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Departure of Roger Ellis from JF Funds
Ray Heath

March 2003

The sudden departure of Roger Ellis as Chief Investment Officer of JF Funds in Hong Kong jolted the local fund management community. Ellis insisted he was leaving the firm for personal reasons, but the rumour mill linked his departure with that of Blair Pickerell, who had exited as chairman just weeks before Ellis.

Critics within the industry seized on the two departures as proof that, not for the first time, the culture of British style managers (both Ellis and Pickerell are British) just did not fit in with those of the United States. The merger of JF Funds (British) and JP Morgan Chase (American) was proving another example of oil and water, ran the argument.

Investors in the funds run by Roger Ellis had other concerns - who would be looking after their money now? In particular, who would run the JF Asia Absolute Fund (AARF), one of the departing Ellis's star vehicles, and one of the investment group's two hedge funds authorised for retail sale in Hong Kong?

Step up Miles Geldard, who is now responsible for the fund which has produced annualized returns of 40% since 1998, and consistently provided positive returns, whatever the market conditions.

He dismisses the culture clash story, and sees his promotion as a practical rebuttal of the rumours:

"We work as a team here. Victor Lee, who has been working with Roger on the fund has also been doing a very good job running the Pacific Technology fund, and is effectively the senior analyst in AARF. The continuity is very much in place".

Geldard was recruited into JF in 1998 by Ellis himself - they were school friends - after what he calls "a long time" in derivatives and currency management, including a spell at the former James Capel broking operation in Tokyo. There was even a "sabbatical' in Botswana, where Geldard helped to run the country's significant foreign exchange account.

At JF his principal task before taking over AARF was running the group's fixed interest business in Asia, which also included the group's lower risk type vehicles, as well as looking after convertible operations, where his previous experience in derivatives has been brought into play.

"I found myself becoming more and more involved with Roger on all his funds. Obviously, AARF has some of the largest positions, given the difficulties of equity markets, some of those have been currency positions, so I had been effectively giving input into that. My derivatives background was also useful," explained Geldard.

Despite his long association with the hedge fund, Geldard finds himself with a large pair of boots to fill. (Within days of his departure Ellis was in ski boots, jumping out of helicopters on to black runs in Canada).

Since Ellis took over the fund in October 1998, it has never had a red calendar year, and only two 12 month periods when it lost money. In the 12 months to January end, AARF returned +6.30%, when most conventional funds in Asian equities were losing money. The legendary year for the fund was 1999, when it returned +455% as Ellis tapped into JF's remarkable stock picking spell which generated huge returns from Japanese technology plays and smaller companies.

Not surprisingly the current strategy is much more conservative, and Geldard has no plans for any early shifts.

A switch away from the heavy equity exposure of previous years has already taken place, he explained, and there has been a temporary stepping back from markets as a reaction to Ellis' departure, he admitted.

"Our positions were cut down prior to Roger leaving. They have been approximately halved from December end levels, which is normal because when a fund changes managers you want a period of stability as you decide what to do next. Inevitably there will be people who want to leave. That's very normal, and we wouldn't be surprised by that."

What he plans is to build on the current experience of the team. "People looking after the fund now are not new, they have had a lot of time with Roger, and we would not envisage any radical changes to policy. We have already made some modest changes to the portfolio, but the broad approach and management style will not materially change. There will be slight variations. Obviously, I have a background in derivatives so we may incorporate more in that area.

"This is a fund which must respond to market environments, so for the last couple of years we have had a very difficult equity environment, but there have been attractive opportunities for reward in the currency markets and that is why we took larger currency positions than previously. I am not saying we will continue to do that, but we will if the opportunity arises, and the risk/reward is attractive. We are seeking maximum positive rewards for the risk we are taking."

The last quarterly report to investors from Ellis showed a heavy bias towards long position in the Euro. Short term prudence has seen some of those unwound, but Geldard remains a long term bear on the US dollar.

"We took the view that we have had a good run in currencies, and so it was appropriate to reduce that exposure on the basis that the risk/reward was less attractive. For example, the Australian dollar was a big performer and had a tremendous run.

"While we have cut back on the Euro, and that was fortunate timing, we remain long term negative on the US dollar. It is our principal view that the arguments for a weaker US dollar are hugely compelling."

The Euro will remain a fundamental building block of the AARF, but largely as a flipside of the downside potential on the US dollar rather than on its own merits, admitted Geldard.

"Domestically the Euro is in bad shape, but from an export competitive view, it is not quite so bad. Euro-land is likely to have a slightly higher currency by virtue of the imported inflation effect and the Euro can take up a lot of the global currency adjustments."

So, is equity off the screen at AARF now that Ellis is no longer at the controls?

Absolutely not, says Geldard. "All our positions could be equity, whether short or long, it's not as if we have to have currency exposure. It was just felt that the arguments in favour of an increase in currencies were so compelling."

Now the arguments in favour of equities are beginning to appear on the horizon, he said. "In Asia ex-Japan, the equity valuations are becoming extremely attractive, from a range of valuation parameters. The difficulty at the present time is the big markets. Asia is still correlated with them and can't avoid weakness coming from abroad. Asia ex-Japan is very attractive.

"There will be significant opportunities in Asian equities and in Japan on a very specific basis. While it is currently very challenging, a lot of babies are being thrown out with the bathwater, but there is still a lot of bathwater. The reason our position size is small is that geopolitical factors could cause markets to move significantly in any direction.
In a few months time we will be looking at some extremely attractive opportunities."

The big test for JF Funds, Miles Geldard, AARF and its investors, is whether they can reproduce the equity magic that made Roger Ellis famous.


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