Q&A: Cube Capital Founder Sees Opportunity In Distressed Credit, Asia

Jan 31 2011 | 2:17pm ET

Last year, London and Hong Kong-based alternative asset management firm Cube Capital surpassed the $1 billion in AUM-mark as it began to take in money from institutional investors. Its activities are spread across three main platforms: multi-manager hedge funds, single strategy hedge funds and real estate investment. FINalternatives’ Mary Campbell recently spoke with Francois Buclez, founding partner and CEO of the $1.2 billion asset manager, about growing his firm and its funds, opportunities in distressed credit, and why he likes the Asia story.

I’ve read that Cube Capital recently decided to open its doors to institutional investors, what was the thinking behind that?

We started the fund and the firm in 2003, our flagship fund of funds, the Cube Global Multi-Strategy Fund, was the first fund...and we started with about $150 million. Up until January 2010 we’d been growing by word of mouth and our clients were mainly family offices and high-net-worth individuals. In 2010, we thought that the track record was long enough, that we managed the 2008 bear market reasonably well—we lost money, we lost about 12%, that’s not great and we were a bit frustrated, but that’s a bit better than the indices and maybe than our competitors, and in 2009 we made about 17 and a half. So we thought...the investment platform and the investment philosophy and the track record were robust enough to start talking to a wider audience. As far as expanding into institutional investors, I don’t think it’s necessarily a conscious decision. I think the decision was to raise assets for the fund—currently the fund is $650 million.

Do you have a target amount for the fund?

With roughly the same resources and keeping the same investment philosophy, I think we can potentially manage up to $3 billion. We started [a marketing push] in January 2010 and we raised a reasonable amount in 2010—pretty much every month we had inflow—and we’re going to do the same in 2011. We were not necessarily consciously going to institutional investors, we just said, “We’re going to raise more money.”

Okay, so I’ll rephrase my first question—have you attracted institutional investment?

Yes we have. For a couple of reasons I would tend to think. A) because most of the allocations into fund of funds and, to a certain extent, to hedge funds in 2010 were driven by institutional investor appetite. A lot of pension funds, a lot of institutional endowments have been active in deploying capital in the hedge fund industry, whereas the usual high-net-worth individuals/family offices have been a bit more subdued.

So, that’s the first reason. But it’s also because up until January 2010 our name was not well known in the market, we were relatively confidential, as I mentioned, we were going by word of mouth, so we didn’t make a concerted effort to go out and talk to the institutional world. We did, starting 2010, and we had some good response from that. We had talked to some charities, some pension funds, some endowments, so it’s going reasonably well.

Cube has a fund of funds, single strategy funds and you’re also involved in real estate. What is your core business?

Our core business is the fund of funds or the multi-manager fund. Here we have one product that we started in 2003. We have about $800 million in the strategy—the flagship is about $650 [million] then we have managed accounts for specific investors.

On the fund of funds, we’ve been averaging 11% since we started in 2003, annualized, with about 6% volatility. There were really three periods in the type of return that the fund generated: there was the bull market of ‘03 to ‘07 where we were averaging about 15%; then 2008 where, as I mentioned, we lost 12%; then in 2009 we made 17 and a half. In 2010, we’re going to make about 9%. So, it’s a little bit more punchy than a LIBOR+ type product. The target of the fund is 10% to 15% throughout the life of the investment cycle, and so far we’ve been true to that with moderate volatility.

And what can you tell me about your two single-strategy hedge funds?

One is a global multi-strategy, the other one is a distressed/credit opportunity in greater China, so it is a very niche product. We have $180 million in total assets in these two products. We’re going to open up and start raising assets for them probably in the second half of 2011. Right now we’re focusing on the fund of funds, on the marketing side.

These products have had very decent returns—the multi-strategy was started in 2009, we made 26% in ’09, we’ve got 12% in 2010...so it’s a little bit more punchy than the fund of funds.

In terms of your fund of funds, what strategies do you like these days?

The way we run the fund of funds is very opportunistic, very dynamic, so it’s quite a way from the old fund of fund business model which was allocating to some big fund and then sticking with them through thick and thin. We are a lot more agnostic, a lot more opportunistic. We move the exposure around quite a lot, so probably every two to three months we tweak the portfolio...So in that respect, we cover a lot more strategies and regions than we would do with a normal fund of funds.

We like event-driven, lots of cash on the company balance sheets whether it be in Europe or the U.S., lots of M&A activity, so that has done well for us in 2010 and we think it’s going to be a good return-driver in ’11. We like distressed, very rich pickings in this strategy in 2010 and I think in ’11 as well, but here we are mainly focused on Europe. We view the distressed strategy opportunity in Europe in two ways: the first way right now is in structured credit, as the banks are unloading paper that they can’t keep anymore because the regulator or maybe the political pressure is pushing them to reduce their balance sheets. So, there’s a lot of CLOs, RMBS, CMBS, CDOs and so on coming out of the banks at very interesting evaluations. So, that is one area where we are focusing right now.

The next leg of the distressed market in Europe is going to be more corporate driven. There is about, I think, about $400 billion that has to be re-financed of the old LBO wave that happened in 2005, 2006, 2007; $400 billion that needs to be refinanced in 2012, 2013, 2014. So there’s going to be plenty of paper to play with.

Frontier emerging markets is something that we like. We’ve seen quite a few emerging markets roaring back in 2010—mainly Asian countries, if you look at Philippines, Indonesia, Malaysia and Thailand...We now think some of these markets are a little bit overheated, they’re a little bit crowded, so we’re looking at the second tier or the laggards of that particular wave—markets like Vietnam, maybe to a certain extent Russia, these types of, not necessarily second-tier but markets that did not perform as well as could have been expected in 2010. We think they’re going to catch up, there will be a rotation in terms of investor appetite in 2011, so frontier EM or laggard EM would be the next strategy we would go for.

What role does Asia generally and China in particular play in your investment strategy?

Very, very important for two reasons, A) because we have real estate and single hedge fund exposure there as well as a little bit of the fund of fund exposure, so from an investment point of view, it’s one of our natural destinations (mainly China, India we don’t cover that well). But China definitely, we have an office in Hong Kong with satellite offices in Shanghai and Beijing and we’ve been there since 2005, so we have a reasonable amount of knowledge of the market, we have also a reasonable amount of resources, we have about 22-23 people in Asia... so, as an investment destination, definitely something interesting.

But also, to understand the macro trend of the world, it’s good to have an ear on the ground over there. To give you an example, in mid-2007 we started to completely de-risk not only the fund of funds portfolio but also some of the 20 positions we had on the back of the fact that we felt, through our Hong Kong office, that the GDP growth of China was slowing down quite abruptly—it used to be 12% and then the government started to put the brakes on the economy and GDP growth slowed down to 8%. At the time (and still now) China was the biggest driver of GDP growth in the world, so we thought that this slowdown in GDP growth would have a massive impact on the rest of the investment world, and it did actually, so I think to a certain extent we were able to capture some of that a little bit ahead maybe of some of our peers, because we had that office on the ground, because we had these deals in China and we felt that the government had a real impetus, a real focus on slowing down the economy. So it’s a long-winded way to say China or Asia is not only an interesting investment destination it’s also a very important source of information for us. I think if you don’t have an office on the ground it’s a little more difficult to capture what’s important from the noise.

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