High five for largest hedge fund start-ups
Last year was a tough time to launch a hedge fund in Europe.
According to trade magazine EuroHedge, only 86 European offshore hedge funds launched in 2012, the lowest number of new funds since the data provider began tracking the industry in 2000.
Barriers to entry have risen: prime brokers say any new fund has to battle to raise capital, cope with more demands from investors and handle a higher cost of doing business driven by more regulation – factors that together are deterring launches. On top of this, last year managers also had the eurozone sovereign debt crisis to grapple with, making investors uncertain and risk-averse.
Despite the record low number of launches, those that did take off were bigger. The average size of new funds was more than $100 million, compared with less than $50 million 10 years ago, according to EuroHedge.
And the quality of new funds crossing the line is undoubtedly higher. Only the best launches are getting away and they are raising more when they start.
Here Financial News looks at the five hedge funds launched in 2012 that were the biggest by the end of the year. We are looking only at start-up funds, rather than new funds launched by existing managers.
The five biggest start-ups at the end of 2012 were Frere Hall Capital Management, Hengistbury Investment Partners, Naya Management, Stone Milliner Asset Management and Verrazzano Capital.
Of the five, two received seed or cornerstone investment. Naya received a ticket from Blackstone, which normally allocates between $100 million and $150 million to its seed investments, while Stone Milliner received roughly
$800 million from Louis Bacon’s Moore Capital, where the main portfolio managers used to work. Three of the five came from blue-chip hedge fund firms – Naya and Hengistbury’s founders were formerly partners at Chris Hohn’s The Children’s Investment Fund, while Stone Milliner spun out of Moore Capital. Verrazzano was set up by a former trader at Gartmore, traditionally a long-only house, while Frere Hall was launched by a former proprietary trader at Goldman Sachs.
Among the five, there are three long/short equity funds, one is a commodities strategy and one global macro fund. It is too early to assess which are long-term survivors but here Financial News looks at how they have fared so far.
• Frere Hall Capital Management Current AUM: $650 million
Taimur Hassan was a managing director at Goldman Sachs – one of the youngest of the class of 2010 managing directors – who ran its oil trading desk before leaving in December 2011 to set up Frere Hall, named after a building in Karachi, the city in Pakistan where he grew up. Hassan is joined on the investment team by Robert Zizza, an analyst. Damian Dwan, who used to be a partner at hedge fund Camargue Capital Management, is the firm’s chief operating officer.
Hassan trades the energy markets and his style is to structure relative value trades rather than making big directional calls. Frere Hall launched an energy hedge fund on July 1 and the strategy gained 8.75% in the remainder of 2012, according to an investor letter. This year through September the fund is up 0.96%, after a fall of 5.63% in September erased much of the year’s gains.
The drop in performance during September came from losses in oil positions, while there were small gains on natural gas directional and relative value positions, the letter said: "Crude oil markets gave back some of their recent strength in September on the back of a partial restoration of Libyan production, the aversion of an immediate military strike on Syria, optimism of a breakthrough in relations between the United States and Iran, and continued deterioration in refinery margins."
The portfolio has active positions in crude oil, natural gas, distillate and fuel oil markets. The main share class of the fund charges a 2% management fee and a 20% performance fee.
Hassan was named in the Financial News 40 under 40 Rising Stars of Hedge Funds in 2012 and 2013. A spokesman for Frere Hall confirmed the contents of the investor letter.
• Verrazzano Capital Management Current AUM: $530 million
Former Gartmore trader Guillaume Rambourg was joined by four other founding partners at Paris-based Verrazzano. On the investment team, Karim Moussalem, formerly co-head of Delta One equity trading for Goldman Sachs, is senior investment officer and Rambourg’s former Gartmore colleague Tomás Pintó is senior investment officer and head of research. Verrazzano’s head of business development is Tim Williams – who was the senior investment officer at UBS Alternative and Quantitative Investments – and chief operating officer is Murielle Maman, formerly founder and chief executive of Lyxor Asset Management. Rambourg’s former partner at Gartmore, Roger Guy, is a partner in the management company.
In March 2012, Verrazzano launched two European long/short hedge funds with a total of $280 million. The Verrazzano European Opportunities fund invests in 40 to 80 stocks, while the Verrazzano European Focus fund runs a more concentrated portfolio of 20 to 30 stocks and has higher leverage and higher gross exposure to the markets. There is 90% overlap between the two funds.
The funds launched amid a sell-off in the markets driven by concerns over the eurozone. Between March and May 2012, the Eurostoxx 50 index dropped 15.6%, while the Opportunities fund lost 3.3% and the Focus fund fell 5.8%. Performance of the two funds improved in the rest of 2012 and the opportunities fund ended the year up 1%, and the focus fund up 1.45%.
This year, the Verrazzano European Opportunities fund is up 7.22% through September, while the more concentrated Verrazzano European Focus fund is up 9.79% in the first nine months of this year.
The funds made money at the start of this year from positions in defensive stocks, before being stopped out of several positions in value stocks and those linked to peripheral Europe in March after concerns over Cyprus. Verrazzano went back into the market in April and over the summer made money from positions in banks, industrials and construction companies in peripheral Europe that it had been stopped out of earlier in the year. It used market sell-offs in June and, to a lesser extent, August to increase gross and net exposure to the markets and recycled long positions into growth stocks and companies that do not rely on economic growth to see earnings upgrades. Verrazzano believes that UK companies are starting to look attractive.
At the end of September, the Opportunities fund’s five biggest holdings were Barclays, Svenska Cellulosa Aktiebolaget, a Swedish basic materials company, Roche Holding, a consumer company, HSBC and AP Møller-Maersk, a Danish industrial company, according to its latest investor letter. Firm assets have grown to $530 million and Verrazzano plans to launch a long-only absolute return fund. The funds have had a strong October. This calendar year to October 18, the Opportunities fund is up 9.16%, while the Focus fund is up 13.04%.
A spokesman for Verrazzano confirmed the figures and the contents of the investor letter.
• Stone Milliner Asset Management Current AUM: $1.5 billion
A roughly $800 million ticket from Louis Bacon’s Moore Capital Management helped make Stone Milliner the biggest day-one launch of 2012, kicking off with about $1 billion. Stone Milliner chief investment officers Jens-Peter Stein and Kornelius Klobucar previously spent six years running money at Moore Capital.
The other two managing partners are senior portfolio manager Christopher Nicoll and Peter Murray, who has overall responsibility for business management. Murray was most recently co-head of global foreign exchange at Morgan Stanley. There are now about 30 on the team in total, based in London and Zug, Switzerland.
The Stone Milliner Macro fund’s returns have been split roughly 50/50 between emerging and developed markets, and typically 75% to 80% of the exposure is in FX and rates. There are a dozen people on the investment team.
The fund launched in January 2012, amid a trading environment characterised by risk-on/risk-off, with high correlations between markets and asset classes driven by fears over the future of the eurozone. Stone Milliner’s fund posted four negative months and four positive months, and was up about 1% by the end of August.
However, markets steadied after European Central Bank president Mario Draghi pledged in July that he would do "whatever it takes" to save the eurozone, and the fund capitalised on a better environment for fundamental investing to end its first year up 8.05%.
A lucrative trade for Stone Milliner since December, when Japanese Prime Minister Shinzo Abe came into power after Japan’s general election, has been short yen against long Japanese equities. The yen has weakened and Japanese equities have rallied on the back of "Abenomics", Abe’s aggressive fiscal and monetary stimuli to reignite the Japanese economy.
This calendar year, the fund is up 8.08% through September and firm assets have grown to over $1.5 billion.
According to Stone Milliner’s latest investor letter, "uncertainty in financial markets has increased notably". This is on the back of the Federal Reserve’s decision in September not to reduce its pace of bond purchasing, the US government shutdown and the debt ceiling debate, all of which "argue against large positions". As a result, the fund continues to run a reduced level of risk.
It is long the US dollar against the yen, and long the euro against the yen, the letter said. It thinks that Japanese equities should benefit from Abenomics gaining traction and so the fund owns Nikkei options and a "modest amount" of futures. In fixed income, the fund has structured some relative value themes, one of which is a belief that growth in Norway will outperform that of Sweden, according to the investor letter. It is also short UK fixed income in a variety of instruments and short the front end of the US yield curve through options.
• Hengistbury Investment Partners Current AUM: $1.35 billion
Hengistbury founder Stuart Powers previously spent seven years at Chris Hohn’s activist hedge fund, The Children’s Investment Fund, where he was a partner and senior analyst, latterly running a separate portfolio that was a sub-fund of the firm’s main hedge fund. He left TCI in January 2011 and launched a global long/short equity hedge fund at Hengistbury a year later. Hengistbury is named after a place on the Dorset coast where Powers used to go on holiday and after Hengist, the founder of Kent, where Powers is from.
There are seven other partners in the firm, including Jon Sharp, the chief operating officer, who was most recently a director in prime services origination at Barclays Capital; senior analysts David Fairweather, Daragh Horgan and Angelo Putignano; and Tyne Cameron, head of investor relations.
The fund has a core focus on Europe across companies in all industry sectors with a market capitalisation of $2 billion upwards. Its strategy is based on fundamental stock analysis that aims to identify substantial discrepancies between market price and intrinsic value. It holds about 20 long positions and 30 shorts.
The fund launched with $25 million and gained 23.34% in its first 12 months. It grew to $600 million in its first year and soft-closed to new investors on January 1, 2013. This year the fund continued to grow through performance, gaining 13.26% in the first nine months of the year. Combined with inflows from existing investors, this beefed up assets to a current size of $1.35 billion. The plan is to close the fund at year end at around $1.5 billion.
Since it launched the fund has run a consistent net exposure to the markets of 60% to 65%. Its overall exposure to cyclical stocks is almost zero. Performance has been driven by successful stock picks on the long side, while the short book has not cost very much despite equity markets rising both this year and last.
Most investors are in the ‘B’ share class, which imposes a two-year hard lock, charges a performance fee of 17.5% and a management fee that reduces as assets grow.
A spokeswoman for Hengistbury confirmed the figures.
• Naya Fund Current AUM: c.$1 billion
Naya was the second start-up from a former senior partner at Chris Hohn’s The Children’s Investment Fund to launch in 2012.
Masroor Siddiqui, who worked at TCI from July 2009 to October 2011 as a partner responsible for global equity and credit investments, teamed up with Bruce Emery, ex-head of European equities at Citadel, for a new hedge fund venture. Before TCI, Siddiqui founded and ran California-based hedge fund manager Canyon Partners’ European business in London.
In May, Siddiqui was named to the board of News Corp, parent company of Financial News.
At Naya, which is a Hindu word for a new beginning, Siddiqui is chief investment officer and Emery is director of research. Ian Wylie, who was previously chief executive at European long/short manager Theorema Asset Management, joined as chief operating officer. There are four other individual partners in the firm, according to filings at Companies House.
The Naya Fund, which focuses on equities but is opportunistically able to take positions in credit, launched in July 2012 with about $200 million, including a seed investment in the region of $100 million from Blackstone and money from friends and family.
The fund gained about 2% in the rest of 2012, according to a person familiar with the situation.
This year the fund has gained 16% net of fees through the end of September, according to two people familiar with the situation, and assets have grown to about $1 billion, one of the people said. The fund is open to investment on a selective basis. Naya declined to comment for this article.