Q&A: FoF Founder Discusses Manager Selection, Fund Launch

Feb 24 2006 | 1:00am ET

Roger Beutler is a principal at Saggezza Investment Management, which he co-founded with Patrick J. Morrell. The firm is gearing up to launch its first fund, a long/short fund-of-hedge funds, later this year. Beutler, who has years of experience in the financial industry working on manager selection, spoke with FINalternatives and told us what he looks for in a manager, what causes him to reject a manager, and why his new fund is unique.

What characteristics do you look for in a manager?

We don’t just look for one specific characteristic. It’s the combination of various quantitative and qualitative characteristics that many good managers have in common. We look at a manager’s investment edge, business model and his/her investment team. In most cases, we find managers who focus on a specific investment strategy that can gain a sustainable edge over their competitors and produce superior returns. We also like to see managers who have gone through a period where they struggled. One of the reasons is to see whether they adhere to their investment processes, even if there is a hiccup. It shows a manager’s skills when they go through a tough period. It also says a lot about their risk management. You will see whether they adhere to their selling discipline.       

What do you think the most important attribute is in a good manager?

We certainly do look at the track record, but many hedge funds do not have a long enough track record to draw any statistically meaningful conclusions. The investment process is the most important factor for us, especially its structure and consistent implementation. Further, risk management plays an important role, even more so with strategies that use leverage. The investment team and the complementary skill-set of its members is another attribute we look for.

What causes you to steer clear of a manager? What sort of things raise red flags?

Some of the factors that raise suspicion in our manager evaluation process include when assets under management are growing too quickly; a manager is inflexible on certain investment ideas, positions or the market; forecasts do not continually materialize; he/she diversifies personal assets away from the partnership; there is high staff turnover; positions sizes become too large; the manager depends on the use of leverage to generate value; and a manager allows asset growth to interfere with the implementation of the investment strategy.

What are some current trends in the industry? What is your outlook for 2006-2007?

I think hedge funds and fund-of-hedge funds will continue to grow significantly, though at a slower rate. What we have seen are bigger firms with multi-strategy funds becoming a popular alternative to a fund-of-funds, at least for big institutions. This trend will most likely continue. I expect to see more consolidation in the hedge fund industry with a few mega players driving the boat mainly catering to big institutional clients. However, this also offers room for hedge funds and fund-of-hedge funds that are nimble and adaptable. Multi-strategy, low volatility funds might have a tougher time as the carry trade is no longer as profitable as in previous years. Increasing leverage to deliver the performance cannot be a solution for those vehicles in my opinion. Most leverage-dependent strategies face a more difficult environment. Long/short funds can do very well this year, especially nimble funds with an adaptable net exposure. Further, portable alpha will continue to be very popular, not just for big institutions but more and more for high-net-worth clients. I see fee structures on the rise for good managers, which are able to demand a premium for superior returns.

You are now revving up to launch a fund-of-funds. Why do you think this is a good time to launch such a product?

We believe there is room for a nimble, adaptable and consistent long/short biased fund-of-hedge funds. With the expected consolidation in the hedge fund industry, our commitment to stay nimble will allow us to access capacity constrained niche managers capable of potentially delivering superior returns. Our fund-of-hedge funds is designed to deliver consistent returns in most market environments; the timing of our launch is therefore less relevant to us.

What makes your fund-of-hedge funds unique?

In short, our fund is nimble, adaptable and consistent. We see the complementary skill set and teamwork among the two founders [Beutler and Morrell] as a distinct advantage over other firms.

Where do you see demand coming from, individuals or institutions?

Our client base will include high-net-worth individuals and smaller institutions. The fund aims to be the standalone hedge fund allocation for high-net-worth clients. In an institutional portfolio, the fund aims to represent the core hedge fund allocation to be complemented by satellite funds picked by the institution.

What are some of the benefits of investing in a fund-of-funds as opposed to investing directly in a hedge fund?

One of the benefits of investing in a fund-of-hedge funds is instant diversification. For high-net-worth clients it is often not feasible to construct a hedge fund portfolio with single strategy managers due to the minimum investment requirements. Another advantage to investing in a fund-of-hedge funds is the professional oversight and management of the hedge fund portfolio. Further, in most cases clients do not have the skills to evaluate managers or the due diligence process is too costly and time-consuming for them. 

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