"Investors are looking for a new generation of portfolio managers with advanced risk management techniques, not just salesmen delivering nice presentations"
Noemi Holecz, a risk and portfolio manager of Loyal Explorer Fund says the fund stands out from the competition through the advanced quantitative methodologies utilised by Colombus Investment Management.
Colombus Investment Management is a European AIFMD compliant alternative asset management firm, specialised in managing globally diversified hedge fund portfolios. The company manages both fund of hedge funds and managed accounts totalling US$100 million. Colombus’ professional team has several decades of investment experience, and works with more than 100 carefully selected alternative investment funds from all over the world. Their special focuses are niche managers and emerging managers who already have reliable and stable operation, respected service providers and outstanding strategy, but still have the potential to outperform peers. Colombus builds globally diversified portfolios from these alternative funds with limited volatility and up to double digit target return.
- Noemi, when preparing this interview, we ran the multi-statistic peer group analysis of the Loyal Explorer Fund vs. the entire Eurekahedge Global Fund of Hedge Funds Database of over 2,100 funds. We were surprised by the result: your fund appears in the top 1% across most risk statistics (as displayed). It also shows an exceptional return distribution function with positive skewness and moderate sensitivity to equity markets. How did you manage to achieve this?
When selecting underlying managers, we choose the ones with unique strategy, low correlation to markets and with the potential to generate alpha on a systematic way.
On top of a thorough operational due diligence we check the ‘quality’ of their hedging techniques across different macroeconomic scenarios, take into account hundreds of market factors, run extensive stress testing, employ both returns- and holdings-based risk analysis and many more.
This way we can effectively mitigate any devastating market meltdowns yet provide consistent performance of our fund of hedge fund (FoF).
- It sounds like an extremely sophisticated and complicated investment process usually employed by large institutions. Being a relatively small investment team, how do you handle this?
We use the Risk Shell investment framework from Eurekahedge to solve all the tasks, from manager screening, risk assessment, factor analysis and stress testing - to non-linear portfolio optimisation. Risk Shell offers not only the most advanced FoF investment methodology existing today, but also facilitates the process, making it doable for small teams. Doing the same in-depth risk analysis without Risk Shell would be impossible.
- While the performance of Colombus Explorer Fund speaks for itself, what is your take on the reason many FoF managers fail? What are the typical mistakes in constructing a robust FoF portfolio?
Many FoF managers come from the traditional long-only fund management and don't understand the peculiarities of hedge funds. Hedge funds are unique instruments and should be analysed with special tools (like Risk Shell). On the other hand, some FoF managers use purely qualitative approach and disregard important risk factors. Why? Because it is easy to build a portfolio based on qualitative due diligence questionnaires.
- What is your typical day like?
We typically spend three to four hours with Risk Shell, closer to the Risk Committee meeting even more. Our operation as a fund of hedge funds manager has a monthly cycle with several tasks related to Risk Shell. We continuously screen the hedge funds universe and the software provides easy and advanced search methodology for doing that. Before we invest time and effort into a thorough operational due diligence, we run risk assessment examining correlation to major markets and other funds, we analyse their risk-return characteristics, search for market factors impacting their behaviour, and stress test the funds based on identified factors. The reports created in the system are not only user friendly, but have a nice visual outlook with colourful charts and tables.
We just had the monthly Investment Committee meeting, and prepared all the reports about our portfolios with Risk Shell, using automatic reports showing the risk-return characteristics of the portfolios historically and in different market environments. Additionally, I created factor analysis and stress-tests to see the portfolios’ behaviour in crisis situations. As we keep track of our trades holdings in the FoF accounting section of Risk Shell, we can run reports based on our historical activity and actual holdings. Our monthly liquidity reports taking into consideration the underlying funds’ special redemption terms, the strategy P/L of our portfolios for any time period, the strategy breakdown and its dynamic historical equivalent are all taken the system.
- What differentiates you from other managers in your sector?
I believe we use the most advanced methodologies for alternative investments available today. We don't pick managers purely based on their performance statistics, but on an in-depth analysis of their hedging techniques and driving market factors. When we meet with our investors, we try to explain how we can protect their investments rather than impress them by nice looking presentations.
- Do you have any firm plans for further product launches?
Having a wide pool of selected and tested hedge funds in our scope we can start new products easily. Currently we are planning to launch a new fund offering fixed-term savings for high net worth investors. Of course it will be structured as a fund of hedge funds, since this is the field of our expertise. Limited risk, up to double digit return can be a valuable opportunity for investors in the coming years.
More information about the Eurekahedge Hedge Fund Databases and Risk Shell is available on the following pages: www.eurekahedge.com/Products/Hedge-Fund-Databases and www.eurekahedge.com/Products/RiskShell .