Henderson was one of the first firms to integrate hedge funds into its long-only business, and is well placed to comment on the current buzz surrounding 130/30 funds. By Fionnuala Synott
You can hardly move anymore for people talking about 130/30 funds. These hedge fund ‘lite’ products have captured the imagination of asset managers and have led to predictions that institutional investors will commit between $30bn and $40bn (e21.9bn and e29.2bn) to these products next year.
The 130/30 fund is being marketed as the optimal investment solution. But Kate O’Neill has a word of warning for investors looking at these products: “This is not the Diet Coke version of a hedge fund and it is dangerous to think of these funds that way. They are not hedge funds but instead use hedge fund-like instruments to enhance returns.”
Kate O’Neill is the director of European distribution and hedge funds at Henderson Global Investors and is well positioned to comment.
“We were one of the first institutional pan-European asset managers to start a hedge fund business and to integrate it into our long-only business,” says O’Neill.
Last year, Henderson launched the Pan-European Alpha Plus Fund within its Horizon offshore range, inspired by the multi-strategy equities investment style pioneered by Andrew Formica, Henderson’s head of equities.
O’Neill explains: “The team have index-tracking products that take small bets either side of the index. They choose their overweights and underweights using four different strategies. After the enhanced index product, the team used their same stock picks to form a hedge fund by racheting up the positions and removing the index exposure.”
The Pan European Alpha Plus Fund is a convergence of the two approaches: partially shorting but with index exposure. “This is our 130/30 fund, although the label 130/30 is a little misleading as it can be 110/10 or 160/60 depending on the fund manager.”
As far as O’Neill is concerned, one of the great advantages of Ucits 3, the European fund regulations, is the way it has allowed asset managers to use technical trading to add alpha to products rather than taking a traditional stock-picking approach. “For an experienced hedge fund manager like us, transporting alpha into long-only funds is not difficult but without a track record in hedge funds it would be tricky. Risk management and operational infrastructure are vital as hedge fund-like instruments do take a lot of risk to generate return – they are not for everybody.”
Hedge fund experience is something that Henderson has a lot of. In fact, nearly all of Henderson’s equity desks run hedge funds alongside their long-only funds. The Japanese team, for instance, manages an oeic, a sicav and a hedge fund and the same applies to Henderson’s Asian desk and the value and income UK team.
O’Neill claims that the convergence of hedge funds with mainstream asset management has improved the culture of the firm. In fact, hedge funds have become a part of the incentives process at Henderson. For successful fund managers there is the possibility of being given a hedge fund to run as well as more traditional incentives such as performance fees on some funds and equity share plans – “a huge advantage to being listed and purely fund management”.
“In 2002, when fund managers were leaving traditional investment managers in order to set up or join hedge funds, we managed to retain high-calibre fund managers by offering them the opportunity to run a hedge fund.”
These managers are no doubt glad that they stayed put given how changing investor attitudes have affected the structure of hedge funds: “Nowadays, hedge fund boutiques are starting to look
like mini institutions. The entrepreneurial spirit that characterised the first hedge funds is waning as clients require more stringent controls.”
Henderson believes that a certain degree of autonomy is key to retaining good fund managers. In accordance with this ethos, Henderson doesn’t have a house investment style, preferring to
focus on “pools of performance generation around various desks”. In practice, this means that each fund management desk runs its funds according to its own process. For example, the UK equity funds are managed from a number of different desks including Growth and Income, Value and Income, Multi Strategy Equities (UK Enhanced Index) and Pan European Equities (growth).
“UK equities is an extreme example but it’s important to note that what one person might be adding to their portfolio someone else might be selling. Generally all the fund managers are stock pickers and not so fussed by macro economic trends on the equity side.”
When it comes to distribution, autonomy is also vital for Henderson. The firm is not linked to any distribution house so is free to build its distribution as it sees fit. So far, in Europe, this has meant building from the bottom-up and hiring local talent. “This approach has been successful and has led to great networks and relationships.”
Henderson now has a network of offices in Amsterdam, Frankfurt, Luxembourg, Madrid, Milan, Paris, Vienna, Zurich and London. “We are one of the top three foreign asset managers [in each of its markets] despite having strong competition from local banks, some of which are adopting open architecture.”
According to O’Neill, the secret of Henderson’s success (and its e92.2bn in assets) is the quality of the asset management firm’s product range, which ranges from property funds to listed assets. “We are seen as innovative but we haven’t done ‘me too’ products, so it doesn’t look like we’re just following trends.”
As well as a suite of eight mutual funds, Henderson offers investors a number of fund ranges including UK OEICs covering fixed income and equities, Luxembourg Sicavs including equities, property equities, bonds and US mutual funds. It also has specialist direct property funds for institutional clients, as well as segregated and pooled funds for institutional clients covering equities and fixed income PFI.
In addition to the Alpha Plus Fund, Henderson has recently launched two new funds that also use Ucits 3 powers. The Alpha Return Bond Fund, which is managed by Henderson’s fixed income hedge fund manager, and the Asian Dividend Income Fund. “Our Pan European Alpha Plus and our Asian Dividend Income Fund showcase Henderson at its best. These funds demonstrate our long-only and hedge fund techniques and show that we are a boutique of high-performing asset management.”
The asset manager has recently added an activist arm to its equity business and is set to launch an active engagement fund for institutional investors in the second half of this year following interest in the asset class in the US. Activist investing is still at an early stage of development in Europe.
The fund will invest in listed companies that are fundamentally sound but are underperforming and will work alongside management to enhance shareholder value.
Initially, the fund will seek to hold significant minority stakes in 10-15 companies for pan-European listed companies in the £100m (e149m) to £1bn (e1.49bn) market capitalisation range.
For Henderson, the key to growth lies in cutting-edge strategies and risk management capabilities. “We want to anticipate changes in investor appetite by being very close to the client base and understanding drivers, whether they’re prompted by regulatory changes or consumer trends,” said O’Neill.
© fe August 2007