Benedicte Gravrand, Opalesque Geneva for New Managers:
One New York-based hedge fund is successfully riding the trend towards emerging manager managed accounts by focusing on those managers who take the road less travelled.
Boothbay Fund Management has managed Boothbay Absolute Return Strategies, LP, a $239m multi-manager multi-strategy hedge fund, since July 2014. More than half the managers in this fund run a long/short strategy, and almost a third a quantitative strategy.
The fund is overseen by Ari Glass, founder and managing member, who previously served as COO at Intrepid Capital Management, a $2.5bn “Tiger Cub” hedge fund seeded by Soros Fund Management.
“Each of our portfolio manager trades on our balance sheet via a managed account, which affords us the transparency to analyse the correlations of daily returns and positions, and dynamically allocate capital and manage risk,” Glass explains to Opalesque. “An important principal of the model is that each of the underlying investment strategies has to be low beta and generate idiosyncratic alpha. The non-correlated return streams allow us to build a portfolio whose whole is materially greater than the sum of its parts.”
While applying a typical multi-strategy fund philosophy, the fund also implements an open architecture platform so as to avoid the adverse consequences of competing for talent with larger funds, says Frederick Richardson, head of business development. “By not always demanding exclusivity, we can attract top talent willing to run capital for Boothbay in a managed account.” The other area of focus for the fund is niche or capacity constrained strategies.
Allocations to managers range from $5m to $50m, depending on the strategy and its correlation to the portfolio.
The reason why Boothbay likes emerging managers is not only that they tend to generate better returns, he says. They also tend to stay away from crowds. “For example, smaller capitalisation names are much less efficient than large cap names, which big managers are forced to concentrate in for liquidity reasons. Because many of our portfolio managers are smaller, they can take larger positions in a smaller cap name without sacrificing liquidity. Given these stocks tend to be less owned/shorted by mega-funds, they are less subject to the crowding or unwinding risk that takes place every time there is an industry event and large managers de-lever. We saw this in Q1 2016.”
“There is also the advantage of emerging managers’ nimbleness, but the real benefit is that the greatest risk-adjusted opportunities often exist in smaller, less scalable ideas,” he adds. “So, we also like niche strategies as a result. Our goal is to look for places that the laws of efficient markets least apply, and build a portfolio with many of these strategies.”
Benefits for all
The fund’s solid underlying infrastructure is a direct benefit to investors, he explains, as the latter get exposure to emerging managers without taking the operational risk normally associated with direct investing.
As for managers, who are facing longer lead time due to the institutionalisation of the industry, they are increasingly willing to run managed accounts and offer creative fee structures, says Richardson. “We also notice that they are especially keen to partner with allocators who can provide them with intangibles such as business guidance.”
And Boothbay, in exchange for investing earlier than most traditional allocators, can set preferential terms and capacity rights with managers, Richardson adds. “We structure our relationships to minimise paying for beta – which should be almost free – and focus on rewarding managers who produce good risk-adjusted returns.”
In addition to that, a First-Loss platform is embedded in the fund’s umbrella: it is a structure where some managers take the first piece of risks, which gives Boothbay a positively skewed risk/reward ratio.
Avoiding crowds is the future
According to Glass, a great part of the hedge fund industry is getting much of their returns from beta, not from alpha, which he finds “worrisome” as hedge funds without the protection they are supposed to offer will be exposed when the market turns.
“To produce uncorrelated and superior returns, we think avoiding a ‘crowded’ hedge fund business model is just as important as avoiding crowded trades,” he says. “So, for the hedge fund managers who are not afraid to innovate, and risk looking different than what is easily comparable to ‘their peers’, we think the future is very bright. As such we are very optimistic that we will continue to build on our early success.”