Critics have long attacked fund of funds shops for charging exorbitant fees for unremarkable returns. But one, New York-based Archery Capital, has delivered on its mandate. Since inception in 2002, Archery’s domestic flagship, the Helios U.S. Opportunity Fund, has outperformed the Standard & Poor’s 500, returning 49.43% as of the end of January, with a standard deviation topping out at 5.75%. Over the same period the S&P has returned 37.07%, with a standard deviation of 12.15%.
Erinch Ozada, the firm’s founder, has traversed both the traditional and alternative universe and is now managing several funds of funds with 23 underlying strategies. Prior to forming Archery in 1996, he spent 12 years at Goldman Sachs managing a long-only growth strategy for high-net worth clients.
“When I was at Goldman Sachs it became obvious to me that managing funds through cycles was only effective if one was able to short securities,” says Ozada. “Therefore, I felt the long-only approach left out an important component of investing.”
Fulfilling A Mandate
In his first few years in the hedge fund business, Ozada ran three long/short equity hedge funds. But as the equities market became more difficult in 2000, Ozada began to diversify, allocating to other hedge funds in sectors outside of his expertise—technology—such as energy, materials, basic industrials, financial services, healthcare and business services.
Ozada says the transition from a single-strategy to fund of funds manager was an easy one because of his decision to stay within his expertise and invest only in long/short equity funds. His goal is to be an equity substitute that generates positive returns in all market conditions. In a negative S&P 500 environment, his funds of funds “should be as good as cash in the bank,” and his “funds should capture most of the upside of the equity market in a positive environment.”
“We should be able to do this with considerably less volatility than the broad equity markets,” he says.
In June 2005, Ozada further concentrated his portfolio of managers by launching the Helios Focus Fund, which invests in about half of the managers in the flagship funds. Ozada says he’s been “pleasantly surprised” by the negative correlation generated by the managers in the portfolio. “At the outset, we thought that because it had fewer managers, it would be more volatile,” he says. “But so far, the Focus Fund is exhibiting the same volatility and not more.” The Focus Fund finished 2006 up 17.11%.
Ozada makes a concerted effort to avoid the issue of overlapping positions among his underlying managers. “We consciously monitor overlap among managers in the portfolio construction process by paying close attention to sector, style and global diversification guidelines,” he says.
Going forward, Ozada is thinking about setting up a global equities long/short fund of funds, possibly toward the end of the year.
Likes ‘Sizeable’ Managers
Ozada’s ideal manager has at least 15 years of experience with a big hedge fund operation and launches with several hundred million in assets. “We like to see managers launch with a sizeable amount of capital so they can attract and retain good talent and strong back office capabilities,” he says.
He notes that his best sources for new managers are his existing managers, who give him a heads-up on new launches. More importantly, managers who keep their positions close to their vest need not apply.
“When I conduct due diligence on managers, I focus on the quality of their returns and examine how repeatable is the investment process,” he says. “In order to answer those questions we need a good deal of transparency, which we do get from our managers.”
Ozada’s firm emphasizes transparency because it is not in the risk measurement business. “I think that people in the fund of funds business are preoccupied with risk measurement, where the mantra seems to be that ‘more data is better.’ I believe that volumes of data are useless unless you know how to process all the information in a way that is productive,” he says.
By Hung Tran