the expense of performance. We

use ESG information to generate

outperformance.”Omar Selim, Arabesque Partners



AFR icA

“Africa has an abundance of

opportunities driven by

its demographics, its raw

materials and agricultural land. These

opportunities need to be unlocked by

investing into infrastructure-related

products. The ability to unlock that

potential will offer significant returns

to investors over the long-term,”

comments Diane radley, CEO at Old

Mutual Investment Group.

The perception of Africa among

investors has long been that of the

Dark Continent. But the continent is

fast becoming a key emerging market.

Sub-Saharan Africa’s economic output,

for example, is estimated to grow from

USD1.415 trillion in 2013 to USD1.607

trillion in 2015 and USD1.844 trillion

by 2017 (according to the IMF World

Economic Outlook Database). Africa

as a whole is estimated to grow its

economic output from USD2.15 trillion

in 2014 to USD2.382 trillion by 2016.

With a rapidly growing middle

class, reduced political risk and

improved corporate governance, the

opportunities that exist across sectors

such as agriculture, infrastructure

development and sustainable housing

and education are significant.

Old Mutual Investment Group

(OMIG) has been on the continent

for 170 years. It is the oldest asset

manager and the biggest private

manager in Africa. It runs a range of

funds, with a particular focus on sub-

Saharan Africa, managing both listed

and unlisted assets in traditional asset

classes through to private market

investments.

“Within private markets we manage

approximately USD5 billion in sub-

Saharan Africa,” confirms radley.

The firm focuses on four main

investment areas: private equity,

economic infrastructure – its IDEAS

Managed Fund, for example, is an

open-ended fund and a market leader

in renewable energy – development

impact such as affordable housing and

education, which is addressed through

its range of Development Impact

Funds, and agriculture.

Infrastructure is vital to the

development of Africa’s economy

if it is to attract more significant

foreign direct investment. To explore

investment opportunities, OMIG runs a

series of such funds in a joint venture

with Macquarie Group called African

Infrastructure Investment Managers

(AIIM). As at 30 June 2014, AIIM was

managing USD1.21 billion of AUM.

AIIM now has a 14-year track record in

African infrastructure investments.

radley is passionate about the

sheer potential Africa has to offer

moving forward and confirms that

global investor appetite in exploring

sustainable investments within Africa’s

private markets is on the rise.

A recent survey compiled by Ernst

& Young (2014 Africa attractiveness

survey) reveals that since 2011

Africa has moved from the #8 ranked

destination to last year being the #2

ranked destination in terms of investor

attractiveness. So there is definitely an

increased level of confidence. If you

combine that with political stability

and the compelling investment story

-projected GDP growth is forecast to be

7 to 8 per cent over the next five years

– and demographics story and one can

understand why.

“There are 1.1 billion people in

Africa. In the next 30 years it will

have more working age people than

either China or India. In addition, the

continent has an extraordinary pool of

natural resources. Currently, Africa has

60 per cent of uncultivated arable land.

The opportunity set is just enormous

if we can open that up. Clearly, that

relies on infrastructure development to

get product to market,” says radley.

Agricultural investment

opportunities

That 60 per cent figure can be

explained by the fact that a lot of the

land in Africa is still cultivated in small

lots by subsistence farmers. It’s very

small-scale. OMIG uses an agriculture

model that buys up multiple lots of

land and then consolidates them to

increase productivity by increasing the

overall yield.

“At the moment, most of our private

market funds (excluding property)

target a 7 per cent annualised return.

It’s an attractive long-term return for

investors. These funds typically have

an investment time horizon of ten

years. We currently have two funds. We

run a purely South African fund called

the Futuregrowth Agriculture Fund and

we also have the Old Mutual African

Agriculture Fund, which is pan-Africa,”

explains radley.

Lease yields in Africa are very

attractive compared to other parts of

the world: 8 to 9 per cent compared to

2 to 3.5 per cent in the US and 1 to 2

per cent in Western Europe.

When running private market funds

in Africa, the key to success is having

a wide footprint. These are long-term

investments and problems/challenges

are inevitable. In that regard, Old

Mutual is well positioned.

“We can mediate quite easily

without having the challenge of not

being resident in the country. In that

Investing in AfricaDianeRadley,CEOofOldMutualInvestmentGroup,examineshowtounlockthepotentialforprivatemarketinvestmentinAfrica.



AFR icA

sense, footprint is critically important

when managing these private market

investmentsIn one of our infrastructure

funds we had an investment in NLPI

through which we had one of our

railway concessions nationalised and it

was important for us to have stakeholder

intervention at the government level to

get issues resolved. Investors need to

know that,” says radley.

Infrastructure opportunities

Current infrastructure spending in

Africa is estimated at USD50 billion a

year. Two thirds of the funding comes

from African governments, 8 per cent

from multilateral and bilateral donors

and the rest from the private sector.

Nevertheless, on that projected level

of spending, the funding gap is still

estimated to be USD45 billion a year.

To highlight just how much

infrastructure development is needed:

• Only32percentofpeopleinsub-

Saharan Africa have access to

electricity;

• Lessthan25percentofsub-Saharan

Africa’s road network is developed;

• Sanitationinvestmentislessthan0.1

per cent of total infrastructure spend.

radley notes that OMIG uses two

preferred models when it comes to

making infrastructure investments.

The first is the public/private

partnership model, where the

government supplies the concession

and OMIG, as the Investment Manager,

provides some of the funding as well

as the skills necessary to complete the

infrastructure project on time. We use

third party developers; a case in point

is the Lekki Toll road in Nigeria where

you bring the developers in, you put

the project together, you get part of the

investment and you deliver the project.

The second model, used to a lesser

extent, is the funding of third party

infrastructure assets where government

is not involved.

“All of our infrastructure funds in

AIIM are almost fully invested but

we are planning to raise a new fund

either later this year or in early 2016,

which will focus on sub-Saharan

Africa infrastructure investment. The

investments we’ve made, to date, have

largely focused on road, railways,

airports and energy infrastructure

projects (wind and solar).

“We were, for example, one of the

developers of the Beit Bridge project. We

recently handed the completed bridge

over to the Zimbabwe government after

managing the concession for 20 years.

Our focus with these funds really does

span the entire infrastructure complex,”

confirms radley.

The SAIF and AAIF funds were

launched in 2000 and 2004. AAIF is

a USD186 million private equity fund

which was fully committed in early

2009. AAIF2 had its final close on 30

September 2011 with commitments of

USD500 million. These funds typically

have an investment time horizon of 10

to 16 years.

At the heart of OMIG’s investment

philosophy, across all the private

market funds it manages, is

sustainability. Within agriculture, for

example, care is taken to avoid land

contamination and that sustainable

farming practices are adhered to.

“As long-term investors, if we are

going to successfully generate attractive

returns for our investors it has to be

done without any key sustainability

risks hitting our investments. For

us, it’s critical that we apply socially

responsible investing in any of our

long-term private market investments,”

emphasises radley.

Development impact funds

This dedication to sustainable investing

is well illustrated in OMIG’s Development

Impact Funds which aim to deliver

what it refers to as “double-bottom-line-

returns”: a commercially acceptable

return and a positive social impact.

As a pioneer in private market

investments, OMIG offers the only

affordable housing fund (the Housing

Impact Fund South Africa) as well as

the only educational fund (Schools

and Education Investment Impact

Fund). The reason for establishing

these funds is clear: to address Africa’s

socioeconomic problems. The main

focus of the Schools and Education

Investment Impact Fund is on

developing independent low fee-paying

schools in South Africa.

“Our education fund portfolios

comprise various types of education

investments; it maybe an investment

into physical infrastructure, investment

into a school operator that operates

affordable schooling (private schooling

not government-funded schooling). We

would also look to fund maintenance

infrastructure in non-private schools

where the government would be the

primary counterparty,” says radley.

Sustainable housing and agricultural

projects are big areas of focus right

now according to radley, although

OMIG is also having discussions as to

how to improve Africa’s healthcare

sector. regardless of the investment

focus, OMIG applies the same

sustainability ethos.

“It’s about making decent returns

decently. Our investment philosophy

for all our fund investments is that

they add to the planet, not subtract. All

our energy projects are renewable and

designed to generate returns whilst at

the same time helping the continent to

achieve its energy targets.

“By investing in schools, housing

and infrastructure, we are not only

supporting the development of the

continent and making a lasting,

positive impact on the social landscape,

but also ensuring sustainable returns

for investors,” concludes radley. n

Diane Radley



cyBeR secuR iTy

in light of high-profile hacking events, where

the likes of JP Morgan, Home Depot, and,

most notably, Sony suffered significant

losses of information, it is incumbent upon

organisations to think more holistically about

governance. Enterprise must put in place a

security framework that incorporates people,

processes, and technology.

This is especially important for hedge

fund managers, who share sensitive portfolio

and investor information with various

counterparties across external networks. These

data-transfer channels are potential weak points

for hackers to exploit.

Todd Partridge is an executive at Intralinks

and thought leader in the cyber security realm.

The governance framework referred to above

forms one of four pillars of secure enterprise

collaboration that Intralinks incorporates into

everything they do. Briefly, the three other

pillars, which Partridge describes in his recent

blog (Better Safe than Sony’d: 4 Pillars for

Secure Collaboration), are:

• SharingProcessControl:Thisfocuseson

how clients control information access.

• ContentLifecycleControl:Thiscentreson

defining capabilities needed for organisations

to control content, from creation through to

how it is shared.

• TechnologyInfrastructureSecurity:After

the information sharing rules have been

implemented, a service provider has

been selected, and a solution has been

implemented, the organisation must ensure

that all facets of that solution remain secure.

In Partridge’s view, one of the biggest threats to

hedge funds right now is mobile attacks.

“The increased desire of employees to be

mobile and accessing data on various mobile

devices, represents an area of cyber security

that lots of businesses are at risk from: How are

they managing mobile devices? How are they

managing access to important information on

those devices?” says Partridge.

More on that last question shortly.

Another area of increased attacks, and

one that largely explains the high-profile

breaches referred to at the top of this article,

is that of hackers exploiting weak links within

organisations.

As Partridge points out, the resulting

investigations into those attacks revealed that

it was employees, consultants, or other outside

entities who had previously approved access

to the corporate networks who proved to be

the weak link. This is something that hedge

fund managers, who add and subtract different

counterparty relationships through a fund’s

lifecycle, need to be mindful of; not updating

their network security and removing old users

on a regular basis could lead to an unwanted

security breach.

“These types of issues – use of mobile

devices, potential weak links within the system,

use of consumer grade tools – are becoming

Cyber security: A multi-pillar approachIntralinks’ToddPartridgeadvisesamulti-pillarapproachtoguardagainstcyberattack.



cyBeR secuR iTy

more important and firms need to have

the right safeguards in place,” explains

Partridge.

“What we try to do with Intralinks

Fundspace™, and encourage our

clients to do, is take a four-pillar

approach to secure collaboration.

Our premise is that organisations

need to find safe tools and safe ways

to share information outside of their

organisation. To do that, one has to

put in place a plan that addresses all

four pillars: enterprise governance,

sharing process, content lifecycle

management, and technology and

infrastructure security that holds all

that information.”.

Every innovation that Intralinks

develops is done so by addressing all

four pillars.

Maximum compliance

Let’s say a hedge fund is going

through a re-certification process

with an auditor (or any other key

service provider). regardless of how

complex that process may be for the

fund, Fundspace is able to provide

all the compliance data and resultant

reporting needed for the CEO or COO

to know that they are fully compliant

at any point in time.

“They can access this report and

see for every single exchange of

information who those parties are.

That’s what we mean by enterprise

governance. Our platform provides the

compliance reports managers need to

stay in compliance,” says Partridge.

Fundspace model

Fundspace is a vertically focused

collaboration application that runs

on the Intralinks platform specifically

to allow fund managers to share

sensitive information about their

funds. Approximately 14 of the 25

largest hedge funds use the platform to

interact with investors and share files,

safe in the knowledge that there is a

full audit trail.

“We provide a high level of security

around customer and fund-specific

data that is going to be shared on the

platform. Managers can review fund

marketing materials prior to going

on the platform and have granular

control over whether or not people

(i.e. investors) can view content

online. Maybe they are allowed to

download it. Maybe not. We implement

rights management capabilities as

well, meaning that even if a manager

provides someone with the ability

to download a fund prospectus, our

security technology stays with it.

“At any time, the fund manager

can un-share that data and shut it

down from anywhere in the world, if

needed,” notes Partridge.

As mentioned, mobile device attacks

present a serious threat to hedge funds.

Intralinks has responded to this by

increasing mobile security measures on

the platform. One of these measures

is device pinning. If an Intralinks

user accesses data remotely, the

organisation can control what mobile

devices can be used.

“You can put in place unique PIN

codes for each mobile device, which

adds another layer of security to

make sure you are validating the

identity of the user(s) before they are

authenticated by the system,” says

Partridge.

Through a programme called

Enterprise Fabric, Intralinks is

establishing technology partnerships

with best-of-breed vendors in mobile

security. The most recent was with a

firm called MobileIron, a mobile device

management vendor. MobileIron acts

as a protective shell for users who have

the Intralinks SecureMobile application

on their iPad, for example.

A hedge fund’s IT team knows

that all the Intralinks applications,

like Fundspace, are running inside

MobileIron. If, for any reason, they

need to wipe that data off the device,

they can do so without impacting

personal files. MobileIron gives them

the ability, remotely, to shut down

access to the data by removing the

file(s) entirely.

This is particularly important to

maintaining the integrity of a hedge

fund’s security network. After all, if

an employee leaves their iPad on an

aircraft, for example, and it contains

sensitive files, the organisation is going

to want to ensure that either the data

is secure from an access perspective,

or, at worst, can be eradicated at the

click of a button.

“Our technology can prevent data

from being opened. MobileIron goes

one step further by wiping the file

completely,” explains Partridge.

There are still a large number of

firms – hedge funds included – that

share information with clients via

email. In many ways this is archaic.

Anyone who picks up a misplaced

mobile device has the potential to

easily access confidential information.

A layered approach to security

What Fundspace allows is the ability

for fund managers to avoid using email

“The increased desire of employees to be mobile and accessing data on various mobile devices, represents an area of cyber security that lots of businesses are at risk from.”Todd Partridge, intralinks



cyBeR secuR iTy

fund suffer a serious cyber attack, providing

evidence of the steps taken to prevent the

breach could at least soften the blow and offer

some degree of understanding from investors.

“There’s a big difference between an

organisation that took steps within their

means to protect their clients’ data from being

breached versus a company that, for any variety

of reasons, did not. It’s something we try to

stress with our clients. In a business where

you are sharing sensitive information there are

tools, such as those we offer on Fundspace, that

can mitigate the risk,” says Partridge, adding:

“No one is naïve enough to think that they

can’t be breached. There are organisations out

there, somewhere, that, if they want to, can

dedicate the time and resources to attacking

your network and sooner or later they’ll find

a weakness, some way in – whether it’s a

technology route or, as I mentioned at the top

of the article, exploiting the weakest link.”

It is therefore incumbent upon the fund

to define their own governance around

risk tolerance. What is the most important

information they need to secure, and how often

do they audit what is being secured? By having

that governance structure in place, managers

can start to tie together the technology tools to

support it.

“They have to first decide on the rules

that determine what types of information are

allowed to be shared with what types of users –

administrators, custodians, etc. Next they can

align the technology to support that. Finally,

once they’ve aligned the technology to support

those rules, they need a compliance policy in

place to ensure they are protected.

“rules. Technology Alignment. Compliance.

At a high level, those are the areas to focus on,”

says Partridge.

Whether it’s the SEC, FINrA, or another

regulatory agency, managers need to

demonstrate that any of the information they

share doesn’t end up in the wrong hands.

“It used to be enough to have compliance

reports that showed access to files. That’s not

enough anymore, concludes Partridge. “Now

you need to be able to show who accessed the

file and when the system sent out a notification

that a new file was in the system. Compliance

reports have to deliver a lot more information

detailing every electronic communication

that occurred on the Intralinks platform for a

particular fund.” n

altogether and share information in a secure

environment.

The fund manager is then able to control

who can access what data. If it’s too sensitive,

maybe they’ll decide that prospects can only

view their fund information online.

“The next layer is where the fund manager

allows prospects to download their fund

prospectus. When they do, we have security

embedded with the document that controls

what a user is able to do with the file once it’s

downloaded. Maybe we restrict the user from

printing it, or copying and pasting text.

“Layer three is what we call information

rights management. For any files that are

downloaded, specific permissions are embedded

and unknown to the user. We don’t want it to

be hard to share information; we just want it

to be secure. Every time that file is opened

it effectively ‘phones home’ to the Intralinks

platform and says ‘Person X is trying to open

this file’ which is fine because they have

permission to do so when online. If they try to

access it offline, they will be prevented from

doing so.

“The final layer is that, in the event of

leaving the iPad on a plane and someone

tries to impersonate the owner, IT staff can

immediately revoke access to all necessary files

in the click of a button,” explains Partridge.

Add MobileIron on top of this, and one gets a

good sense of how secure Intralinks Fundspace

has become as managers look to get on top of

their security issues.

Take heed of the Sony attack

The Sony attacks that led to enormous swathes

of personal data being leaked into the public

domain are a stark warning to hedge funds. The

consequences of investor information being

accessed and used for nefarious purposes would

cripple any hedge fund. The financial liability

would be manageable; the potential litigious

fallout and resultant lawsuits, such as those

facing Sony, would not be.

“Sony has already put aside approximately

USD15 million to deal with numerous lawsuits

that have arisen from the recent hacking

incident. Could a small or mid-sized hedge fund

manager afford to do that? Can they be sure

that USD15 million would not have a material

impact on their fund? It’s unlikely,” says

Partridge.

One caveat to this is that, should a hedge




“The central philosophy behind the

firm is to make it as easy as possible

for people in the financial industry

to provide validated risk management reporting.

That includes everyone from small hedge funds

to global sell-side institutions,” says George

Kaye, founder and CEO of Derivitec.

We are speaking over coffee in the club

lounge of Level39 at 1 Canada Square, Canary

Wharf; a hot bed of innovation in what is

Europe’s largest technology accelerator for

start-up companies, spanning everything from

financial technology to cyber security and retail

technology.

At the heart of the Derivitec model is the

ability to analyse a portfolio of derivatives

exclusively via the web, with no need for users

to go through the time and ongoing costs of

a system install. This is about leveraging the

cloud to optimise portfolio risk management.

No other risk management firm is taking this

approach; especially one as focused as Derivitec

is on derivatives risk.

With a PhD in theoretical physics from the

University of Cambridge, Kaye has amassed a

wealth of experience as a quantitative analyst

(“quant”) in investment banking. He worked for

seven years at Credit Suisse before joining the

Derivative Analysis Group of Goldman Sachs

in 2006. It was here that Kaye helped build

a methodology for model risk analysis of the

firm’s equity derivatives positions before moving

on to join the Quantitative Analysis Group of

UBS in 2010.

It was in the spring of that year that Kaye

decided to take time out to write a book on

derivatives: The Value of Uncertainty – Dealing

with risk in the Equity Derivatives Market.

“Coincidentally, at that time a couple of

former colleagues from Credit Suisse set up

their own hedge fund to trade equity derivatives

in the Asian markets and they wanted to use

some of the models I’d put together for the

book. I replied by saying: ‘Well, they’re not

quite industrial strength yet so I’m going to set

up a company, and then I will provide them to

you’,” recalls Kaye.

In 2011, Derivitec Ltd was born. Initially, it

started life as a derivatives analytics software

vendor. “Then I started to do some deep-dive

market research into who in the market was

successful and why. There were two points that

clearly stood out in my mind: ease of use, and

scalability,” says Kaye.

“On both counts the cloud became the

obvious solution. It would allow us to scale the

costs of the offering with the cost of delivery

to the client. That’s how Derivitec came into

its present form; as a cloud-based provider of

derivatives analytics.

“I didn’t make the point of using the cloud

to differentiate myself, it was simply the right

platform for what I wanted to do. In terms of

other people in this space, there are others who

are providing services from the cloud but most of

the incumbents are using it as an add-on to their

core offering. Ours is what you would call a pure

cloud solution whereas others allow you to scale

out the compute from your physical location

into the cloud; it’s added on top of the software

license. We do everything from the cloud.”

Although these are early days – the Derivitec

risk Portal only officially launched at the end

of 2014 – there are already over 100 users.

roughly one third of these are US-based hedge

funds and sell-side institutions (commercial

and investment banking). Private banks are also

showing interest in using the application for

their HNW clients to monitor their structured

portfolios.

“Our target market is hedge funds but what’s

nice is that people have found all sorts of other

ways to use our solution. That’s one of the great

things about the cloud. Because it’s ubiquitous

you’re not pigeonholed at all,” says Kaye.

Derivitec is certainly turning heads. Not only

was it recently voted by Business Insider as one

of Europe’s 15 most innovative finance start-

ups, it was also voted one of the 2015 Hot Ten

Fintech companies by FinTechCity.

Cloud derivativesJamesWilliamsmeetstheDerivitecteamwhoshowcasehowbesttomanagederivativesriskthroughthecloud.




“The first thing somebody will do when

looking at a solution like ours is compare the

data against their own data stream; if you’re

wrong by any magnitude, one basis point,

50 basis points, it’s game over. The level of

precision needed is all about getting every last

detail correct,” states Kaye.

Derivitec uses a number of standard industry

models that derivative traders on both sides

of the Street are accustomed to. The number

of workhorse models is not that huge for

the simple reason that they have got to be

absolutely robust and bulletproof.

“We use models which calibrate to market

and that industry participants know and

understand. On top of that, however, you have

to have all the data flowing in. There has to be

a process around that and the application has

to be built and tested. It needs to be available

worldwide, it needs to be automatically

scalable, the data itself needs to be essentially

limitless so you need to have horizontal scaling

capabilities; it goes on and on. So in terms

of the actual scope of the solution we have

created, it is very substantial,” explains Kaye.

Market data is consumed from Thomson

“Ours is what one would call a pure cloud

solution. We do everything from the cloud.

There’s no license fee. It’s a pay-as-you-go

model,” says Kaye, stating that the objective

from the outset was to make the Derivitec risk

Portal as efficient and scalable as possible.

One of the key problems that firms face with

existing non-cloud based solutions is install,

and the associated ongoing costs. By powering

everything from the cloud, all the client needs

to have is access to a web connection. As the

software is upgraded it becomes automatically

initiated the next time the client logs in to

the portal.

“You can be on any operating system,

any device. All of that infrastructure and

expertise, the quality of the analytics and the

quality of data we offer, is available on tap.

That is a massive advantage, and for us, a key

differentiator to other existing solutions on the

market,” says Kaye.

The engine that runs Derivitec’s risk analytics

is quite simply enormous. After all, it has taken

the best part of two solid years to construct. The

minutiae are manifold but vital because as Kaye

points out, “they could make or break a sale”.

Derivitec team, left to right: Jon Hodges, chief technology officer; George Kaye, founder and CEO; Marc Tuckmantel, head of product development; Anthony Grocott, head of sales.




To test the security of the front-end,

Derivitec used two third party validations. The

first was with a company called Veracode that

performed static code analysis and dynamic

code analysis, which, as Kaye explains,

“basically involves getting robots to attack your

network. This lasts for a full week. We came out

with a 99 per cent pass rate so we are now PCI-

compliant.

“On top of that we brought in a consultant

to try and hack the system and they found no

areas of vulnerability.”

Back-end is all to do with how the data

is stored, levels of encryption, how data is

separated out – one-way encryption versus

two-way encryption. And then there’s the host,

which in Derivitec’s case is Microsoft Azure.

There is a fairly widespread misconception that

having a server in the office is more secure than

having it in the cloud. “This is totally wrong,”

states Kaye quite categorically.

“Having the systems in a remote location

is very secure and remember, Microsoft is

probably more focused than any other firm on

security surrounding its physical installations.

So, I would actually say that hosting solutions

on the cloud is a more secure option.”

Moving forward, Derivitec hopes at some

point to establish a footprint on the east coast

of the United States; understandable given that

many of the world’s largest hedge funds are

located there. Asked as to what the future goal

of the firm is.

“The global ambition is that we become the

hosted risk management platform of choice for

the derivatives industry, supporting the main

asset classes across global markets. We want

people to view Derivitec as the benchmark for

validated risk management,”concludes Kaye. n

reuters and a company called Xignite in the

US and is presenting being expanded further.

If a client wishes to price intra-day, live or

on a 15-minute delay, Derivitec is able to

integrate with front-office APIs routed to their

preferred vendor.

Currently, asset class coverage applies to

equity derivatives and fixed income vanillas

– swaps and futures. That will be extended

shortly to FX options and flow exotics, with

Kaye noting that it has also had a request for

basic commodity options.

“All of these asset class extensions will be

done in conjunction with clients so that we

have a clearly defined scope of how much

coverage we need to have. Fixed income bonds

will be included in due course. We are talking

with a company about the provision of the

reference data to support that asset class,”

confirms Kaye.

Derivitec generates standard risk reports

that include all the usual Greeks one associates

with derivative risk, as well as stress tests and

will soon be providing historical and parametric

(Variance/Covariance) Var. What is especially

powerful, however, is that end-users are able to

drill right down into the analytics from which

the headline numbers derive.

This is particularly important for investors

and is something that start-up hedge funds,

in particular, can use as a real point of

differentiation. They could, for example, invite

prospective investors on to the platform so

that they themselves can check the numbers,

look at the underlying risk metrics within the

report, and get a deeper understanding of that

manager’s approach to trading risk.

“Users are free to generate risk reports any

time they wish. My record is two minutes!” says

Kaye, flashing a grin. “One can take an Excel

spreadsheet of portfolio trades, upload it to the

portal, go to the risk reports section, click run

and it’s done. It’s very fast. We are currently

working on putting together standardised

reports that could be provided as a service via

secure email.”

Security is a massive issue facing the hedge

fund industry as the level of cyber attacks

increases. For firms like Derivitec, who

operate entirely in the cloud, great emphasis

has been placed on making the platform as

impenetrable as possible. The firm views

security in three blocks: front-end, back-end

and host.

“Our target market is hedge funds but what’s nice is that people have found all sorts of other ways to use our solution. That’s one of the great things about the cloud. Because it’s ubiquitous you’re not pigeonholed at all.”George Kaye, Derivitec



euRoPeAn M&A

cMS’s 2014 recently published study of

European M&A in private companies

reveals a major uplift in deal value

across the region. Martin Mendelssohn, partner

in M&A and corporate finance at CMS in the

UK says: “One of the interesting things is that

investment into Europe has been greater than

people realise in 2014.”

Popular comment cites growth in BrIC

countries or new economies but the statistics

tell a different story. “The statistics show global

M&A was up 45 per cent in value over 2014,

of which Europe accounted for 41 per cent

in value and a rise of 5 per cent in volume,”

Mendelssohn says.

The boom in inbound deals in Europe has

largely stemmed from North America with,

Mendelssohn says, 1200 deals with a value of

USD320 billion over 2014, the highest inbound

figure into Europe since 2001 in both value

and volume.

And while 61 per cent of inbound activity

came from the US, some of it went the other

way too, with outbound European activity into

the US also improving.

“The North American economy is more

vibrant, more self-sufficient than where it was

three years ago” Mendelssohn says. “There

is more political and general risk attached to

new economies and in Europe they see an old

recovering economy – Europe has infrastructure

and is stable. It’s seen as a good place to put

your money.” Currency risk has also been

working in favour of the dollar and the pound,

although, going forward, that may change with

Europe’s new commitment to quantitative easing.

“That may change over the next nine months”

Mendelssohn warns. “It’s too early to tell.”

CMS’s study also reveals two particularly

notable pro-seller trends. “What we have seen

is that in our business of buying and selling

private companies a lot of the push and pull on

who takes the risk in the sale of a company has

changed” says Mendelssohn.

The survey showed significant use of locked-

boxes and warranty and indemnity (W&I)

insurance. Locked-boxes fix the price of a deal

without reference to any completion accounts

adjustment and 2014 saw the greatest use

in consumer products and business services

deals. W&I insurance provides a solution

for the ‘warranty gap’ where sellers who are

not prepared or able to give warranties and

indemnities can provide a package which will

enable buyers to make warranty claims against

the insurer. In 2014, W&I insurance was used

primarily in private equity, real estate and

infrastructure fund deals.

“The combination of availability of insurance

and fewer price adjustments all means that

sellers are doing rather well in terms of

come backs, which are few, when they sell

companies. This is a marked development

over the last few years, particularly in 2014”

Mendelssohn says. n

European M&ABeverlyChandlerdiscussesanewstudybyCMSwithMartinMendelssohn,partneratCMS,whichfindsprivatecompanyM&AinEuropeenjoyingamajoruplift.

“The statistics show global M&A was up 45 per cent in value over 2014, of which Europe accounted for 41 per cent in value and a rise of 5 per cent in volume.”Martin Mendelssohn, CMS



ReAl esTATe

At the start of 2015, EQT Partners,

a Scandinavian private equity firm,

announced that it was moving in to

the real estate sector to pursue opportunistic

and value-add opportunities across Europe.

Two industry specialists were brought in to

establish the platform: Edouard Fernandez

and rob rackind, co-founders of Wainbridge, a

boutique London-based real estate investment

advisory firm.

“We’ve kept most of our team together.

We will be bringing on board a pan-European

director and a Nordics director and the idea is

for EQT to be Europe’s leading PE firm with a

large real estate presence. Most of the existing

real estate groups in Europe are backed by US

private equity firms; the Carlyle’s and KKr’s of

the world. The market is missing a European PE

player,” says Fernandez.

Combined, the two firms have extensive

experience in the marketplace. Since it was

established in 1994 EQT has raised 17 funds

equating to EUr22 billion in capital. It has

more than 300 institutional investors and a

network of 200 industrial advisors. This should

benefit Fernandez and rackind in terms of

sourcing deals and building relations with

this network of group CEOs and presidents.

As for Wainbridge, the management team has

transacted on more than 23 million square feet

in European real estate. “We’ve worked on 60

different projects in all asset classes and we

have experience investing across the capital

structure; preferred equity, equity, mezzanine

loans. We’ve transacted in more than 13

European countries,” confirms Fernandez.

Fernandez and rackind joined EQT on

1 January 2015 and are already analysing

opportunities to put capital to work. The

investment strategy will, says Fernandez, be

value-add and try to match EQT’s strategy in

Western Europe as closely as possible. Although

the platform will have a pan-European remit,

the aim is clear: to become a leading global

player and compete with the heavyweight US

PE houses.

Both Fernandez and rackind worked

at Hines, a global real estate investment,

development and management company. After

Hines, rackind joined Meyer Bergman before

moving on to Cambridge Place Investment

Management where he helped put together a

USD1.5 billion pan-European portfolio. In 2008,

they both met in London and decided to join

forces to take advantage of the global downturn.

“We felt there was going to be a huge amount

of capital going into core assets in a flight to

safety, in particular the cities of London and

New York. We wanted to take advantage of

that by using our hands-on development and

asset management experience, taking non-core

product, fixing it up to make it core and then

selling it into the more liquid market,” says

Fernandez.

Ultimately this led to the establishment of

Wainbridge with backing from two cornerstone

investors: Kyrill Pisarev and Mikhail Serdtsev,

who between them acquired 50 per cent of

Wainbridge. This enabled Fernandez and

rackind to raise a London Value Add fund that

went out and invested GBP170 million.

“We then established a mezzanine lending

fund: Wainbridge Special Situations. We sensed

an opportunity in the New York metropolitan

area where the market had turned around,

particularly for residential developments, and

there was absolutely no financing available.

We were doing land loans, bridge loans,

development loans, etc. That fund is still doing

very well. We also took on third-party projects,

taking over buildings from existing developers

and revamping them, doing all the asset

management.

“As we became more institutional – for

example we brought in Morgan Stanley

Alternative Investment Fund as a co-investor

in one project – our goal was to launch a pan-

European institutionally-backed investment

Building assetsJamesWilliamsinterviewsEQTPartnerswhohaveestablishedanewEuropeanrealestateplatformtofocusonLondonandtheNordics.



ReAl esTATe

This is what Fernandez means by identifying

the best transitional assets and applying hands-

on asset management expertise to turn them

around.

Aside from London and other parts of the

UK, the strategy will focus on the Nordics to

leverage the penetration that EQT already has

in that market. Other market opportunities

that look attractive in terms of generating

alpha over the medium term include France,

in particular Paris, Spain, Italy and to a lesser

extent Benelux.

Build to core strategy

Part of the strategy will be to search out

commercial real estate in the UK with say a 7

per cent secondary yield (compared to a 4 per

cent primary yield).

“To find those opportunities we would need

to look within Greater London, not central

London. rather than rely on the markets

for increased rental rates, we would work to

reposition the assets by physically improving

them, improving the leasing structure, etc. If we

can reduce the yield gap to primary by one per

cent or more we’ll make a healthy return on the

management platform. At the same time

our HNW investors weren’t as keen on

commercial (compared to residential) projects.

By 2014, because we wanted to focus on

raising institutional assets we split ways with

Wainbridge. We have kept the third-party asset

management mandates,” says Fernandez.

As Fernandez and rackind were about to

embark on the first round of capital raising for

a new fund, focusing on UK commercial real

estate, they were presented to EQT by Fredrik

Elwing the ex-managing director of Greenhill.

The chemistry worked and the result was a

partnership agreement to join EQT and build

out its real estate business line.

“We share the same values – they take

underperforming companies and make them

great and we, hopefully, do the same with real

estate assets!” says Fernandez with a hint of

humility.

To start off with, EQT plan on pursuing a

value-add strategy, which refers to the sourcing

of transitional assets and the re-positioning

of these assets to core products. Since 2008,

in cities such as London, there has been very

limited real estate development, creating

supply/demand imbalances in micro markets

i.e. markets within markets.

As Fernandez explains: “We spend a lot

of time looking at micro markets. These are

areas that are attractive because of changes in

occupier trends (we are seeing that in the TMT

sector for example), because of obsolescence

of stock. We look within those areas for

transitional assets: assets that need work to

re-position them, to micro-manage in order to

get the leasing up.

“Anything from tearing the building down

to giving it a new façade, installing new MEP

(mechanical, engineering, plumbing), maybe it’s

a vacant building that just needs an effective

marketing campaign. That’s what we refer to

as hands-on asset management. It helps to

differentiate us from many of our competitors

who rely on third-party operating partners.”

EQT will look for these transitional assets

across Western Europe and it’s fair to say that

Fernandez and rackind have got the track

record to make it work. Over the last two years

at Wainbridge, the team has transitioned 1.5

million square feet of office space in London,

managed 203 tenants, created 39 lettings,

conducted seven rent reviews, and been

involved in 378 lease events.

“We firmly believe in the absolute lack of supply in London’s office market and don’t anticipate interest rates going up anytime soon across Europe.”Edouard Fernandez, EQT Partners



ReAl esTATe

investment; this is what we refer to as

‘Build to Core’,” says Fernandez.

The strategy will focus exclusively

on commercial real estate. After all,

this is what Fernandez and rackind

are specialists in. Offices make up 40

per cent of all real estate investments

in Europe, followed by retail, which

makes up 23 per cent, and then other

asset classes; logistics and distribution,

hotels, etc. As far as residential

projects go, Fernandez said that they

would consider office to residential

conversions.

“We have done a lot of residential

development projects in our time but

it requires a dedicated, local team and

that’s not our primary focus right now.

To be clear, we’re not house builders.

We can imagine ourselves acquiring

portfolios of private rental sector

residential but we certainly won’t be

out there developing new speculative

residential projects,” confirms

Fernandez, who goes on to explain why

there is still reason to be bullish on

London.

“Firstly, it is the largest investment

market in the world and is therefore

the most liquid market. A lot of that

liquidity is in the core, core-plus

market. There are opportunities, not

necessarily in central London, but in

undersupplied sub-markets outside

of central London close to strategic

transport hubs, primarily in office

developments; these transitional asset

opportunities are what I referred to as

our ‘Build to Core’ strategy.

“Secondly, yields have dropped a bit

but the gap between secondary yields

and prime yields is still at historical

highs. The gap between bond rates and

rE yields is also still at historical highs.

We firmly believe in the absolute lack

of supply in London’s office market and

don’t anticipate interest rates going up

anytime soon across Europe.”

The signs are that investor interest

in real estate debt has ramped up

as they search for alternative yields.

According to a CBrE 2015 Investor

Intention’s Survey, 32 per cent of

respondents said they would be

pursuing real estate debt opportunities

in 2015. Over the last two years the

market has grown from EUr10 billion

to EUr49 billion. This number is likely

to continue to increase given that an

estimated EUr350 billion of debt is

set to mature over the next two years.

Good news for Fernandez, as it will

present a plethora of new assets to

pick up.

“Sovereign wealth funds, pension

funds and endowments are increasing

their weighting towards rE funds

in their portfolios so we think we’ll

continue to see more money coming

in to Europe, looking for the core

products that we are aiming to create.

We don’t think there’s going to be

show-stopping growth but we do feel

that the fundamentals look good for

the next few years, based on our

approach to identifying value-add

opportunities. You’re looking at a 2.5

per cent difference between prime and

secondary yields for office space across

Europe. The highest it’s ever reached is

3 per cent,” notes Fernandez.

Aside from picking up real estate

debt from banks as they continue

to deleverage, there will also be

opportunities to acquire buildings

outright. This is something that

Wainbridge has already done,

purchasing office buildings from Nama,

Lloyds and rBS. As Fernandez points

out: “If the building is in the hands of a

bank it has some issue that needs to be

addressed; the more complicated the

issue the better it is for us.”

Potential risks

Within some of the larger opportunistic

real estate groups there are still Irr

targets of 20 per cent or more – a

figure that Fernandez says seems to

have been set in stone many years ago

– but investors should be aware that

Europe is not a distressed continent.

Yes, there are structural weaknesses

in markets such as Spain and Italy

but it is not a pan-European issue. In

other words, to shoot for those types

of returns, the investments have to be

way out on the risk curve. Investors

are best advised to do their homework

and check what the fund components

are before diving in: a case of Caveat

Emptor.

“My sense is that the risk reward

balance is a little bit out of kilter.

There are some investment groups who

think they are taking less risk when

the opposite is true, versus those who

think they are going to achieve higher

returns when the opposite is true

because there aren’t enough distressed

opportunities.

“I don’t see too much geopolitical

risk in Europe right now. I don’t think

the Spanish or UK elections are going

to impact the real estate market much.

The idea of Greece exiting the euro is

not as great a risk as it was previously

and then there’s EU monetary policy.

The ECB has said it will do whatever

is necessary to encourage growth. We

don’t see them putting the brakes on

anytime soon so interest rates will

remain low for quite some time,”

opines Fernandez, adding that the only

other category of potential risk is the

unknown unknowns; that is, Black

Swan or tail-risk events that no-one

can predict.

Fernandez and rackind will be

taking EQT’s industrial approach to

building out the real estate platform

with the aim of ensuring its long-term

success.

“We create our own value and are

less reliant on the volatility of the

markets. We take a private equity

approach to real estate investing,” says

Fernandez in conclusion. n


Documents

April 2015 FOR INSTITUTIONAL INVESTORS & ASSET MANAGERS · 2019-12-17 · Clearbell’s Manish Chande on commercial property funds and their sudden attraction AlphaQ April 2015