Hedgeweek Interviews
“So far, so good”: Quant start-up TrueRisk Capital aims to make a splash with all-weather approach
Los Angeles-based TrueRisk Capital is a newly-established fully-systematic CTA manager which trades a range of algorithm-based options and futures strategies developed by co-founder and chief quant Rito Bhattacharyya over the course of almost nine years.
Having launched a separately managed account managing internal money in July, the firm is preparing to roll out its first strategy, the TrueRisk Market Volatility Fund, later this month.
TrueRisk represents the start of founder Bhattacharyya’s own direct management of client assets and application of his models, having earlier worked as a consultant for several hedge funds, either as a chief quant or head of quantitative research, as well as licensing models to more than a dozen asset managers globally.
In 2015, Bhattacharyya set up TrueRisk Labs, a data and machine learning signals vendor for investment managers. He is also a founding member and faculty member of WorldQuant University, the financial engineering educational programme established by former Millennium Management statistical arbitrage portfolio manager Igor Tulchinsky.
TrueRisk was launched in May with USD4 million of internal capital, around USD1 million of which is already up and running in a separately managed account that began trading in July.
Now, the firm is preparing to launch its main strategy, the TrueRisk Market Volatility Fund, later this month, with an initial USD2.5 million in assets. The volatility income strategy focuses predominantly on equities markets, though the model can also adapt to broader institutional investor interest through a fixed income version.
Meanwhile, the remaining USD500,000 of assets will be used to launch a separate managed account for a systematic US equity long/short strategy, to be rolled out before the end of the year. That strategy will focus on US publicly traded equities with a market cap of USD1 billion or more, using machine-learning algorithms that take company information and market sentiment information, social signals.
All-weather approach
The firm’s main TrueRisk Market Volatility Fund is built around three algorithm systems, and offers what CEO, CIO and co-founder Kaushik Saha describes as an “all-weather return stream” that trades across “more scenarios more robustly” than typical managed futures strategies.
Saha, who has more than 25 years’ investment experience, met Bhattacharyya at Hercules Investments, where he had led the design, implementation and positioning of the firm's liquid alternatives strategies.
Having started his career in 1997 within Freddie Mac’s portfolio group, building stochastic valuation models for the internal pricing valuation of mortgage purchases, Saha later held quant management roles at Barclays Global Investors, NewFleet Asset Management, and Black King Capital, where he had been co-founder and CIO.
“What's unique about this strategy is that it is made up of three separate algo systems,” Saha tells Hedgeweek.
Dubbed ‘Differential Evolution Optimisation’, the complex three-system algorithm combines to configure the option strikes and entry and exit parameters for the investment portfolio.
“Our strategies are quantitative, systematic, fully-automated, including trade strategy generation, allocation, risk management, even trade execution – we have both manual and automated options to implement trade executions,” he explains.
The first system implements a so-called ‘broken wing butterfly’ options trading model, harvesting a return premium within a definitive range around current index prices. A second system built around the ‘iron condor model’ – comprising one long and one short put option, two calls (one long and one short), and four strike prices – offers wider bounds, so that while the average return may be lower, it offers a wider range of trading opportunities it can remain profitable in.
“It also has a directional kicker in case the index gains some modest momentum in one direction or the other, and the local direction will introduce some alpha,” Saha says, adding that system two serves as a counterbalance to system one, with both systems being short volatility.
“What that means is it enters the trade configuration at a certain level of volatility measured in the VIX, and if volatility spikes after the trade is entered, then the trade will suffer from that volatility spike, and we’ll have less targeted gains to make as a result,” Saha says.
To address this, the strategy uses a third system, which implements symmetrical calendar spreads that offer positive vega and offsets any losses in systems one and two. If there is a sharp move in the index, coupled with a spike or rise in volatility, system three will kick in and help counterbalance systems one and two.
A viable alternative
Saha and TrueRisk’s chief operation officer Vishal Olson also discuss on some of the challenges and opportunities of launching a new strategy in the midst of the coronavirus pandemic, and reflect on the evolving investor sentiment towards quantitative funds.
Olson recalls how many fully-systematic so-called “black box” strategies had traditionally been frowned upon by institutional investors some 15 years back. But that cautious stance has shifted in recent years as managed futures strategies gathered momentum, he observes.
“Over the last decade, it has become obvious that the strategies that are more quantitative, or 100 per cent quantitative, and which remove the human element, or the discretionary element, from decision-making are much more viable than discretionary volatility strategies, especially during crisis moments or fat-tail events,” Olson tells Hedgeweek.
Prior to TrueRisk, Olson – who has some 15 years’ market experience – co-founded Holson Alternatives, a third-party marketer aimed at servicing, institutional investors and funds of funds, having earlier held a number of consultancy roles performing due diligence on CTAs, hedge funds, and funds of funds.
Red flags
He notes that certain discretionary short volatility strategies were rocked by the VIX “explosion” in February 2018, as well as the March 2020 market maelstrom at the outset of the Covid crisis, which saw US equities tumble some 35 per cent in a far shorter timeframe than ever before, later rebounding at equally-rapid speed.
“The strategies that have tended to survive and make it through those fat-tail risk events were either a hundred per cent quantitative or mostly quantitative,” Olson adds, while Saha suggests, that in his view, trend-following or equity volatility-based strategies with discretionary elements herald “all sorts of red flags”.
Noting how automated trading has made markets move faster than ever before, with assets and sectors snapping increasingly-closer to the edge, Saha draws an analogy between sharp pencils and broad brushes when discussing the relative merits of systematic versus discretionary investing.
“If you’re using a sharp pencil, you’re recomputing minute-by-minute, second-by-second, and arriving at precise numbers to make decisions on. But once you introduce a discretionary element, you’re talking more in terms of views and opinions, and you’re using a broad brush, instead of the sharp pencil,” he explains.
“Once that happens, you’re missing, say, two of the four decisions that you could have taken, because you’re happy with the two you have made, and you decide to forego the other two. Or two haven’t gone in your favour, and so the loss from those two trades is influencing your view on the next two trades and so you step away.”
The model is run at a leverage ratio that institutions are comfortable with, Saha says, adding that such institutionally-guided leverage allows the strategy to target returns averaging in the low-20s. The separately managed account – which has been in operation for just over a month – is already generating positive returns, largely due to volatility remaining range-bound, he adds.
“Some managers may often try and use up as much margin available to pump their returns while the going is good. Our systems are well-designed to extract the max out of these options,” he continues.
“Rising markets are a like a rubber band which can snap back, so similarly, when volatility gets too low, one has to be mindful that sudden shocks can cause volatility spikes that are higher since they are starting from a lower level.
“We haven't seen that in any appreciable way. We have our three systems, with the third system that will counterbalance those potential vol spikes, so we can breathe a bit easier. It’s been so far, so good.”
Like this article? Sign up to our free newsletter Related Topics Funds InvestmentsCboe Futures Exchange to list AMERIBOR Term-30 Futures on 13 September
Cboe Global Markets, a provider of global market infrastructure and tradable products, is to launch futures on the AMERIBOR (American Interbank Offered Rate) Term-30 interest rate benchmark.
The new futures are expected to be available for trading on Cboe Futures Exchange, LLC (CFE) on business date Monday, 13 September, 2021, subject to regulatory review.
The AMERIBOR Term-30 benchmark, disseminated by the American Financial Exchange (AFX), is designed for financial institutions in need of forward-looking short-term interest rates as the planned cessation of LIBOR approaches. The benchmark is designed to capture wholesale funding costs for American financial institutions over a thirty-day period at a specific moment in time.
AMERIBOR Term-30 futures (AMT1 futures) will be cash-settled and are designed to reflect market expectations of the level of the AMERIBOR Term-30 benchmark rate, which is used in the determination of the final settlement value of the applicable AMT1 futures contract. Cboe Futures Exchange plans to initially offer futures on the 30-day term rate, followed later this year by futures on the AMERIBOR Term-90 benchmark rate, subject to regulatory review.
The AMERIBOR Term-30 benchmark has a credit sensitive element and represents a forward-looking interest rate, making it comparable to One-Month LIBOR, but derived in a transparent and representative fashion and based upon actual financing transactions. As such, the benchmark is expected to serve as a "plug-in and play" replacement for One-Month LIBOR.
"We are pleased to further collaborate with AFX and provide market participants with the tools they need to help ease their transition away from LIBOR," says Michael Mollet, Vice President, Futures at Cboe Global Markets. "We expect market participants, especially banks who consider the AMERIBOR index representative of their true cost of funding, will find the new futures to be particularly well-suited to manage interest-rate risk on loans or execute interest-rate trading strategies."
Banks and other financial institutions may use AMT1 futures in connection with hedging their variable short-term funding costs and interest rate risk. Proprietary trading firms may use AMT1 futures in connection with hedging their exposure to other interest rate derivatives or to conduct trading strategies involving AMT1 futures on the one hand and other interest rate derivatives on the other hand, such as swaps based on the AMERIBOR Term-30.
"AMERIBOR Term-30 is the result of extensive research, testing, analysis and consensus-building to provide the marketplace with an innovative alternative to One-Month LIBOR," says Dr Richard Sandor, Chairman and CEO of the American Financial Exchange. "We are excited to further expand our suite of offerings with Cboe to include futures on the AMERIBOR Term-30 benchmark and to deliver more choices so that market participants can use the products that best suit their trading needs."
Like this article? Sign up to our free newsletter Author Profile Related Topics Markets Trading & ExecutionPGIM Fixed Income adds global investment strategist based in London
PGIM Fixed Income, a global asset manager offering active solutions across all fixed income markets with USD954 billion in assets under management, has hired Guillermo Felices as global investment strategist in London, effective immediately.
Felices will work under Gregory Peters, PGIM Fixed Income managing director and head of multi-sector and strategy.
PGIM Fixed Income is part of PGIM, the global investment management business of US-based Prudential Financial, Inc (PFI) (NYSE: PRU) and one of the world’s top 10 asset managers with more than USD1.5 trillion in assets under management.
Felices joins from BNP Paribas Asset Management where he was global head of investment strategy and a member of the multi-asset investment committee and helped oversee the firm’s multi-asset portfolio asset allocation. Previously he was the Head of Asset Allocation Research (Europe) at Barclays and before that a Senior Macro Strategist at Citi. He started his career at the Bank of England where he was a Senior Economist in his last role. He holds a PhD and an MA in Economics from New York University.
Peters says: “As our European client base continues to grow, PGIM Fixed Income is expanding our investment team with the local and regional expertise to navigate the European and global credit markets. Guillermo’s wealth of experience grounded in fundamental research and portfolio management will prove critical in identifying opportunities, managing risk, and driving alpha in the current low-rate environment.”
Like this article? Sign up to our free newsletter Author Profile Related Topics Moves & AppointmentsZEDRA appoints new Head of Funds for Guernsey
ZEDRA has appointed Damien Fitzgerald as Head of Funds for Guernsey. In the role, he will lead the firm’s fund solutions offering and will be supported by the recently appointed Head of Fund Operations, John Donnelly, an industry veteran with considerable experience in client service management, financial reporting and fund accounting.
Fitzgerald has accumulated a wealth of knowledge with 23 years of fund administration, corporate governance, accounting and audit experience, including 17 years in Guernsey’s financial services industry. Prior to joining ZEDRA, he was Head of Funds at another renowned fund services administrator in Guernsey, leading a team of 70 and chairing all of their Guernsey regulated boards. Previous experience also includes senior roles at several other Guernsey based administrators as well as KPMG in Guernsey and Deloitte in Ireland. Fitzgerald is a Fellow of the Chartered Accountants Ireland and holds a Diploma from the Institute of Directors.
The Guernsey fund team specialises in fund establishment and administration, company secretarial services and governance as well as financial accounting and NAV production. In Q4 2020, ZEDRA’s Guernsey Funds AUA reached GBP1.7 billion.
The funds team also supports the Guernsey Green Funds initiative which aims to provide greater access to green investments to end investors. As such, ZEDRA is currently assisting managers who wish to establish funds which qualify for the new green fund mark and plans to be one of the leading administrators in the green sector.
Wim Ritz, Global Head of ZEDRA Funds, says: “We are thrilled to have Damien join our team. His in-depth knowledge of the funds industry will help us further propel the firm’s growth strategy. As highlighted by our recent acquisition of the fund and corporate services arm of Banque Internationale in Luxembourg, ZEDRA’s ambition is to be recognised as a leading fund formation and administration provider globally.”
Fitzgerald, says: “ZEDRA is a successful and vibrant company that I am delighted to be joining, especially at a pivotal moment in the Guernsey funds industry with the implementation of the new rules for Private Investment Funds earlier this year, set to enhance the appeal of the island as a leading fund jurisdiction of choice.”
Eurex launches bitcoin ETN futures
European derivatives exchange Eurex is to launch bitcoin ETN futures, a new contract that offers clients access to the price of bitcoin in a regulated on-exchange and centrally cleared environment.
This offering will be the first regulated market in bitcoin-related derivatives in Europe.
Launch of the new contract is planned for 13 September. The futures contract is based on the BTCetc Bitcoin Exchange Traded Crypto (ISIN: DE000A27Z304), which is listed on the Frankfurt Stock Exchange and has been among the most heavily traded ETF/ETN contracts on Xetra since its start in June 2020. The bitcoin ETN was equivalent to 1/1000th of a Bitcoin at launch and is fully backed by and redeemable in bitcoin. The new futures contract will be traded in euro and physically delivered in bitcoin ETNs.
This set-up allows investors to track the price development of Bitcoins in a fully regulated on-exchange environment and based on a transparent price discovery of the underlying ETN. Both the underlying ETN, as well as the futures, trade, clear and settle on Deutsche Börse Group’s proven infrastructure. Bitcoin ETN futures are centrally cleared like any other derivatives traded on Eurex. Eurex’s standard clearing, netting, and risk management processes thereby come into effect, mitigating counterparty risk and reducing operational costs for market participants.
Randolf Roth, Member of the Eurex Executive Board, says: “There is significant demand from institutional investors to gain Bitcoin exposure in a secure and regulated environment. We are pleased to be the first regulated exchange to offer this innovative contract. The new Bitcoin ETN futures enable investors to trade and hedge Bitcoin within Eurex’s proven trading and clearing infrastructure without the need to turn to unregulated crypto venues or set up a separate infrastructure, such as a crypto wallet. It is the logical extension of the ETN that already trades very successfully on Xetra.”
Like this article? Sign up to our free newsletter Author Profile Related Topics Digital AssetsEnergy hedge fund Westbeck’s momentum halted, as rising Covid cases send oil equities into retreat
Energy-focused hedge fund manager Westbeck Capital Management’s flagship strategy has suffered its first monthly loss in eight months, after surging coronavirus rates in China, Europe and North America dented oil markets – but the fund remains up more than 70 per cent since the start of the year.
The Westbeck Energy Opportunity Fund – a long/short directional hedge fund strategy which trades a mix of oil equities, futures and options – fell 5.3 per cent in July. By comparison, the SPDR S&P Oil & Gas Exploration & Production ETF (XOP), which tracks oil services companies, lost 14.4 per cent in July, while and Brent (total return) gained 2.1 per cent.
The USD230 million manager – which is led by co-founders Jean-Louis Le Mee, CIO, and Will Smith, CEO and deputy CIO – has profited from a resolutely bullish stance on oil for much of this year. The Energy Opportunity Fund is up 70.8 per cent year-to-date, as prices rebounded towards the mid-USD70s earlier this summer on the back of the anticipated reopening of global economies.
But July proved “one of the biggest dislocations on record", they said, noting a “sharp pull-back” in energy equities against positive performances in crude oil and natural gas prices.
The strategy remains down so far in August, Westbeck managers said this week, with crude oil prices having now fallen some 10 per cent, which also knocked oil equities: the XOP tumbled 24 per cent and the VanEck Vectors Oil Services ETF (OIH) fell 30 per cent from recent highs.
Now, the firm has “reduced risk further with our drawdown limit in mind” but ultimately remains constructive on the fundamental oil market outlook.
“While Covid demand losses in Asia are now in line with the potential loss we were estimating last month (~1m barrels a day), we believe these losses are likely to be short-lived and have been partly offset by upside demand surprises in Europe & India and disappointing supply,” Westbeck wrote in a strategy update.
They said the Delta variant wave has had a bigger impact on market psychology and price action than expected, with Covid news flow “worse than anticipated”, noting rising hospitalisation rates in the US and evidence in Israel suggesting the need for booster shots.
“But for all these negative developments, the Covid demand hit to oil demand is still essentially on par with our estimate last month,” the London-based manager observed.
“We maintain that this summer sell-off is at odds with strong fundamentals and could be a big buying opportunity. Brent prices moving to the USD80s is still in the cards before year-end, in our view.”
Like this article? Sign up to our free newsletter Related Topics Oil Results & performance FundsAlternative Fund Advisors partners with UMB Fund Services
UMB Fund Services (UMBFS), a subsidiary of UMB Financial Corporation (Nasdaq: UMBF), has been selected to provide services to the AFA Multi-Manager Credit Fund—Alternative Fund Advisors' (AFA) first registered closed-end interval fund.
UMBFS will provide transfer agency, fund accounting, tax reporting and fund administration for AFA’s fund, while UMB Bank will provide custody services.
“We are pleased to provide a suite of services to support Alternative Fund Advisors‘ first registered closed-end interval fund,” says Maureen Quill, executive vice president, executive director of registered funds at UMBFS. “In addition to accessing our award-winning fund administration and custody services, Alternative Fund Advisors will be able to take full advantage of our high-touch client service as they continue to grow and evolve their product.”
Alternative Fund Advisors, founded in 2020, was launched with the purpose of offering institutional-quality private investment strategies in a convenient interval fund format to RIAs, family offices, and wealth advisors at private banks.
“From the beginning of our partnership, UMB Fund Services has demonstrated their steadfast commitment to client service by helping us through the challenges associated with launching a closed-end interval fund,” says Marco Hanig, managing and founding principal, CEO at AFA. “We are confident that UMB Fund Services is the right partner to have in our corner for the AFA Multi-Manager Credit Fund.”
This announcement follows UMBFS’ recent selection by Hamilton Lane to provide administration, fund accounting and custody services to certain registered and private funds. UMBFS was also recently chosen to provide services to Bow River Capital’s Evergreen Fund, following its conversion from a private equity to a registered closed-end interval fund.
UMBFS was named Best Interval Fund Administrator in the 2021 Fund Intelligence Operations and Services Awards. In 2020, the Mutual Fund Service Guide ranked UMBFS as the top transfer agency for US registered closed-end funds based on the number of accounts serviced. Private Equity Wire also recognised UMBFS in 2020 as Best Fund Administrator–Technology, while UMB Bank was voted as Best Custodian in 2019.
UMBFS is a subsidiary of UMB Financial Corporation, offering a complete line of products and services to the fund industry, including administration, fund accounting, tax, investor services and transfer agency, distribution* and custody.
Whistleblower advocates argue 'related action' rule has 'chilling effect' on SEC whistleblowers
Whistleblower lawyers from Kohn, Kohn & Colapinto and the National Whistleblower Center have submitted comments for a proposed rule change to the SEC Whistleblower Program. The final vote on the rules is set for September 2021.
The comments address several alarming amendments passed in September 2020 that could be harmful to the highly successful Whistleblower Program, which has issued almost USD1 billion in awards to whistleblowers since 2012.
The “related action” rule amendment was the focus of the letter. This rule change directly impacts the amount SEC whistleblowers can receive in awards. In some cases, it creates a chilling effect by using ineffective reward laws to deny payouts under the Dodd Frank Act.
Because the "related action" rule permits the Commission to deny paying awards in proceedings where the whistleblower earns an award from another agency, the whistleblower lawyers argue it undermines the Dodd Frank Act.
On 2 August, 2021, SEC Chair Gary Gensler released a statement regarding the possibility of the Commission revising the proposed rules.
“In September 2020, the Commission adopted amendments to the SEC’s whistleblower program rules,” Gensler says in the statement. “Various members of the whistleblower community, as well as Commissioners Lee and Crenshaw, have expressed concern that two of these amendments could discourage whistleblowers from coming forward.
“I have directed the staff to prepare for the Commission’s consideration later this year potential revisions to these two rules that would address the concerns that these recent amendments would discourage whistleblowers from coming forward.”
MakerDAO partners with JST Capital to provide on-chain securitisation for institutional investors
MakerDAO's Real-World Finance Core Unit has partnered with JST Capital, a financial services firm specialising in the digital assets market, to bring on-chain securitisation to institutional investors.
JST and MakerDAO will be working together to develop robust frameworks for bringing real-world assets on-chain.
They will also look to improve legal structures, the smart contract platform, and custody and settlement processes to allow established asset-backed participants to feel comfortable with decentralised finance.
Like this article? Sign up to our free newsletter Related Topics Digital AssetsEU’s SFDR sustainability framework remains a “work in progress” for many fund managers
The implementation of ESG metrics for regulated funds under the EU’s sustainability-focused SFDR framework remains a “work in progress” for many hedge funds and other asset managers, according to fund structuring and governance service provider Waystone.
Waystone, which formally launched earlier this year following a merger between DMS, MontLake and MDO, partners with institutional investors, investment funds and asset managers, and supports funds with regulatory governance and structuring requirements across multiple jurisdictions.
“We work with all types of institutional clients who have increasingly complex needs and look to provide bespoke and tailored solutions, and as a group we work very closely with our asset managers in structuring hedge funds, no matter where their investors are based and what their needs are,” Vanora Madigan, executive director, told Hedgeweek this week.
With sustainability investing and environmental, social and governance (ESG) indicators gaining momentum across the global hedge fund and asset management spectrum in recent times, ESG metrics have been a key area of focus for Waystone this year.
Madigan observed how the implementation of the EU’s Sustainable Finance Disclosure Regulation (SFDR) – which seeks to further clarify for end-investors the sustainability credentials of all regulated funds within the bloc’s scope, proved a “huge exercise” for the industry ahead of its March 2021 implementation date.
“A lot of our clients are on different journeys when it comes to integrating sustainability as part of their investment decision-making process,” she said. “It’s a work in progress and there is still a lot more that will need to be done in terms of fund documentation and managers becoming compliant, with SFDR Level 2 requirements and the Taxonomy Regulation to be implemented, but that journey has begun for the industry.”
With funds classified as either article 8 (‘promote ESG characteristics’) or article 9 (‘have ESG as an explicit objective’) under the framework, Waystone worked closely with managers in terms was required ahead of the March implementation date.
“A lot of our role there was about educating clients, particularly non-European clients who might not be so familiar with the European requirements – for example, evaluating and considering the strategy type, what they were looking to achieve, whether it was an ESG fund or not, and assisting them with making that classification for the fund, and what the integration of sustainability risk would look like for them in order to become an ESG fund going forward,” she added.
“What we are seeing now in our pipeline for fund launches is more ESG funds, article 8 and article 9 types funds, being launched than previously.”
Now serving assets of more than USD1 trillion, Waystone has more than 20 years’ experience in providing institutional governance, risk and compliance services to the asset management industry globally.
In July, the firm received significant investment from Montagu Private Equity, a leading European private equity firm, to accelerate its global growth strategy.
“What we’re seeing, not just from our hedge fund clients but across the asset management industry, is that clients want a comprehensive regulatory solution across all core markets and domiciles,” Madigan said.
“Rather than go to five or six outsourcing partners and trying to manage those relationships, managers want a provider which has multiple regulatory licenses, across MiFID, UCITS and AIFMD, with experienced management teams to be able to be that one-stop-shop fund provider with the required infrastructure and architecture.”
She added: “There is a huge growth in the third-party management company sector. We see over the next few years a lot of consolidation in the market in terms of asset managers deciding whether to continue to run proprietary ManCos internally or outsource to a third party management solution, and large part of that is the ability to support regulated funds and increasing regulation coming down the tracks.”
Meanwhile Paddy Governey, head of management company services, said that for hedge funds and other asset managers entering a regulated domicile, understanding the expectations of the regulator remains key.
“Certainly in Ireland and in Luxembourg, there are costs involved, and those costs are inescapable,” Governey said. “We try to keep those costs as low as possible and to establish robust solutions. We share the knowledge we have built over the last 20 years with managers to allow them to make informed decisions.”
Like this article? Sign up to our free newsletter Related Topics ESG & Responsible Investing Services Compliance OutsourcingBaton Systems completes connection to ICE Clear Europe
Baton Systems (Baton) has completed connecting to Intercontinental Exchange (ICE), a global provider of data, technology, and market infrastructure, making ICE Clear Europe the fifth major global CCP available on the Baton network.
All FCMs using Baton will now be able to automate and optimise collateral holdings and expedite the movement of cash and securities with the CCPs of greatest strategic importance to their business. These firms include the world’s largest financial institutions, responsible for managing 43 per cent of the funds held by global CCPs.
Citi recently became the first FCM to connect to ICE Clear Europe and benefit from the extended CCP network.
The Baton network is trusted to facilitate the movement of billions of dollars every day, connecting the world’s largest exchange operators, FCMs, custodians and banks. Using Baton for automated collateral management allows market participants to access CCP account balances and acceptable collateral lists on-demand and view all assets deposited at external custody banks and CCPs. FCMs can also be automatically alerted to changes and introduce zero-friction workflows to optimise allocation and accelerate productivity by instructing multiple cash and securities movements via the Baton interface.
Mariam Rafi, Managing Director, Americas head of Clearing and FXPB and Global head of Financial Resource Management, Futures, Clearing and FXPB, Citi said “With Baton we have been able to accelerate our innovation agenda and drive efficiencies throughout our entire clearing process. Our Collateral Management team can now access information in real-time and dynamically manage our inventory of eligible collateral across the network of CCPs we interact with the most, which enables us to better serve our clients.”
J Christopher Giancarlo, Senior Advisor to Baton and former Chairman of the United States Commodity Futures Trading Commission (CFTC), says: “What we are now seeing is a real shift in the collateral management landscape. The world’s largest FCMs are connecting directly with the world’s largest CCPs - this means that for the first time in history it will be possible for a significant proportion of the total collateral held with CCPs globally to be automatically optimised.” adding “As the network expands the benefits derived by all participants are only likely to increase. This presents huge potential for the industry as a whole to eliminate unnecessary risks.”
“We are always focused on how we can help our customers bring efficiencies to their processes,” says Chris Edmonds, Global Head of Clearing and Risk at ICE. “With Baton completing a connection to the ICE Collateral API, our clearing members can further optimize their collateral and margin management processes. We are now facilitating additional ICE CCPs with Baton, so we can assist more of our clearing members globally across the numerous asset classes we clear.”
ICE Clear Europe is the first member of the ICE Group to go-live on the Baton platform. Baton is now working on a structured roll-out plan that should see ICE Clear US and ICE Clear Credit connected in coming months.
Tucker Dona, Head of Business Development and Client Success at Baton Systems, adds: “The market coverage that’s now possible via the Baton network is remarkable - as is the speed that we can bring new participants on-board. We can now get new clearing firms live on the platform, with full access to our extended CCP network, in a matter of weeks.”
Like this article? Sign up to our free newsletter Related Topics Trading & ExecutionMatrixport makes senior hires
Matrixport, Asia’s fastest growing digital assets financial services platform, has expanded its management team with recent appointments of Justin Buitendam and Omid Zadeh as Directors of Business Development & Sales.
These senior hires are part of a wider talent acquisition programme to scale-up capabilities in support of Matrixport’s global expansion.
Based in Australia, Buitendam is a senior addition to the business development team in Asia, while Zadeh will lead business development in EMEA, based in the United Kingdom.
Having held senior trading and portfolio management roles with companies including Macquarie Bank, Transmarket Group, RKR Capital and Refco, Buitendam has over two decades of derivatives experience. He brings with him a wealth of experience driving business development and will collaborate across Matrixport’s global network to shape business development strategy and engagements.
With over 15 years of experience in electronic trading and multi-asset sales across FX, equities, fixed income and futures, and options derivatives, Zadeh has held senior sales positions at ICAP and the London Stock Exchange and will drive Matrixport’s institutional client strategy and engagement in EMEA.
John Ge, Co-Founder & Chief Executive Officer, Matrixport, says: “We are excited to welcome Justin and Omid. Strengthening our international management bench strength is key as we deliver on our vision of being the one-stop digital assets platform of choice. With their combined experience, they will play important roles in onboarding the next global wave of cryptocurrency users.”
Following its successful Series C fundraising round and a valuation of over USD1 billion, Matrixport plans to continue its global expansion and to secure licenses to operate in more jurisdictions. The company’s exponential growth has been driven by robust technology capabilities and innovative product offerings, such as the world’s first crypto dual currency product.
Most recently, Matrixport launched its “Lite” version interface on the Matrixport App that is aimed at enhancing the customer experience for those who have recently embarked on their crypto investing journey.
Global Fund Management launches new mixed asset arbitrage fund
Global Fund Management, the asset management arm of the GDA Group, has launched its latest venture, the Avalon Fund. The fund is being launched by 12 Peers Capital, in partnership with GDA Capital, to provide a mixed asset arbitrage vehicle offering short and long exposure into digital assets, equities, and fixed income products.
“Our mission is to create long-term value for our investors through the identification of digital asset strategies that generate alpha, while also limiting potential downside by generating yields from traditional market exposure like equities and bonds," says GDA Group COO Zachary Friedman.
“To successfully manage and grow investment capital in the marketplace of today, a Fund Manager needs to have proven diversified strategies and asset allocations. By partnering with GDA we further strengthen our ability to invest confidently in the digital asset sector,” says Gord Ferguson, 12 Peer Capital CEO and Managing Director of the Avalon Fund.
The mixed-asset investment thesis from the Avalon Fund includes decentralised assets and mining infrastructure assets, equities, and fixed income products such as options and derivatives. This asset allocation gives the Avalon Fund strategic positioning to maximise short-term market opportunities while insulating shareholders from macro volatility. The fund has engaged Circle Investment Support Services (USD) LLC as the fund administrator, Northern Trust as the custodian, O’Neal Webster as the legal counsel and Deloitte & Touche as the auditor.
Asset management at The Avalon Multi-Asset Strategy Fund, Ltd is carried out by a highly specialised and well-equipped group of 10 directors, analysts, and researchers including Gord Ferguson, who brings a significant background with alternative asset investments, and David Shafrir, Executive Chairman of the GDA Group.
“Launching Avalon is the culmination of months of hard work, and brings the GDA Group one step closer to our long-term goal of creating stronger institutional onramps that make digital assets more accessible and desirable to the traditional investment community. Avalon, and all of Global Fund Management’s upcoming investment products will offer more sophisticated exposure into one of the best performing asset classes of the last decade,” says David Shafrir, Executive Chairman of The GDA Group and Director of the Avalon Fund.
Like this article? Sign up to our free newsletter Related Topics Funds Launches & FundraisingThe “new normal”: How virtual conferencing has optimised investor due diligence during Covid-19
The “fluidity” of virtual conferencing has proved a “silver lining” during the pandemic, optimising allocator time during the investor due diligence process, according to new research by alternatives-focused software-as-a-service and data management company Vidrio Financial.
In a new market commentary, Mazen Jabban, founder and CEO of Vidrio Financial, examined the sweeping changes and far-reaching impact of virtual manager meetings on hedge fund manager-investor relationships over the course of the Covid-19 pandemic.
New Vidrio Financial research shows 100 per cent of those surveyed expect a transition to a hybrid mix of virtual and in-person meetings – the so-called “new normal” – when it comes to the due diligence and asset allocation process, with one manager not expecting return to in-person due diligence meetings until 2022.
The firm’s latest ‘Vidrio Views’ monthly market survey of global allocators and LPs – collectively representing more than USD100 billion in alternatives assets under management – explored how virtual manager conferencing is shaping allocator views 15 months into the pandemic, gauging perspectives on the allocation process as well as the improved cost and time efficiencies resulting from reductions in meetings and travel expenses.
Vidrio – which supports institutional allocators deploying assets primarily to hedge funds, managed accounts, long only, private equity, and other alternative asset classes – sees virtual meetings as representing a more efficient way to assess managers than had been pre-pandemic.
“We’ve always recommended that allocators try to do as much research, analysis and preparation before any onsite due diligence visit to ensure onsite time is optimised,” Jabban said, noting that the “fluidity” of remote meetings has proved a “silver lining” during Covid, when measured against the extensive planning and organisation of travel and accommodation required for multi-manager trips during pre-Covid times.
“While there is certainly great value to kicking the tires on-site and making eye contact in-person with a manager, the trade-off that has come through the forced change to virtual is a more efficient use of time and resources, something that can be a precious commodity and more beneficial for more financially aware investment plans like public pensions.”
Underlining the degree to which virtual conferencing has penetrated manager-investor relationships, the research indicated almost three-quarters of allocators have now invested with new managers without meeting in person, while just 29 per cent had generally made allocations only to existing managers during the pandemic.
Elsewhere, Vidrio’s August survey found that almost two-thirds – 62.5 per cent – said they had “not really” changed the pace and speed of allocations to new managers despite Covid-19. Meanwhile, 37.5 per cent have seen “no” difference in the pace and speed of their allocation programs pre- or post-Covid.
Jabban said: “What seems to come across is a level of confidence with allocators able to make selections without meeting in person, which was a far cry from early 2020 when the pandemic hit and many new managers lagged on the fundraising front for the good part of the year as allocators were reticent to pull the trigger or review their investment guidelines and allow for new manager selections virtually.”
Like this article? Sign up to our free newsletter Related Topics Coronavirus The New Normal Technology & software solutionsHow pioneering hedge fund Sancus Capital has stayed at the cutting edge of credit investing
Launched in the immediate aftermath of the Global Financial Crisis, pioneering credit-focused hedge fund manager Sancus Capital Management has built a formidable decade-plus track record in the market, and more recently broadened its focus into CLO management.
Established in 2009 by former Goldman Sachs and JP Morgan credit derivatives specialist Olga Chernova, Sancus today has approximately USD550 million in assets under management in total, split between its flagship Sancus Capital Select Master Fund, managed accounts and its newly-launched CLO management business.
The flagship hedge fund strategy trades across the structured credit spectrum in a broad range of asset classes and instruments, using a mix of long/short, relative value and event driven investment approaches.
Specifically, it looks to invest nimbly across North American and European markets, taking a fundamental approach to identify inefficiencies and other asymmetric opportunities within deal structures.
The firm – which has offices in Los Angeles and New York – has a flexible investment mandate, so “technically we can go all the way up to the top of the capital structure”, managing partner and chief investment officer Chernova tells Hedgeweek.
“When we first started, we were doing a lot of credit defaults swaps, CDS and CDX indices, bonds, and loans,” she recalls of the fund’s origins. “As some of those derivative products became less liquid, we gradually migrated to cash assets and CLOs.”
While the fund has traded higher-rated and senior tranches, its double-digit return target means it typically gravitates towards the high-yield, junior mezzanine, and equity classes further down the capital structure.
Evolution
Chernova – who has traded a range of structured credit instruments including single name CDS, CDX indices, tranches and options for both buy-side and sell-side firms – started her career as a credit derivatives trader at Goldman Sachs in 1999. She later became head of the bank’s US credit correlation business, developing its index and bespoke high yield correlation trading platform.
“The early 2000s saw a big evolution in credit products,” Chernova recalls. “There were new products, new indices, options, synthetic CDOs. While I started my career in fundamental trading very quickly took me more towards the structured side.”
Running Goldman’s correlation and index trading in the US, Chernova – who came to the US aged 16 as the Soviet Union was breaking up – saw the ease with which synthetic deals could be put together, which in turn helped the sector grow in the early 2000s.
In 2006, she moved to the buyside, becoming managing director and head of correlation and index trading at Dillon Read Capital Management, focusing predominantly on liquid credit. She later joined JP Morgan’s proprietary trading desk, where she was a managing director and head of North American credit and structured credit until 2009 when she left to set up Sancus.
“We were one of the few prop desks that made money during the crises,” she says of her time at JP Morgan. “That’s what allowed me to launch Sancus in 2009.”
‘Radical change’
Chernova says the collateralised loan obligations sector has undergone a “very radical change” in terms of investor appetite over the past decade, with a whole host of institutional investors and pension funds returning in the years since the 2008 Global Financial Crisis, when large parts of the structured credit universe – mainly mortgage-backed securities – were blamed for the turmoil.
Since launching in the latter half of 2009 in the aftermath of the crash, Sancus’s flagship strategy has built an impressive track record. In its first full year of trading, the fund was up more than 10 per cent, and while the European sovereign debt crisis of 2011 left it nursing a 5 per cent annual loss, it has since rebounded, scoring several annual double-digit gains.
More recently, structured credit has held its own during the Covid-19 pandemic, drawing further investor interest. Following an initial sell-off during the March 2020 maelstrom, CLOs quickly rebounded, and their recovery from the latter half of last year into 2021 has helped drive Sancus’s year-to-date returns towards the mid-teens territory.
“With the asset class having done so well, it’s attracting new capital,” Chernova says. “People are looking at it, new players are coming in, which has helped tighten some of the CLO equity spreads and drive prices up.”
In the prevailing investment environment, she sees recent concerns surrounding inflation as helping to further fuel allocator demand for floating-rate asset classes, such as loans and CLOs.
“CLOs are a floating rate asset class, and one of the things people are afraid the most of right now is inflation,” she observes.
“The asset class has also performed very well throughout Covid, despite the doom and gloom predictions. This is all driving interest in credit and floating rate credit, which is leveraged loans and CLOs.”
On current market opportunities, she adds: “We often go back and forth between the equity and the mezzanine. If you look historically, you probably have done better in the BB tranches. When market sells off, the BBs sell-off significantly. They also rally a lot faster. So there’s an interesting trading opportunity in BBs.
“If you look at where BBs are today – at 600-700 spread over Libor – it’s significantly wider versus corporates. On a relative value basis, they are attractive, but at that level we start to prefer the CLO equity more. So whereas last year we were bigger fans of the mezzanine, this year we are leaning towards the bottom tranche.”
Pioneering
As a CLO equity investor, Sancus is also known for pioneering a novel feature in CLOs called an applicable margin reset (AMR). This mechanism provides a method for refinancing CLOs electronically without having to go to the new issuance market, which helps reduce costs compared to traditional refinancings.
“When we started to look at CLO equity back in 2014, we felt there had to be a better way to refinance. Why does there have to be a new issuance process if all you want to do is lower the coupons on debt?,” she says of the process, which avoids the lengthy process of engaging underwriters, legal counsel and other parties in structuring, offering and rating new issuance notes.
To date, Sancus has issued and invested more than USD200 million of CLO equity using this AMR feature.
“Originally, we were among the first ones doing it, but there have since been some transactions printed by other investors using this feature, with around USD6.5 billion issued using this online refinancing innovation,” she explains.
“It improves the returns for the equity investor significantly, and depending on the environment, you can achieve anywhere from 1.5 to 3.5 per cent IRR improvement.”
‘Natural progression’
Sancus has also expanded its focus beyond hedge funds, branching out into CLO management with the launch of its first issuance, Trysail CLO 2021-1, earlier this year – a move which Chernova sees as a “natural progression” for the firm.
“This is something we kicked around for a while,” she says of the move into the CLO management sphere, which saw the firm hire portfolio manager Andrew Maria, formerly CEO and CIO of East West Investment Management, last December.
“We’ve been investing in this space since 2013. In our hedge fund business, we spend a lot of time trying to analyse managers, manager behavior and their investment styles.
“By looking at manager styles, and meeting managers when doing our own due diligence, we have accumulated much institutional knowledge and have learned from the best.”
Like this article? Sign up to our free newsletter Related Topics Funds InvestmentsUS non-profits increase allocations to hedge funds, yet private markets remain key
Non-profits in the US are allocating more to hedge funds, yet private markets remain a favourite, according to TIFF Investment Management (TIFF), an outsourced chief investment officer (OCIO) serving the non-profit sector.
Suzanne Dugan, Investment Specialist, Diversifying Strategies at TIFF, said the company has seen an uptick in hedge fund interest in the RFPs of its clients. Dugan added that though the last five years have seen a “constant interest in the hedge fund space from non-profit clients”, they are now asking more questions about hedge fund investment due to concerns over low bond yields.
Jay Willoughby, CIO of TIFF, said: “With yields on all types of fixed income somewhere near all-time record lows, investors have been forced to think more about alternative allocations designed to replace some of the historic attributes fixed income allocations provided.”
He commented that many investors have identified hedge funds as providing more predictable returns than most other asset classes, downside protection in the event of equity market pullback, and some amount of liquidity, should rebalancing opportunities surface.
“All in all, because the expected forward return of hedge funds exceeds that of fixed income by a fairly wide margin, more investors are choosing to allocate marginal capital to hedge funds,” he said.
Willoughby added that the source of hedge fund allocations that TIFF advise on is from fixed income or other more diversifying allocations, or from the equity allocation of investors who are attempting to moderate the overall risk of their portfolio.
TIFF is an OCIO advising non-profits across the US. Its client base is made up of education-related institutions (36 per cent) and public benefit institutions (29 per cent), but also private foundations (22 per cent), community foundations (6 per cent), healthcare-related institutions (4 per cent) and cultural/historical institutions (3 per cent).
Dugan explained that TIFF has a “non-traditional” hedge fund investment strategy, leading it to explore certain types of strategies. The TIFF hedge fund team first identifies an attractive space for their clients, then researches the hedge fund managers who are specialists in that area. The team seeks out asset classes and sectors that either exhibit asymmetry, such as SPAC’s, CCA’s, or show inefficiencies because of the nature of the other market participants, such as Canadian mid cap or global healthcare.
This approach has recently led TIFF to research the mandatory global carbon allowance asset class, and managers specialising in the energy transition. They also identified Europe and peripheral Europe as an attractive hedge fund strategy.
Finally, though interest in hedge funds has been strong, private markets remain the most popular asset class with TIFF’s clients, with private equity products such as venture capital increasingly in demand.
Willoughby said he expects that over time private markets investments will outperform public market benchmarks. He sees the benefits of private equity over public equity to include managers’ ability to only invest when they find a compelling opportunity, the ability to bring operational and capital structure improvements to bear on the target company, and the ability to sell when valuations are compelling.
“Increased private equity allocations are typically funded from public equities or from other asset classes when an investor is becoming more aggressive in their posture,” he added.
Python will remain the number one choice for quants and traders, says SigTech
SigTech says Python is set to remain the programming language of choice for backtesting investment strategies, as new research reveals the world’s most popular systematic trading language is set to become even better.
Some developers and researchers transitioning from more traditional compiled programming languages like Java, C++ and C often criticise Python’s runtime performance. However, Sigtech says with careful optimisation, speed need not be an issue.
In 2013, Sigtech decided to build its systematic investment strategy platform from the ground up in Python. To ensure optimal runtime of its platform, it continuously monitors strategy runtime performance benchmarks for its codebase. These benchmarks are critical in maintaining the current performance status quo and to protect the framework against sub-optimal code changes.
Since the rise of cloud computing, Sigtech sees even more compelling reasons to continue to run its framework in Python. It says some parts previously coded in Python have been moved to a cloud computing infrastructure or were optimised using Cython. This has already improved Sigtech’s backtesting engine performance by 2x across the board, and in some areas, even greater improvements have been seen: for example, in equity universe construction where the cloud compute delivers 10x improvement compared to an equivalent Python implementation.
Historically, the Python core developer community did not focus on improving runtime performance because Python was typically used in situations where ease of writing code outweighed speed. As the applications of Python have grown (such as backtesting in Python), Sigtech says speed and performance are becoming more important, and accordingly are now being focussed on by some of Python’s most influential programmers.
SigTech users have already seen a pronounced improvement in terms of speed over the last few years, and with these upcoming changes to Python, it expects this trend to continue.
A new paper by SIgTech looks at the runtime for a 10-year backtest of a systematic strategy using minute bar data and reveals trading has decreased markedly over the last few years. Within another two years, it expects the backtest to be complete in under two minutes – an improvement of >95 per cent.
TriOptima’s triResolve Margin connects to major tri-party agents through SWIFT
TriOptima, an infrastructure service that helps to lower costs and to mitigate risk in OTC derivatives markets, now offers integration via SWIFT to the four main tri-party agents; BNY Mellon, Clearstream, Euroclear and JPMorgan.
TriOptima’s clients will have direct connectivity to tri-parties via SWIFT for sending instructions as well as receiving status messages and end of day reports.
With phase five of the uncleared margin rules (UMR) coming into effect in September, firms in scope will need to ensure they have the right infrastructure in place to exchange initial margin (IM) efficiently. This involves carrying out IM calculations, proactively monitoring their exposure and integrating with tri-party agents.
“Extending the margin call process to incorporate instructions to the custodian reduces the manual steps in the process which ultimately reduces the risk of delayed or failed settlements,” says Joakim Strömberg, Head of triResolve Solutions, TriOptima. “By using our SWIFT automation, clients do not have to build and maintain their own integration to the tri-party agents.”
“BNY Mellon has developed a range of collateral segregation options in order to maximise our flexibility in serving clients ahead of UMR phases five and six, including third party segregation and our fully automated tri-party segregation AccessEdge offering,” says Ted Leveroni, Head of Margin Services, BNY Mellon. “With just a few weeks to go until the September go-live, and the bigger challenges to come in phase six, TriOptima’s integration with SWIFT will greatly expedite the onboarding process for mutual clients turning to our firm to connect them to the services they need to meet their UMR obligations.”
“Automating the trade all the way through to the settlement goes a long way to helping firms drive operational efficiencies and deliver greater transparency,” says Richard Glen, Head of Collateral Management, Clearstream.
“By integrating into the four main tri-party agents; TriOptima offers buyside firms’ easier access to tri-party services, further facilitating preparations for UMR phase five. Ultimately, the broader adoption of tri-party services that interlink margin and settlement processes will reduce risk, meet regulatory requirements and improve market efficiency,” says Olivier Grimonpont, Head of Global Collateral Management at Euroclear.
“The integration between tri-party agents and TriOptima via SWIFT is an important step forward for the market in an effort to simplify onboarding and ease the burden of testing for mutual clients,” says Ed Corral, Global Head of Collateral Management Strategy at JPMorgan.
CAIS appoints Director of Business Development for CAIS IQ
CAIS, an alternative investment platform, has added Michelle Browning as its Director of Business Development for the CAIS IQ learning platform.
Browning brings two decades of experience in financial services education to the role, having served in a variety of different roles ranging from advisor relations to sales leadership at Merrill Lynch, ATEL Capital Group, W P Carey Inc, AI Insight, and most recently Alternative Investment Exchange. Browning has also managed relationships across the entire wealth management ecosystem including advisors, broker dealers, and custodians.
Browning says: "I share CAIS’s commitment to transform advisor education. With CAIS IQ, we have an unparalleled advantage to truly advance the wealth management industry with our state-of-the-art learning platform.”
With this new hire, CAIS IQ continues its commitment to empowering financial advisors to master alternative investments and better serve end clients. The platform combines machine learning and content curation from industry leaders to accelerate learning for financial advisors who access the platform via web and mobile applications. Most recently, CAIS IQ partnered with Buckingham Strategic Wealth to develop original content for their advisors.
CAIS provides financial advisors with a broad selection of alternative investment strategies, including hedge funds, private equity, private credit, real estate, digital assets, and structured notes.
“CAIS’s strong advisor adoption rates and accelerated growth allow us to attract the top-tier talent required to build the leading fintech platform for financial advisors and asset managers," said Matt Brown, Founder and CEO of CAIS. "Michelle's passion for financial services education, combined with her deep industry experience, makes her an outstanding choice to lead CAIS IQ’s business development efforts.”
Like this article? Sign up to our free newsletter Related Topics Moves & AppointmentsSanne acquisition: A bidding frenzy between hedge funds and private equity?
By Robert Quartly-Janeiro – Not long ago the debate of active vs passive was a guaranteed topic at industry events where portfolio managers could battle it out with a machine – sorry, I mean quants.
Then, as time elapsed and the hedge fund industry accepted there was – and is – a place for both investment types, the debate shifted. Hedge funds and private equity firms meanwhile peacocked for the largest allocations as institutional investors put PE front-and-centre of allocations strategies.
The global pandemic then arrived and inflation turned up. Hedge funds become more prescient to investors seeking hedging and a desire for liquid returns, even if inflows still lagged PE fund raises.
But things have gotten messy. PE firms are playing in PIPE investments and hedge funds in illiquids, diluting what their respective industries are meant to do and blurring the lines between them.
It is ironic then, that one of the alternative industry’s plumbers, Sanne Group PLC, which is making money rain or shine, is being targeted by private equity investors. Talk about parking a tank on a metaphorical hedge fund lawn!
It may not be quite as cut and dried as that, but at a GBP1.5 billion (USD2.06 billion) valuation, Sanne is cheap given what it does, for whom, and its scalability.
Sanne has GBP460 billion (USD633 billion) of assets under administration, of which is GBP160 billion is PE, across 500 managers, and GBP30 billion hedge funds (230 managers). The share price today is 923p, above the then premiums offered by PE firm Cinven (875p) and fellow fund services firm Apex (920p).
The Sanne deal, another take private of a FTSE 250 firm, is quietly moving forward just as many of Europe’s and America’s fund managers are on a beach unbothered by it. Perhaps the lack of je ne sais quoi or sexiness of Sanne, unlike Meggitt-Parker Hannifin and Cobham-Ultra (take that ESG!), means its sale has moved steadily forward little noticed, for now at least.
From a bolt-on perspective the company should be of interest to private banks looking at new revenue streams, further administrators eyeing market share, law firms with a desire to bring in more clients, and prime brokers sensing upselling and diversification – the list of suiters grows.
Then there are hedge funds.
It is surprising that more hedge funds are not interested in the deal. For those looking for an event driven play the company seems undervalued, and the likelihood of other private equity firms hungry for UK deals entering the bidding seems more than realistic. The shares are +290.5 per cent YTD and +490 per cent over the past five years; revenues and net profits have increased every year since 2017 (but who’s counting?)
For the long/short funds of this world, Sanne represents a buy and hold position; for the activist a chance to cannibalise the market, roll out its ESG offering to industry contacts and listed firms alike, and push it to new levels. Sanne’s real asset business at GBP85 billion assets under administration is miniscule when considered against the assets held by global REIT funds, infrastructure investors, and real asset portfolios.
With the growth of private equity, new fund launches, and an ever-diversifying product range, matched with more money both in the economy and chasing allocations, Sanne’s business model seems robust in the medium term – it is also the type of accounting firm that UK regulators want to grow as a wave of antitrust poking hits the Big Four. Any would-be private equity buyer will surely raise costs for the end client, or clients will see cuts in service levels as costs are stripped out of the business to meet IRR targets.
In some ways Sanne is a case in point for hedge funds to group together and control a business they have more direct knowledge of than most. Let’s be honest, at a GBP1.5 billion valuation it would not take many funds to take that approach. Perhaps the more interesting part is what Sanne reflects: the health of the alternatives industry, its developing needs, and internal power struggles.
Sanne’s acquisition from a financial and commercial perspective makes for an understandable play, but it goes deeper than that. It is also a contest of private equity-vs-hedge funds manifested in a firm who supports both sides of the aisle – an act of domination, characterised by a PLC that does not need to become private because it is a healthy and growing.
It is one instance where the interests of equity hedge funds who need firms like Sanne in their portfolios come up against de-listings. With the ink yet to be penned on any deal there is some way to go before Sanne theoretically disappears from Bloomberg terminals. Yet this particular acquisition does not feel like everyone has quite yet turned up to the party and it is all to play for as potential bidders dry off their swimming gear and fly home with their minds recharged and tans topped up.
A bidding war could yet arise.
Robert Quartly-Janeiro is Visiting Fellow at the Hellenic Observatory, London School of Economics
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