Ireland's Billion-Dollar Baby: Abbey Capital Booms With U.S. Bucks, Targets Asia, Middle East

Feb 2 2007 | 12:16pm ET

Dublin, Ireland-based Abbey Capital has a billion reasons to be optimistic this year. The six-year-old managed futures shop recently surpassed the US$1 billion mark in assets under management.

One Billion and Counting…

Last year, Abbey’s strongest asset inflow stemmed from U.S. investments banks, according to founder Tony Gannon, who says that 70% of the fund’s investors are U.S.-based, with Europeans making up the balance.

“I think investors in the U.S. are more familiar with managed futures because it’s been a part of their portfolio for a long time, and it’s probably a newer asset class to Europeans,” he says.

The firm is also looking to extend its reach to the Asian and Middle Eastern markets, where investors’ attitudes have been changing. “Historically, the Asian market has preferred much lower-volatility products, but the view now is that they’re looking for marginal volatility. And what they’ve noticed is that if you add a managed futures portfolio to an equity portfolio, the marginal volatility can actually be negative if not zero,” says Gannon.

The firm is currently in discussions with investment banking groups in the region to distribute its fund. Gannon says there are no stricter barriers to entry in Asia than in Europe or the U.S., but that success is based on making contacts and building up a firm’s recognition in the marketplace.

Solid Returns

The fund returned 14.1% in 2006, which Gannon attributes to big movements in the metals market, particularly copper. The base metal was bullish for the first five months of the year, but reversed its trend toward year-end and Abbey was able to capitalize on both the long and short sides, Gannon says. The fund also profited from other metals such as gold and zinc, and the natural gas and equities markets.

Abbey’s fund currently has a 35% exposure to currencies, 9% to stock indices, 9% to interest rates, and 18% to bonds on a volatility risk-adjusted basis. Since inception, the fund has generated compounded returns of 12.2%. 

However, it hasn’t always been smooth sailing for Abbey. In 2004, its fund suffered a drawdown of 4.8% because of trend reversals in the dollar, bonds and equities markets. The Bush/Kerry summer slam fest, which sent market volatility spiraling downwards, and the rush of investors away from the copper sector, made for an ulcer-laden year, says Gannon, who maintains that the key to success in managed futures is to remain committed to diversification.

“We believe it is impossible to forecast which markets or sectors are going to be the next trend, and we often find it is the market where least is written or commented about which often provides for the best trends,” he says.

Managed-Account Approach

Abbey’s fund currently invests in 20 CTAs, ranging from multi-billion operations to hundred million dollar shops via separately-managed accounts, which is efficient when it wants to pull the plug on a manager. “We can fire a manager literally within 30 seconds by just closing down the brokerage account, and that’s the big advantage over a fund of funds,” says Gannon.

The managers’ investing styles also range from short-term traders to value and discretionary macro traders. “All of these styles have a zero to 0.3 correlation to trend following, so you can nearly regard them as different asset classes, which is how we view them,” says Gannon.

To date, the fund has only fired two managers in its brief history, one because of style drift and the second for not having enough skin in the game. Gannon says he avoids short volatility or options traders because, “we’re trying to give our clients returns when there is an equity market collapse or a credit crisis, and those guys will actually kill you in that kind of environment.”

A New Kind Of Twitch

Gannon is old hand when it comes to the managed futures industry, having joined Gandon Securities, one of the first European managed futures shops, in 1988. He created and traded Gandon’s breakout trading program, and then, in 1993, he left with three colleagues to found Allied Irish Capital Management in conjunction with Allied Irish Bank. He helped that firm grow its assets under management from US$50 million to over US$1.2 billion.

Gannon says his experience as a trader lends itself to his current business. “In Gandon, we had 16 different traders and in Allied, we had four traders, so I was already familiar with analyzing the different styles,” he says.

And the ex-trader-turned-multi-manager-advisor definitely does not miss working in the trenches. “I don’t get that twitch when I see a Bloomberg screen, so I do find this is much more interesting because you’re seeing a wider range of trading styles and looking at how they blend together,” he says.

Gannon’s future plans for Abbey include doubling the firm’s assets under management every year to build up a US$10 billion managed futures behemoth within the next four to five years. The firm is also working with firms that are creating feeder funds to flow into its own fund, and may pursue creating a specialist funds, such as a macro-only fund.

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