It's been an eventful few years for fund of hedge funds International Asset Management (IAM). In February 2006 the firm was bought by ABN AMRO Asset Management, which saw a robust alternatives manager that could benefit from a global distribution platform, as well as offer investment-advisory services for ABN AMRO Alternative Investments' own range of SICAVs. As always with these acquisitions, it took some months to manage the synergies - and then in March 2007 Barclays declared its interest in the Dutch bank. From that point until the final, ill-fated acquisition by the RBS-Fortis-Santander consortium in October, it did not matter how autonomous IAM was: the story for investors was increasingly about ABN AMRO and ownership.
The corporate noise was becoming too much and, post-acquisition, the new entity's cluster of hedge fund operations meant that IAM was no longer filling a gap. Talks began with the bank's board; an MBO, and IAM returned to independence on 9 July 2008.
It was painful for the firm's AUM. Just over a fifth went to the majority Fortis-owned Cadogan Management in a coterie of SICAV advisory mandates, reducing IAM's AUM to $4.6bn (€3.4bn). Last year's performance (IAM's listed diversified fund of funds was down 19.6%) cannot have helped, but neither does it account for the full outflow, which now sees the firm managing around $2.6bn.
And yet IAM is no neophyte. It celebrated its 20th birthday in April; its co-founders Alan Djangoly, Anthony Forward and Albert Fuss were allocating to hedge funds in the 1980s and remain head of investments and executive directors, respectively; in 1996 its Alternative Investment Strategies became London's first listed fund of hedge funds; from being almost exclusively patronised by family offices it now manages 80% of its assets for institutional investors; it recently opened an office in Stockholm; and two big-name shareholders were brought onboard to support the MBO - Apax Partners co-founder Sir Ronald Cohen and the investment bank Jeffries Group.
"I think that we need to spend time getting our story out there, because what we've done has not necessarily been appreciated as much as it might have been," says CEO Morten Spenner. IAM's specialism is in tailoring portfolios of hedge funds within segregated accounts: strategies, exposures and liquidity are built to complement what clients are doing elsewhere in their portfolios, to isolate their hedge fund allocations from redemption risk, and to offer complete transparency and flexibility and customised reporting. While this did not fit particularly well with the first wave of pension-fund investment in hedge funds - when hedge funds were seen as an asset class and funds of funds as due-diligence machines for constructing standardised diversified portfolios - it is far better positioned for the coming wave of more discerning allocation. In some ways, it also explains why the ABN AMRO relationship never quite delivered.
"There was a lot of goodwill and effort expended on introducing us to potential clients across the world, but it was always difficult for the ABN AMRO sales people to truly understand the nuances of what we do and engage with those clients at the right level. That's not a reflection on that sales force - it's more a reflection of what we are trying to do: the way we work today is to have potential clients come in and talk to me, to the co-founders - that's the best way for them to get a good understanding of what we can do for them. Perhaps it was naïve to think that someone could sell that idea next to their US high yield or European large-caps."
As with all good tailors, however, personal service does not preclude a distinctive house style. IAM tilts towards liquid strategies, deeper markets and directionality and away from marking-to-model and arbitrage (currently as little as 5% of many clients' portfolios). In terms of risk/return, that has tended to translate into a more predictable, yet volatile, profile.
"Historically, we've been frequently asked, ‘Why is your volatility so high?'," says Spenner. "It's because we try to limit our tail risk and maintain good liquidity. But only a minority really respected that reality behind the numbers and a lot bought into the notion that you could get 12% returns from 3% vol. In general, investors were allocating to this area away from fixed income - which seems bizarre, with hindsight. Investors seem to be moving away from this continuous LIBOR-plus story with a renewed focus on futures, long/short equity, macro and long/short credit. And for us, it's a simpler story to tell, as well."
That story is implicit in the pooled funds IAM has launched in addition to its LSE-listed, diversified offering. The IAM Global Long/Short Equity Strategy fund, rolled out in 1995 and described as "an active equity substitute", generally eschews market-neutral funds for trading-oriented managers who vary their net exposure quite nimbly.
"It's always puzzled us that more investors don't utilise our long/short equity portfolio for their equity allocation, and I think it is partly because they have been thinking of hedge funds as an asset class," notes investment manager Sean Molony. "That confuses the decision because it is not always clear in some institutions whether hedge fund purchases should it be made by the CIO, the equity managers or the asset allocator."
This February, IAM launched its Trading fund, dedicated to one of the most volatile hedge fund sectors - managed futures (or CTAs). The research that led to this offering was aimed at optimising CTA allocations in clients' diversified portfolios in order to allow a bigger allocation to the strategy without the volatility eating up their risk budget.
"We found that by combining more shorter-term model managers with the ones we had tended to use in the past, together with pattern recognition and short-term trend reversal, we could maintain the returns but substantially reduce volatility from the high teens to single-digits," Molony explains. Last year the volatility of IAM's allocation to CTAs was 5% below the sector average, while returns were 5% above, he claims. Client portfolios average a 15% allocation to the sector.
This approach made delivery of the dedicated fund, allocating to 10-15 programmes selected from the hundreds IAM has due-diligenced over 14 years, feasible.
The timing is good - pension funds are taking note of this strategy, which they have previously saw as too volatile. CTAs offer lots of plusses: they are extremely liquid; despite the truisms about ‘black boxes' they are very transparent in terms of individual risk/return profiles and performance-predictability; they exhibit negative correlation with equities and bonds (and other hedge funds); and last year they bucked the market, finishing 2008 up 18%.
"I'm as cynical as you about the launch of all these funds of managed futures programmes," says Spenner. "We didn't want to answer the question, ‘Should you be investing in CTAs?' But if you've decided that you do want CTAs, this is the way we think you should do it. This is how we manage CTA exposure for our own accounts - a much lower-risk and more stable method than what we had before. Commercially it would have been much more interesting to launch this last summer, but we've taken our time to construct this. We see it as a long-term prospect and not something we are launching just because the strategies have been en vogue."
It is an important point, because CTAs can exhibit quite vicious mean-reversion and are therefore one of the worst strategies for those intent on chasing recent outperformance. While hedge funds in general are up 4% this year, CTAs have given back about 5% of last year's gains.
"Our view is that we are still in dislocated markets where trading strategies tend to do well; that there are still trends to capture; and that these programmes remain negatively correlated with equities," says Molony. "We expect gains to be lower than last year, but we still expect double digits."
It's a mood of optimism that pervades IAM at the moment. The firm clearly feels that it is both getting back to basics and making a fresh start, at a time when the hedge fund industry as a whole seems to be stirring with new life.
"Some of the managers that we've seen launching since the last months of 2008 are among the most talented to come onto the scene for a long time, and the great thing for us is that they're not launching with billions anymore, which means you get a lot of value from your investment," says Spenner. "Our job is to get out there and let people know that segregated accounts bring tangible benefits and are not more expensive - you need to spend more time on it, but it's time that is well rewarded, as the problems of 2008 demonstrated."