Hedge Fund Interview with Tim Enneking and Alexander Polykovskiy of Altima Asset Management

Tim Enneking is a founder and director of both the Tera Capital Fund and its investment manager, Altima Asset Management. Enneking is the chairman of Altima. He is also the director of corporate development for Optim Advisors, which manages over US$25 million in assets of the Diversified Property Fund (DPF), a fund focused on emerging European markets, as well as president of Optim's Metals Group and president of, which include all DPF's metal production and trading activities. He is also chairman of the board of Amerim-1, which is constructing a warehouse complex between Moscow's Sheremetyevo International Airport and the main road link between Moscow and St Petersburg.

Prior to joining Optim, Enneking was the president of Tera Finance, a financial consulting firm, and the CEO of Baytree International, a B2B Internet company. He was the vice-president, M&A of GTS, working for GTS from 1997 to 2001. While with GTS he was a key player in taking two Russian companies public on the NASDAQ. In various positions, he has been the principal on over 50 M&A transactions throughout Europe and the CIS Countries worth over US$10 billion and has extensive analysis and transactional experience in Russia. He speaks near-native Russian and French. He has four advanced degrees: in international business, international law and Soviet Area studies from Georgetown, the University of Baltimore and the University of Maryland.

Alexander Polykovsky is a founder and director of both Tera Capital Fund and Altima Asset Management. He has been successfully managing investments and business in Russia since 1992. He recently successfully completed construction and sale of a large warehouse complex near Sheremetyevo International Airport outside Moscow. Polykovsky is a graduate of the Moscow Production Engineering Institute. He is also co-founder and a board member of the Alan Group of companies, including logistics and construction companies.

  1. Given that the Tera Capital fund has a much lower minimum investment requirement relative to the industry norm, does this increase the sensitivity of Tera's performance to redemptions? What checks do you have in place to address this issue?

    It is certainly theoretically possible that Tera is more sensitive to redemptions than other funds. However, during Tera's relatively short existence, we have not had a single redemption of any funds whatsoever, although the number of new investors has been increasing steadily. Pleasantly, the opposite is true - the average investor in Tera has already invested twice in the fund; we have invested several times each. Also, since investors are free to invest relatively small amounts, it's kind of like the labour market: if you can't fire someone you don't hire them. With Tera, it's relatively easy to get out, so one is comfortable leaving money in.

    In terms of checks and balances, we have the relatively standard authority to delay redemption in the event that it causes serious cash flow problems within the fund. Of course, the funds in which we've invested also require a certain period for redemption, so in effect we end up with the 30 to 60-day redemption period reflected in our prospectus and marketing documentation. We think this is plenty of time to be able to effect redemptions in a controlled manner.

    Finally, we are very slowly allowing a bit of cash to accumulate in the fund. Of course, this will never reach a large percentage of the fund's assets because we need to put the money invested in Tera to work, but there are several good reasons to have some cash on hand, and meeting redemptions is one of them. Since our minimum and average investment is relatively small, we really do not need a large reserve to handle redemptions of even several investors at once.

    Therefore, we see the lower average investment size as an advantage, not a disadvantage.

  2. Could you also discuss the above in terms of the capacity constraints on performance?

    We certainly don't see that having a larger number of investors than most funds of funds constrains us in any way. If anything, the opposite is true. For instance, one of the funds we invest in has almost US$2 billion under management, but has only approximately 225 investors. If five of those investors decide to leave within a relatively short period of time, that fund will have to really work to redeem them all in a timely fashion. Given our, if you will, diversification in sources of investment, as well as in the investments we make, we would not have any difficulty in redeeming a far larger number of investors under comparable circumstances.

  3. How does Tera Capital's mix of investee funds meet its investment objectives?

    We really have tried to diversify as much as possible in the relatively new markets in which we invest. We invest only in equity. Consequently, through the investee funds, we invest a significant portion of our assets in "blue-chip" stocks, another significant portion in secondary stocks, some in tertiary stocks and relatively young companies, with a reserve that we are planning on investing in private equity but have not yet done so.

  4. Could you give us a break-down of the fund's assets by targeted/actual market segment and/or asset class, and the rationale behind the same?

    Interestingly, we cannot provide a detailed breakdown by market segment because we don't have complete transparency with respect to the funds in which we invest. Given that we are heavily invested in Russia at the moment, we are obviously also have significant investments in the oil and gas industry, extractive industries and raw materials. However, we also have significant holdings in power generation, telecommunications, FMCG, pharmaceuticals and other rapidly growing industry segments in Russia and Eastern Europe.

    In other words, given the nature of the markets in which we invest, we are really pretty much an opportunistic fund. While we look periodically at investing in a single sector - and in sector-specific funds, such as power, telecommunications, or oil and gas - for the moment we have elected to stay more of a generalist fund. This gives us considerably more flexibility and makes us far less dependent on developments in any specific sector. Given that some of the markets in which we invest are not deep, and perturbations can be significant, we feel that this approach is much better from both a diversification and risk-minimisation standpoint

  5. Insured bank deposits are cited as an effective means of reducing political and other macro-economic risks in Russia and the CIS. What other risk mitigating practices does the Tera Capital Fund have in place?

    Risk reduction was probably our top priority in structuring Tera. That is one of the reasons that we created it in an offshore jurisdiction and not in Eastern Europe. Given that we only work with highly professional funds, this means that investments in Tera are made through major banks, that the individual investments in the investee funds are effected between major financial institutions who act as our respective administrators, that our fund and the funds in which we invest are audited by major firms, and that deposits are all insured by major insurers or institutions. Overall, we feel that, although we are clearly exposed to significant regional and country risk, we have been able to minimise collateral risk such as banking system risk, repatriation risk, and various other types of risks that are not directly related to the investment itself.

  6. Comparing the Eurekahedge emerging markets hedge fund and fund of funds indices over the past few years, one notices that for the period from May 2005 to date (the collective period of operation of Tera's investee funds), funds of funds have actually overtaken (up 26%) their hedge fund peers (up 23%). Do you feel this is a reflection of an increase in quality of fund of funds managers, or of the benefits of diversification, in such markets?

    Frankly, it's difficult for us to answer that question without a deeper analysis of which funds have really generated that sort of performance. Hazarding a guess, however, I would say it might be due to the fact that more funds of funds are focusing on emerging markets and during the period of Tera's existence, emerging markets have done extraordinarily well. Of course, in that case, it's only a temporary aberration; the underlying investee funds almost have to catch up and surpass the funds of funds eventually.

  7. How does Russia stack up against other emerging markets in terms of opportunities for hedge funds/funds of funds?

    Russia is the largest single market and the most resource-rich one in the region on which we focus, therefore it's probably the most interesting. However, given where the Ukraine is today - about where Russia was six or seven (or even more) years ago - that market, among others, is also extremely interesting. Unfortunately, the level of political stability in the Ukraine has not quite met expectations, and it's probably still too early for all but the least risk-averse capital to enter the country in a serious way.

    As we have been looking at various markets in Eastern Europe, using Russia effectively as a base, there has been rather surprising development: investment in Russian companies has become progressively less an investment in just Russia. Russian companies are so cash-rich that they are buying more and more interesting assets outside of Russia: in the former Soviet Union, in Eastern Europe, in Central Europe, and even in Western Europe and the United States.

    Therefore, as we are looking to further increase Tera's diversification, the portfolio is diversifying all on its own.

    Given the increasingly stable political environment in Russia - whether you agree with the politics of the current party or not - the prospects in Russia and in most contiguous countries look to be quite good for at least the next three to five years.

  8. Do you foresee a crowding out of opportunities for alternative investment in the Russian markets any time soon? What is your fund's main edge over its competitors?

    Interestingly, there appear to be very few funds of funds focusing on Eastern European emerging markets. I'm sure you know more about the others than we do. And, while there is probably more money chasing good projects and companies than ever before in Russia and Eastern Europe, the need is tremendous and there will be no shortage of investment opportunities for years to come.

    One of the interesting distinguishing features of Tera and its management company, Altima Asset Management, is that Altima covers all of Tera's expenses and only collects a success fee. In other words, investors in Tera do not see their investment whittled away by load fees, banking expenses, or even auditor's fees - Altima pays them all. Altima only earns money if Tera earns money.

    Between those two characteristics of Tera, we think it is singular. It also gives the management company one heck of a motivation to succeed!

  9. You mentioned that the need for investment in Russia is tremendous. Would you have some figures at hand that might give a better picture of the kind of demand chasing the kind of capacity among hedge funds allocating to the region?

    Some approximate figures:

    i) Power sector: Over the next 15 years, US$450-600 billion of investment will be required. The power sector has been a very successful sector for investment.

    ii) Gas sector: For projects currently underway or approved, almost US$100 billion in the next five years.

    iii) Oil and gas pipeline construction: US$150-300 billion over the next 15 years.

    iv) Foreign investment increased by 10% in 2004, 10% in 2005 and is expected to increase 11% this year. However, the total for 2005 was still only US$6 billion - an almost insignificant sum given the size of the country, its population and the size of its economy (where foreign trade turnover alone totalled almost US$300 billion in 2005).

    In other words, demand for foreign investment is enormous and, even with the recent increases, the amount being invested in Russia is extremely small.

    Further, there are enormous investment requirements in the financial (banking, insurance, etc), FMCG, food, manufacturing and other sectors that are just beginning to be felt. 70 years of communism didn't help Russian and the other countries of the former Soviet Union modernise. More importantly, there was virtually no emphasis on consumer goods. Finally, while the very top level of technology in the Soviet Union may have been comparable to that of the West (even ahead in some areas, while behind in others), there was one enormous distinction: in the West, a good idea is distributed through all levels of the economy and society very quickly by entrepreneurs or existing companies. In the Soviet Union, such ideas were generally closely guarded and reserved for a small group of elite. Consequently, consumers needed everything in Eastern Europe and the former Soviet Union. Uncontrolled imports, among other things, contributed to the crash in Russia in 1998. Now, we are seeing much import substitution and demand for high quality, Russian-made goods is enormous. Again, statistically, much of the impact of this is being masked by climbing oil prices, but the trend is real and clearly visible "on the ground".

    Curiously, since most production facilities in Russia and Eastern Europe are old and/or in poor condition, the region has an advantage: it can simply leap four or five generations of technology and invest in the most recent. In the West, where a company may have invested not long ago in technology that is now only one or, at most, two generations old, there is a tough economic decision to make as to whether to upgrade. Here, there is no such decision. And since there is plenty of cash from exports in Russia, in particular, we are seeing much investment in state-of-the-art facilities as a result.

  10. Could you share with us your outlook for Russia in the near and medium term?

    In the near term, two or three years out, we think Russia will grow quite rapidly. The same is true over the medium term if Russia addresses some of its more serious problems: corruption and the lack of real opposition political parties, an independent media and an effective judiciary.

    However, there are lots of "haves" in Russia now compared to ten years ago when there were really only "have-nots". Therefore, it is in the best interest of those who can influence political and economic events that the situation in Russia remains stable and profitable for everyone. There is also a tremendous amount of diversification in terms of production taking place in Russia today that is hidden from a statistical standpoint by the simultaneous increase in oil prices.

    These two factors, which are largely hidden from the outside world, significantly enhance the prospects for stability and growth in Russia.

    Of course, much depends on the world price of oil as Russia has only begun its economic diversification process. Given that there are few, if any, indications that the price of oil will fall below US$50 per barrel,



    however, and given the pace of economic diversification that we see every day here in Russia, we do not see major cause for concern.

    That said, Russia runs on the old "Internet time"; one year in Russia, or in most places in Eastern Europe for that matter, is five years virtually any place else. You have to be on your toes here and know what you are doing because things change very quickly. And that makes events a bit more difficult to predict.

Contact Details
Tim Enneking
+7 495 765 2824

Alexander Polykovskiy
+7 495 969 9557