“It must be very tempting for funds of hedge fund managers in the good years to suggest that returns in the high teens are possible in all market environments. That is not true. They ought to be emphasising strong consistent returns for low levels of risk with preservation of capital. Equally, I get concerned when in down markets, fund of hedge funds are perhaps not delivering. If so, they do themselves a great disservice by not managing their funds of hedge fund strategies as well as they should. Hedge funds are meant to avoid losing capital when markets go down.”
Omam runs a range of multi-strategy funds called Spectrum, which are not funds of hedge funds but a proprietary managed account platform with 11 underlying hedge fund strategies (three of which are in-house). Mr Murray touts it as a more transparent alternative to funds of hedge funds which gives investors the opportunity to build a better risk-balanced portfolio.
“The greater transparency allows us to look through to the underlying investments on a day-to-day basis and adjust our allocation to the different pools of capital or the leverage we employ on a day-to-day basis. It gives us far better control of our risk budget for that kind of strategy.”
To gain the higher level of transparency, the underlying strategies must be liquid and priced daily. At present, the funds comprise equity market neutral and statistical arbitrage, long-short equity, fixed income and global asset allocation, including CTA and currency.
Cheaper option
Mr Murray claims that managed account platforms are also cheaper than funds of hedge funds. Omam’s multi-strategy fund levies an annual charge of 50 basis points plus a performance fee of 10 per cent over Libor which he says is “considerably less” than the fees charged by a funds of hedge funds.
Omam UK, which currently manages $10bn (€7.45bn), is not on a mission to amass huge amounts of assets under management. Rather it is seeking to win high-alpha absolute return mandates with the potential for generating a lot of fee income.
Most small-to mid-sized managers will tell you the same thing. So what makes Omam stand out from the crowd?
He says: “It is enormously competitive today and the one way we are looking to distinguish ourselves from the competition is through consistency. It is about delivering 4 per cent to 6 per cent outperformance year after year. And if I look at the weighted average percentile ranking of our long-only unit trusts – over one year we are 12th, over two years 10th and over three years 10th and over five years 16th – that to me spells consistency. If we can continue that we will be well-placed to win these high-alpha mandates.”
The multi-strategy fund is targeting cash plus 5 per cent on the ‘plain vanilla’ product and cash plus 10 per cent with the version which employs a little more leverage.
While Omam might feel it can see off competition from funds of hedge funds, the emergence of low-cost hedge fund replication strategies is perhaps a more serious challenge in the longer term.
Acknowledging that such products might appeal to some investors, Mr Murray maintains that hedge fund replication strategies “in no way diminish the appeal of true alpha generators, be they single strategy, multi-strategy or funds of funds”.
He adds that many hedge funds offer particular characteristics such as specific risk/return profiles or other distributional including non-linear characteristics, which makes them suitable for investors.
Omam, which manages $3bn of assets in hedge fund strategies, launched two new hedge fund products last year and has plans to launch at least three more in 2007.
Following the recruitment in January 2006 of a statistical arbitrage team – Paul Simpson and John Dow - from Millennium Capital Management, a European statistical arbitrage hedge fund was launched which closed recently with $300m. Steve Kelso and Paul Jones were poached from KBC Alternative Investments in June 2006 to launch a volatility arbitrage fund which, says Mr Murray, delivered 8 per cent in its first three months of operation.
“The volatility fund was a new area for us, as it involved using more complex derivatives instruments. On the back of that we have had to bring our operational platform and our risk management tools up to scratch.”
The above four staff form part of Omam’s quantitative strategies team.
A European investment team was also hired last November with a view to launching a European equity long-short hedge fund in 2007. Fund managers Graeme Gilchrist and Graham Forster were hired from Cambian Capital and Deutsche Asset Management respectively, while Dorothee Deck was previously a European equity analyst at Carlson Capital.
Furthermore, the firm intends to exploit its corporate bond investment capability by launching a credit hedge fund.
Old Mutual’s £873m (€1.28bn) AA-rated corporate bond fund posted a return of 19.66 per cent in the three years to the end of February, compared with an IMA UK corporate bond sector median return of 11.68 per cent.
A currency hedge fund is also planned. All of these strategies are currently being incubated with Old Mutual seed capital.
Mr Murray believes that over the last two years, investment consultants have gained a greater understanding of the risks inherent in hedge fund investing and how to manage them.
“Investors also are beginning to understand that a long-only equity mandate carries more risk that a multi-strategy hedge fund mandate which has, by comparison, bond levels of volatility.”
While developing a critical capability in hedge funds is a key business aim, he stresses that the long-only side is considered no less important and product gaps also remain to be filled.
“Today we have a very strong small-to mid-cap equity offering, a very strong UK income offering and it makes sense for us to round that out with an UK all-companies offering. We think such a long-only product would hold great appeal to the institutional market as well as to the retail market. This product would be offered on both a segregated account and pooled fund basis.”
Focusing on the UK
In the European institutional marketplace, Omam has been paying particular attention over the last two years to building up its UK book of business.
It is targeting pension funds with a number of specific products including global equity, global fixed income, the Spectrum multi-strategy funds and what is described as a “new-age managed fund” - a balanced fund combining allocations to equities, bonds and cash, with significant investments in property and hedge funds. This multi-asset fund,which has been running for about two and a half years has, says Mr Murray, been attracting a lot of interest in the UK without much investment yet.
Alluding to the challenges associated with trying to penetrate a crowded and highly competitive marketplace, Mr Murray likens the push into the UK institutional arena as “a journey begun which cannot be underestimated”.
But he adds: “On the fixed income side, we are well placed with a first class corporate bond offering. We also have a European high yield Dynamic Bond product which is beginning to get some serious traction in the retail space and that may well start to interest institutional investors.”
Describing fixed income as a “fascinating” asset class because it offers a growing range of diverse strategies, Mr Murray contends that investment managers are becoming more comfortable with the complex derivatives instruments available to closely manage the risk of these portfolios.
“The larger investment banks which have in-house pensions strategy groups have done a good job of educating institutional investors in the benefits of derivative instruments such as inflation-linked swaps. And new accounting regulations such as FRS17 are forcing pension funds to focus on their liabilities which in turn is making them consider the composition of their bond portfolios.
“I’d like to believe that hard lessons were learned at the start of the millennium and that liability-driven mandates, including portable alpha mandates, are here to stay. Such strategies do have a genuine place in the portfolio of any pension fund.”
Other new products are in the pipeline. The firm is currently developing tactical asset allocation (TAA) overlay and currency overlay strategies which are designed to appeal to institutions with large asset pools who need to diversify their assets globally and might wish to reduce unwanted risk exposure resulting from these investments.
“Besides helping to mitigate risk, overlays offer an opportunity to add uncorrelated alpha to most funds,” says Mr Murray.
Omam’s quantitative equity investment capability is hailed as the basis of products such as equity long-short, equity market-neutral, statistical arbitrage and volatility arbitrage.
Over time, Mr Murray maintains that quantitative and discretionary investment techniques will be used increasingly in-harness.
Leading the trend
“We believe that this trend is being led by the fund managers themselves as they seek to use a complete set of tools that will allow them the best opportunity to deliver alpha.”
He adds that ongoing research is a key part of the firm’s quantitative investment process. Omam outsources discrete research projects to selected, latter stage PhD students. Financing is provided in exchange for influence over the direction of the research conducted. This is said to offer Omam additional capability alongside its in-house research teams.
EOIN MURRAY: THE MAKING OF A CIO
2006: Appointed chief investment officer at Old Mutual Asset Managers UK
2004: Joins Old Mutual Asset Managers UK as head of quantitative strategies
2001-04: European head of quantitative management at Northern Trust Global Investments. Before this, he fulfilled a similar role at Deutsche Asset Management, prior to the acquisition of Deutsche's passive and enhanced index businesses by Northern Trust.
1999-2000: First Quadrant
1996-99: PanAgora Asset Management
1992-96: Wells Fargo Nikko Investment Advisors (now Barclays Global Investors) where he managed a range of strategies, including market neutral funds
1990-1996: Begins his investment career at Manufacturers Hanover Trust (now JP Morgan Chase)
2000: Completes his MBA at Warwick University
1986-1990: MA (Hons.) in Economics and Law from Edinburgh University
