A fundamental shift in how global institutions select and use hedge fund- of- funds in their portfolios is underway today.
No longer can hedge fund-of- funds remain static and expect to survive – especially given today’s ever changing market conditions, warns Rachel S. Minard, newly installed president and partner of San Francisco-based Cogo Wolf Asset Management.
“The toolkit or investment process manual that hedge fund of funds had traditionally used is no longer effective, given the adaptability one must have today,” she maintains. “In order to deliver alpha to clients, one must marry thematic top-down macro economic signals with bottom-up manager hedge fund selection.”
In short, says Minard, hedge funds-of- funds today must utilize original thought and “be adaptable to capitalize on market anomalies.”
In the funds-of-fund space, where nearly 80 percent of the funds are correlated with one another, Cogo Wolf Global Strategy Fund, the flagship of Cogo Wolf Asset Management, operates out of the box, and illustrates this trend. The fund has adopted a top-down, forward-looking thematic investment strategy, focusing on identifying shifts in the global economy and anticipating their long range investment implications. Importantly, unlike many rivals, it takes on no leverage at the FOF level and uses no or little leverage at the underlying hedge fund level.
The fund’s managing partners and co-CIOs, Giles Conway-Gordon, 67, and Christopher Wolf, 54, together have a 13-year track record at Cogo Wolf Asset Management. Gordon started the fund in 1995, and Cogo Wolf Global Strategy Fund was formally incepted in name in March 2006.
Since then, it has been ranked in the top 1 percent among global FOFs by virtue of its net annualized returns. Three-year net annualized returns places the fund eighth out of 921 global FOFs, and its five-year record CAR record ranks Cogo Wolf second out of 552 global FOFs, according to Bloomberg data.
Whereas many managers simply rely on past trends or an algorithmic approach, Cogo Wolf Global Strategy’s approach is not formula based. Gordon and Wolf don’t rely on correlations or projections. Nor do they necessarily focus on historical performance. Instead, they look at various industries, sectors, economies and investments they think will break out and be top performers in the next six to 18 months, and seek top fund money managers in those target areas.
This intuitive strategy allows them to get in early, and when everything goes right, give investors a steep investment performance advantage.
“We find investment management strategy that relies on past statistics and corrections to predict the future is like driving using only the rear view mirror, and, however sophisticated your dashboard is if the road starts to curving you’re likely to crash,” says Gordon. “This is particularly true now when the world financial and geopolitical scene is so turbulent.”
Adds Wolf: “The use of excessive leverage exacerbates this rearview mirror approach because if you’re going on that curve at 200 miles an hour the consequences are worse than if you’re going at 20 miles per hour. We believe the world economy is undergoing a fundamental secular shift, and fundamental economic growth is now shifting from the developed to the developing countries, and during this fundamental change new financial rules and relationships are formed.”
The managers seek to capitalize on inefficiencies in the market on the upside while protecting investor capital through strategic risk management. According to Gordon, the fund uses no leverage at the fund-of-funds level, and avoids excessive leverage in the underlying funds themselves. In addition, it is broadly diversified by asset class, geography, and managers. There are currently 36 underlying hedge funds with the fund itself.
The strategy has paid off, most recently in Africa. “As a result of adopting a China footprint theme, we followed China’s resource investments in Africa, looked at the underlying economies and equity markets by country, refined our theme, and then identified those superior hedge funds who exemplified that theme,” says Wolf. The funds used in Africa averaged around a 50 percent performance in 2007.
Not that everything always goes swimmingly. For example, the fund overstayed its welcome in certain emerging markets early this year. “We have now made appropriate changes in allocations,” says Gordon.
Despite a wobbly economy and perilous times for many hedge funds, Cogo Wolf Global Strategy has grown assets to just under $100 million within two years and appears on the cusp of substantial growth.
Growth is part of Minard’s new mandate. Formerly a partner and director of global marketing at hedge fund-of-funds manager Corbin Capital Partners in New York, she built AUM from $600 million to $4 billion from 2005 to 2008.
Whereas Cogo Wolf Global Strategy’s investor base has been primarily high net worth individuals and family offices, it is now moving into the institutional arena. “We are being much more judicious in the types of caliber of client we are seeking. We’re targeting all types of distribution channels, ensuring that we have a clear understanding of what clients will be positively impacted,” says Minard.