Hedge Fund Selection: Sussex Partners’ Patrick Ghali Bullish On The Best Of The Best

Oct 2 2014 | 5:56am ET

Ten years ago, Patrick Ghali and Robin Nydes co-founded Sussex Partners with the idea of using their decades of expertise to select only the best of the best hedge funds and fund of hedge funds and pair them with their extensive rolodex of institutional investors. Today, the firm has grown to 12 employees, all of whom are veterans in the industry.

FINalternatives editor Deirdre Brennan recently sat down with Ghali to find out what kinds of funds make the cut, why he is still bullish on fund of funds, and how Sussex is expanding its business by outsourcing its expertise to private banks.

Tell me a bit about your firm, specifically how you focus on employing only experienced, senior executives.

Today, there are a dozen of us spread between Switzerland, London, and the U.S. What we've tried to do is a create a platform for very senior advisory executives who want to continue to work with their clients but to do so in an environment that is less inhibited and more entrepreneurial than a large financial institution can offer. The average person that is client-facing here is in their early 50s and is a very experienced professional who doesn't want to manage money anymore but wants to continue talking to the relationships that he's built over the years.

Who are your clients?

They are all institutional. Well, we do have some family offices but they tend to be large, such as a £4 billion family office. So they are in fact like institutional investors. And private banks, but to me that's institutional in the sense that you deal with the CIO, you deal with the head of research. You don't deal with individual people, they have very institutionalized processes in terms of approving the products that they want to invest in.

And we are an advisor to [our clients] not a sales organization, and that's really, really important for us. We have close relationships with them. We speak to some of our larger clients five times a day or more. We are the first point of contact for any questions that they have. We will tell them to redeem if we think that a manager no longer performs. And we've done it on a number of occasions. And so, it's more about having a partnership approach.

How many fund managers do you work with and how do you select them?

Our approach is highly discretionary based on long observation and careful analysis of potential managers prior to client recommendation. Ultimately we select very few:  Today it's seven – three fund of funds and four single managers. But these tend to be very well established on the fund of funds side. For example we like SkyBridge a lot which as you know, is very large and has a long track record. We do a lot of research and due diligence on our managers. We've got two dedicated people in house who do nothing else. For us, research is essential, it's not a cost. It's something you have to do. It’s how you differentiate yourself.

Do you do research on their underlying fund managers as well?

Yes. So sometimes I actually go on trips with them and look at what's in their portfolio. Or we'll go and look at managers that a fund of funds is considering. We're also going to look at managers that they don't like. It just gives you a better sense. So yes, absolutely.

And the single managers you represent, how large are those?

The last single manager we agreed to work with was Credit Suisse’s European long/short, small-and-mid-cap fund. As you know, Credit Suisse is giant.

But we also have a Japanese manager called UMJ Kotoshiro. He's at $130 million. We were in touch with this manager for five years before we got comfortable. It was a really long process. He used to co-manage the Whitney funds for Japan Advisory which were some of the largest Japanese long/short funds at the time. So, he has a great pedigree. That's typically the sort of manager we look for to introduce to our clients.

You mentioned that you have recently increased the advisory services that you offer your clients, can you tell me about those?

Yes, there are a couple of other parts to the business. One part is an advisory business where if you're a family office or a private bank and you want to have your own fund of funds, you may have a pre-defined set of ideas of how that should look but you have no idea how to actually manage it. We'll find the right manager for you. We'll help you in the evaluation and due diligence process. We'll help you with the set-up of the whole product.

In one case, a family office wanted a fund for internal purposes but had pretty set ideas which were not so easy to implement. There were ethical considerations that the client had. So we first helped him find the right fund manager and then worked to structure and implement the fund, and today we still help with the monthly monitoring and evolution of the product.

And then there's a new part of the business that we have started talking to a few people about, which I like a lot actually. It is going to private banks and wealth managers and basically saying, ‘Why don't you outsource the whole approval process of your fund of fund list to us.’ Because, for a lot of them it's an afterthought. There may be only one person who does this part time along with long only fund research which is somewhat different, and they therefore may not  be able to conduct proper due diligence and they may not  have the resources and expertise required in-house to do this task justice. They definitely don't fly to Hong Kong and Tokyo and New York several times a year to do on-sites, which we do. And they end up with a list of products that doesn't sell or that are not very good.

We also say, ‘let us also train your bankers, and let us act as the product specialists for your bank.’ And we're so convinced that it works that we are paid only on a success fee basis.

You seem pretty bullish on fund of funds. A lot of institutions are pulling away from fund of funds saying they will wait until they start seeing good returns. What do you see in fund of funds that they don't see?

To me, a fund of funds is nothing more than a portfolio manager… But I think the fund of fund industry is suffering because most of the fund of funds were just multi-strategy, 2% allocations to 50 managers, they were diversifying away returns, not willing to have any sort of conviction. And yes, that doesn't make sense.

But I still like fund of funds. And I think for a lot of investors, fund of funds make a lot more sense than single managers. Even if you're a small pension and you have a £20 million allocation to hedge funds, or even a £100 million allocation to hedge funds, are your really going to put that into single managers yourself? Are you going to be able to hire the best talent to tell you which managers to pick, to do the due diligence? Are you going to have five or six people doing operational due diligence and all the other things? Probably not. So you're going to end up buying something that's going to be the same as everybody else. At that point, you may be better of to just buy an index instead.

But if you look at managers like SkyBridge, for example, they're very active, they're willing to take concentrated bets. They have been historically good at timing entry and exit points for different strategies. Look at them, they're raising a lot of assets and they are providing very attractive returns net of fees, historically beating most of their so called peers. People are really interested and they can see the added value because, again, it's just a portfolio manager that helps you navigate the waters. And so, I think if you have something that's either dynamic, or geographically specific, if there's a clear value proposition people still want that and need that.

What other trends are you seeing in the hedge fund space?

That's a good question. Europe, I'm sure people are still quite interested in. A little bit less now with the Ukraine crisis, that's going to impact parts of Europe. I think Asia is still a topic. Another thing that I find quite interesting is the change in risk appetite of Asian investors. Historically, they were considered to be big risk takers. Now they see hedge funds, or particularly fund of funds, more as wealth preservation vehicles. And you've seen a marked shift, let's say in the last 12 months, where you suddenly have clients in Indonesia and Malaysia becoming significant buyers of fund of funds. I wouldn’t have expected that.

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