Q&A: Cube Capital CEO Talks Liquid Hedge Funds, Says Funds Of Funds Are Alive And Well

Nov 22 2013 | 7:07am ET

Francois Buclez wears many hats at Cube Capital—he's CIO, CEO and founding partner of the $1.3 billion London and Hong Kong-based alternative asset management firm. In those capacities, Buclez oversees the two funds Cube is currently marketing: the Cube Global Opportunities Fund, an in-house event-driven hedge fund focused on disruptive events as attractive entry points, and the Cube Global Multi-Strategy, a hybrid fund of hedge funds. To find out more about Cube's offerings, FINalternatives' Senior Reporter Mary Campbell spoke recently with Buclez.

When I last profiled Cube, in 2011, we discussed your fund of funds, your global multi-strategy hedge fund and a Greater China distressed/credit opportunity fund. Can you tell me how your focus has shifted since then?

Our platform hasn’t changed, but we are emphasizing the more liquid side of our product spectrum, namely our hedge funds. These primary funds are Cube Global Multi-Strategy and Cube Global Opportunities.

We think the time is right for CGMS (fund of hedge funds) which is differentiated by our hybrid approach given the general disappointment with classic FoHFs. Our FoHF uses direct investments as well as tending toward smaller, focused managers to implement our macro view.

We’re also emphasizing CGO, given it’s less common exposures and nimble approach and the increased demand for less mega-funds. CGO is an event-driven hedge fund with a focus on European and Asian markets. There aren’t many of these funds, and the philosophy of being opportunistic and seeking dislocated trades and orphan assets is a compelling story to many investors.

Our less liquid products have generated strong returns and have been important to our business historically, but are not a marketing push for us.

Your in-house hedge fund is an event-driven fund "focusing on disruptive events as attractive entry points;" can you tell me more about this and give me an example of a disruptive event and the investment it triggered?

While CGO is newly marketed, it is already in its fourth year of existence. We wanted to establish a track record to provide evidence of the philosophy and efficacy of the process. While most event-driven funds have traditionally focused on announced corporate actions such as M&A, we take a different approach. We are watching for events at either the industry or security level to disrupt investors’ perception of risk. Then we evaluate the competitive landscape, sift through the components of the industry or a particular company looking for events or catalysts that will cause a security to re-rate and provide us with a profitable exit.

For instance, after the BP oil spill, we bought the bonds of oil rigs that were unrelated to the DeepWater Horizon and operating in regions that were not likely to be affected by potential increased regulation. These bonds suffered from sympathy selling, a change in the perception of risk, though the underlying risk was not dramatically different in our view. In addition, these bonds have significant collateralization, short maturities and aggressive amortization to provide additional downside protection.

What do you say to those who contend that the age of the fund of funds is over? Are institutional investors still interested in funds of funds?

Funds of hedge funds have become a mature product and underneath the overly simplified discussion is a range of products and services that have evolved.

We’ve seen interest increase in our FoHF ability, given our value-added and hybrid approach, from those who want more from a FoHF. We’ve also been receiving attention as a complementary or completion mandate for classic direct HF exposures.

Though we’ve seen an increased use of direct hedge funds, there will always be a role for FoHFs given there are many who will struggle for various reasons with acquiring the resources, talent, or governance structure to allow for direct fund portfolio management. There are also specific mandates suited for a FoHF such as dedicated exposure funds to be used as building blocks, custom mandates, or even discretionary advisory services.

How many managers are there in your fund of funds? What criteria do you employ in choosing managers? How long do you tend to hold a position?

We target 25-35 managers in the portfolio. The number of managers is driven by the opportunity set and market environment. Often we will be at the high end of the range when there are many good opportunities available, or if we are in a period of transition with overlapping redemptions and subscriptions.

We do not apply uniform criteria across each investment opportunity and are agnostic regarding typical selection factors such as AUM and length of track record. However, we must have a comprehensive understanding not only of the opportunity set from the macro perspective, but also a fundamental understanding of each manager’s underlying processes and drivers of return and risk.

Our holding period varies since we select managers with the aim of using them as an extension of our own macro view. We tend to have a relatively long holding period of several years for managers who are operating in less crowded markets and are consistently providing attractive outcomes. However, we also select managers for exposure to an opportunity set or theme that may run its course in a relatively short time frame.

How has the wave of regulation in the industry affected Cube's operations? Can you imagine launching a UCITS fund or a hedge fund-like mutual fund in future?

Increasing industry regulation is a concern for all hedge fund managers, particularly as many look to market to broader audiences. From an optimistic perspective, increased regulation is also an opportunity for those of us with institutional infrastructures.

Our operations have not been adversely affected by the changes in regulations, but we are cognizant of the environment and how we may need to adapt. It seems there is a convergence of traditional asset management and hedge funds, at least with respect to the structures that you mentioned. We have a handful of clients who are asking if we’ll help meet client needs by offering a fund that allows for accredited investors and smaller institutions. We are listening to our clients and evaluating our options.  

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