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Interview with Daniel von Allmen, CIO at Progressive Capital Partners

Progressive Capital Partners Ltd (Progressive) was founded in 2001 and specialises in advising clients on alternative investments. We believe in the existence of periodically inefficient markets and irrational behaviour of market participants respectively and that these inefficiencies can be exploited by active investment approaches.

Progressive acts as investment manager of funds and private mandates (managed accounts) which in total exceeds US$660 million (per January 1, 2014).

  1. Progressive Capital Partners has been around for more than a decade now. When did the firm get into the funds of hedge funds (FoHF) business, i.e. Qualitium FoHF, and what was the rationale behind launching a global multi-strategy fund of hedge fund? Were there any specific opportunities that you were interested in that led to this development?
  2. Progressive Capital was established in 2001 to manage fund of funds (FoFs) but the success of Tulip Trend Fund (single strategy) put the focus more on our single strategy business. I joined in 2006 and Qualitium FoHF was launched in August 2007. Back then I thought that the FoFs business was focused too much on asset gathering and highly over-diversified. Therefore Qualitium was set up with a very different fee structure (0.5% Management Fee, 10% Performance Fee) in order to gain a much higher alignment of interest between the manager and the clients.

  3. Please tell us about your investment philosophy and the key tenets that guide your asset allocation across both regions and investment strategies. To what extent do a fund manager’s credentials weigh upon your final decision?
  4. We target a return of 10% p.a. over the cycles and 3 to 5% outperformance versus fund of hedge fund indices. Such a performance can only be achieved if you are prepared to take a view and act accordingly. Initially we thought that a concentrated portfolio and an opportunistic asset allocation would be enough to achieve our goals. But the crisis in 2008 (and 2011) offered us an additional option for outperformance: discounts in listed FoHFs or single funds and later discounts in closed end funds in general. But returning to your question about philosophy: you cannot eat volatility but performance, therefore we accept a somewhat higher volatility if we get paid for it. In terms of asset allocation we are very flexible and opportunistic.

  5. On average, how many individual funds do you hold at any given point and what is your rebalance frequency? Are there any particular rules governing the rebalancing of your portfolio (e.g. mandatory quarterly rebalance)?
  6. We target 10 to 15 high conviction positions on average and we have 5 to 10 small positions which may or may not become high conviction. There are no rebalancing rules. The higher degree of freedom the more opportunities for outperformance.

  7. The years 2009 and 2010 proved to be excellent for Qualitium FoHF and you managed to outperform underlying hedge funds very comfortably. To put this in perspective for our readers, Qualitium FoHF was up 23.37% in 2009 and 17.38% in 2010. How would you account for this impressive performance?
  8. Indeed 2009 and 2010 were very strong years. But the biggest satisfaction was that we recovered the 2008 loss in only nine months which was much faster than most peers. Let me give you the five biggest attributions for this outperformance: 1) we were able to buy a listed FoHFs which I knew very well at a discount of more than 40%. Within 1 year the discount narrowed to 20% and the NAV increased in addition and we sold at a profit of more than 50%. 2) We went into 2008 with no credit exposure, in late 2009 we invested a total of 18% of the fund in four credit funds which played out nicely. 3) We invested in two convertible bond arbitrage funds in summer 2008 which was three months too early, but our selections was excellent and both of them achieved the HWM in May 2009 already! 4) We bought the closed end fund of Daniel Loeb’s Third Point at a discount of 35%, within less than a year we made more than 60% on discount narrowing and NAV appreciation.

  9. The Qualitium FoHF is up more than 10% in 2013. Could you share with our readers which region has proved to be the most profitable for you in terms of risk adjusted returns- both historically as well as for the last year?
  10. As you learned above we are more micro than macro managers. Furthermore we are contrarian and value investors. In 2013 it helped that we had very little if at all exposure to BRICs. The average discount in our portfolio of closed end funds narrowed from 48% to around 40% this clearly helped. We had a substantial US exposure but on the other hand we missed the Japan rally.

  11. Can you share with us the rough breakdown of your asset allocation across the various investment strategies? To what extent do risk management objectives guide your allocations across these strategies?
  12. Currently we have 50% in closed end funds which is the highest ever. We feel that the average discount of 40% is extremely attractive especially given current VIX levels or High Yield spreads. Because of this high allocation which clearly has some beta we only have 7% in L/S. Then there is 17% each in Event Driven and CTA/Global Macro. The tiny rest is in RV and cash.

  13. Given the high-profile blow-ups and fraudulent managers over the years, operational due diligence has take an important role in hedge fund investing. How much importance do you place on operational due diligence and how robust are your processes in this aspect? Have you ever come across or considered a hedge fund that was subsequently exposed as a fraud (Madoff, Bayou etc.)?
  14. No doubt operational due diligence is an important task; but keep in mind that currently half of the portfolio is in listed closed end funds and their corporate governance is much better and easier. Furthermore as my background for many years has been derivative trading/prop trading I really want to understand the strategy and the ‘edge’. And the track record and this ‘edge’ have to fit. It is probably fair to say that we are putting only average focus on operational due diligence but focus on the underlying strategy. We had no exposure to Madoff or Bayou and just to give you an example what I meant before: Madoff was telling investors that he was using a so called split strike conversion arbitrage (buying stocks, selling calls and buying puts), but puts are almost always more expensive than calls so we could not see how they should have achieved such a stellar track record. 

  15. What classes of investors are your funds targeted towards and what competitive edge do you offer your investors? Can you give us a rough breakdown of your investors by type and geography?
  16. Our investor base accounts for family offices (40%), asset managers which allocate to Qualitium within their mandates (40%), banks 10% and other institutional investors like pension funds (10%). We are very opportunistic investors and therefore our clients trust in our ability to make attractive investments. We are not low volatility managers; therefore many investors use Qualitium as an equity alternative.

  17. While we have seen aggressive asset allocations towards hedge funds this year, the multi-manager model has been less successful in wooing investors. How difficult is the current market environment for a multi-manager with regards to raising fresh capital? What, in your opinion, needs to be done to upgrade the value proposition of the multi-manager model so as to enhance its appeal for the investor?
  18. It is very hard to do fundraising for FoHFs, but I can understand it: most FoHFs have not performed well enough over the past three or five years. We offer basically three things: performance, transparency and alignment of interest. This has helped us to grow the FoHFs business; for example Qualitium started with US$30 million in 2007 and has now grown to US$100 million.

  19. What type of hedge funds are you looking to invest in over the coming few months, given the relative performance of the various strategies in the year 2013? Are you contemplating increasing your exposure towards Japan and Greater China focused long/short equity hedge funds?
  20. We are pretty happy with our current allocation but one area we as value/contrarian investors currently look at is Canada. Obviously Canada had a difficult 2012 and 2013 as it is heavily resource tilted. There are not that many players left but we feel they can find ample value opportunities now. We have basically no BRIC exposure (which was good) and no Japan exposure (which was bad). We played the China consumer theme through Vietnam and Macao. We are pretty cautious re China domestic exposure.

  21. Lastly, could you share with us your near and medium term outlook for the global markets – which region or sector are you currently most bullish on?
  22. Developed equity markets are not cheap any more. But they are not yet overvalued and therefore we expect them to continue to go up. We do not like bonds and would not invest in high yield at current levels. We rather try to capture the still pretty high ‘illiquidity premium’. We have big discussions about the value in emerging markets but it is still too early for us.

Contact Details
Christoph Beck
Progressive Capital Partners Ltd
+41 41 561 40 90
cb@progressivecapital.com
www.progressivecapital.com