When is the ideal time to invest in a fund manager? It is a question that will keep plenty of allocators up at night.
Act too soon, and it’s a shot in the dark; wait too long, and you’ve missed the boat.
For Charles-Henry Monchau, chief investment officer at Syz Bank, the aim is to find the sweet spot in an individuals’ career, after they have raised their profile but before they begin to rest on their laurels.
“If you go with mature fund managers, they can be too mature. They are here to stay rich, basically, to stay in business,” he said. “They become more like asset gatherers. They are not hungry enough, so they don't put in the extra effort.
"So usually there's a plateau in terms of alpha – if not deterioration of alpha – but you feel comfortable because they are big, and because they had very strong performance in the past, so that's good for you as an asset allocator to showcase this to your clients. But unfortunately, it's a recipe for underperformance.”
He said he looks for those managers with a few years under their belt, after they have begun to make money and attract talent. Alpha potential still remains because they are still very motivated, and it becomes a virtuous cycle whereby they go from strength to strength, according to Monchau.
Indeed the mantra of ‘knowing what you’re buying’ is something Asset Allocator has covered in-depth recently.
Hedgies and crypto
Over in alternatives, Monchau says one of the difficulties of creating portfolios is the concentration of hedge fund managers within the biggest firms.
The dearth of new launches in this space has led Monchau to explore other diversifying options, one of which being cryptocurrencies.
While Swiss law prevents investing in non-traditional assets directly (preventing, say, the BlackRock Bitcoin ETF), he says they use a multi-manager, fund-of-hedge funds approach to lower the volatility of the asset class.
“Cryptocurrencies are still way too volatile for most of our clients, so we don't want to create too many discrepancies in our models,” he said.
“But what is very interesting is that whether you like it or not, crypto markets are still extremely inefficient. There are a lot of arbitrage opportunities between exchanges, for instance, or liquidity pools. And this creates – when picking the right hedge fund hedge fund managers – a great opportunity to generate double digit, uncorrelated returns.”
Monchau outlined that this typically comprises one or two per cent of a client’s overall holdings and fits in the hedge fund bucket of alternatives as a pure alpha play for portfolios.
