Monday, 23 January 2017
Last updated 2 days ago
Apr 6 2010 | 1:11am ET
Morten Spenner joined International Asset Management Ltd. (IAM), one of Europe’s oldest fund of hedge funds managers, in 2003, becoming CEO in 2007. IAM specializes in the creation and management of tailor-made segregated portfolios and proprietary commingled funds (Alternative Investment Strategies, Ltd; IAM Global Long/Short Equity Strategy Fund Ltd; and IAM Trading Fund). As of January 2010, the company had $2.8 billion in assets under management.
Spenner recently spoke with FINalternatives senior reporter Mary Campbell from London about the company’s recent history, the fallout from the financial crisis, and his take on proposed new EU regulations for alternative investment fund managers.
IAM was spun out of Drexel Burnham Lambert in 1989, then operated as an independent firm – serving both institutional and private investors – until 2005, when you were approached by ABN Amro. Can you tell me how things unfolded from there?
In 2005, ABN Amro contacted the company and said they were looking for a strong manufacturing capability within the hedge fund portfolio universe. They were basically suggesting that they could be the marketing arm and that they could live with a company that could retain a lot of its identity but could then interface with ABN as the big client, so to speak. So, after a bit of to-ing and fro-ing, it was agreed, and we started taking on a few vehicles that ABN had run in the past and we started a reasonably large program with a focus on engaging the different parts of ABN and the different geographies of ABN’s clients.
The transaction was announced in February 2006, then reasonably early on – in April 2007 – there was that infamous letter as to shareholder value being questioned at ABN Amro, and then the whole notion of ABN Amro itself being in play. And, as you can imagine, that had a significant impact in terms of asset-raising ability and focus of the team; so we went through quite a volatile time in the sense that everyone wanted obviously to continue doing a good job but the response of clients was quite tricky.
And then the trio [RBS, Fortis, Banco Santander] took over ownership of ABN Amro and Fortis ended up being the owner of the asset management unit of which IAM was a component. At that time, Fortis had their own recently acquired fund of hedge fund manager, Cadogan, (that has also since spun out) and [Cadogan] had quite a different style, quite a different set up, a different way of looking at how to manage money [than IAM]. For both parties, as well as for Fortis, it was obviously clear that you couldn’t have too many people [playing] the same role because you end up confusing everybody – both the clients and the salespeople as well the people who work for the various funds of hedge funds. So we approached [Fortis] and we said, ‘Well, we’re very confident in our ability to retain our own clients and we’ll give you back the clients that you helped us find and those funds, and we’d like to start back up on our own.’ … And that obviously also took a bit of negotiation, and then in July 2008, the company bought itself back – the majority of the firm is owned by 23 employees and we have two minority shareholders. One being Sir Ronald Cohen, in a private capacity, and the other being Jefferies [investment bank] for their own book, so to speak, not in a private equity fund.
Fortis is now owned by the Dutch government, so, in hindsight, it looks like your decision was a wise one.
Well, I think what we found – and obviously, we’re not blaming anybody – was that clients can only accept a certain degree of change and a certain lack of understanding of what will happen next. They want relationships that are permanent and we’ve always strongly believed in that notion – we’ve never been transaction focused, we’re much more long-term relationship-driven and that’s why stability around the ownership is incredibly important. I think that what we also saw in the industry was that, from early 2000 onwards, a lot of clients focused on the big brands and, in that sense, obviously a big bank name or insurance name would give clients a lot of confidence; whereas, I think after 2008 what most people are looking for is incentive alignment and interest alignment and [the absence of] conflicts of interest. And I think the new structure will serve us well for a long time going forwards.
What would you say has been the biggest effect of the financial crisis and the Madoff scandal on your business or the way you do business?
It has changed the way in which we go about our investments to some degree. We’ve continued to improve our operational infrastructure assessment, we’ve continued to build on our risk-management tools, and I think it’s fair to say that when we build portfolios we’re asking ourselves even more questions than we already did and perhaps being even tougher on ourselves than in the past. I don’t think that, fundamentally, we act different than in the past. From IAM’s perspective, we’ve always been at the more liquid end of the spectrum, we’ve always been at the more conservative end of the spectrum so, yes, we would have liked to have produced better returns in 2008, but we’re making changes at the margin rather than massive, transformational changes.
For example, we know some competitors are moving away from offshore funds and now just want to use managed accounts or some are looking at just using UCITS over the next four or five years, or there are other ways in which you could imagine that the business could change and that’s not what we’re looking at. I think our focus is a daily, weekly, monthly, continuous improvement of what we already have.
I think what’s changed more than IAM is that the clients we speak to are changing the way in which they want to use hedge funds. It’s peculiar, actually, that after more than 20 years in business we’re finally becoming sort of en vogue, in that clients are looking for solutions, they’re looking for things that match their needs, not some sort of ‘this fits all’ fund or anything like that. They want a much deeper understanding of what’s in their portfolio, they want to be able to influence what’s in their portfolio, they want to see that it can evolve…they want to feel that they can access info about these portfolios. There are things, for example, like performance fees, or the balance between performance fees and management fees, or the structure in which investments are held, in which the people would like to have greater involvement.
We find that many of the clients we have as well as the ones we are speaking to are moving away from this notion [of a] plain, vanilla, multi-strategy, multi-manager fund of hedge funds…They say, ‘Look, I’ve split my portfolio into different asset buckets and what I want to figure out is, within each of the different asset buckets, is there a place for hedge funds, and if so, how do we go about constructing that and implementing that?’ And that’s where the solution notion is particularly valuable. When we go to clients we say we can help you in three areas: we’ll create your own portfolio, we’ll create that within a structure that really suits you, and we’ll create a reporting mechanism that matches your needs.
Your Global Long/Short Equity Strategy Fund is based in the British Virgin Islands, while your Trading Fund (basket of CTAs) is based in Cayman. Proposed EU regulations for alternative investment funds could make doing business in Europe difficult for funds based in third countries. Are you concerned about these regulations? How do you expect to deal with them?
We certainly have had concerns from the moment that we saw the first version of the draft version. But I think also what we have very much tried to do is support AIMA [the Alternative Investment Management Association] as the route [for addressing] these concerns. I think they’ve done a particularly good job in trying to signal to everybody – both investment solution providers as well as investors themselves – that of course we need to do something that is reasonable and that is sound and that isn’t at risk of ruining some sort of financial framework. But at the same time, investors do need to have options and I think as long as the regulations deal with that, then there will be a good appetite for accepting [them].
What we haven’t done is [examine] the draft legislation in each case and how exactly it will impact us because there has been such a great degree of uncertainty around it…Even now, under the Spanish presidency, as I understand it, there have been three draft versions and there are still some contentious issues in there. I think what we would expect to happen is that if there is something put in place, there [will be] a time period over which one can make changes and get into line with these regulations. And that could be a very busy time, but that’s something we’ll need to assess when it comes. I do also think that many institutional investors in Europe would be frustrated if they didn’t have some of these options available to them. I think managed accounts is one way one can look at this, UCITS III is another way, but again, you are precluding a large part of the manager universe and also a significant portion of hedge fund strategies if one can only choose these two routes.
Do you consider UCITS III compliance a viable option for dealing with eventual regulations?
We have no difficulty with UCITS III as a concept overall, we’re just very aware that it only provides so much of a solution at the moment. You know, there are strategies that you couldn’t invest in through that and also, when we look at the hedge fund universe, I believe the quoted number is still in the 8,000-9,000 range in terms of the number of funds – and that’s probably overstating it because that’s not our active selection universe – but even if you limit our active universe down to say, a few thousand, that compares very favorably to the approximately 200 UCITS funds that are in place today. So the UCITS III absolute return universe is very new and I think one just has to keep that in mind – that doesn’t say that it’s good or bad or indifferent, just that it’s new and one has to sort of get used to it. I think that there is an education process with UCITS III as absolute-return vehicles, just as we saw with respect to hedge funds.