Peter O'Neil Donnellon - Managing Director, Research and
Investment, and Member of the ISA Board of Directors
Mr. Donnellon is responsible for overseeing the ISA research
analysis and portfolio management process. He joined the company
from HSBC Investment Bank where he established the Alternative
Investments Group and was responsible for the selection structuring
and distribution of alternative investments. While at HSBC
he was instrumental in the creation of unique structured product
for HSBC's institutional client base that had previously been
unable to invest directly into hedge funds. Prior to joining
HSBC Mr. Donnellon was with Baring Securities from 1989 -1995
where he held various positions including latterly being responsible
for the setting up of new offshore funds to enable institutions
to invest in emerging markets. He holds an MBA from Edinburgh
Interview with Peter O'Neil Donnellon
- The Topix posted a small gain in April and most Japan
hedge funds had a good month, especially those long small-cap
stocks. How did your fund perform?
The Ichibanboshi Fund is up an estimated 1.49% net for
the month of April, versus a market performance of -0.96
for the Nikkei 225 for the month.
- The universe of 'investible' Japan only hedge funds
is very small considering the size of Japan's equity market.
Do you find this a problem when selecting quality funds
for your portfolio? What do you see as the ideal number
of funds in your portfolio?
We monitor around 130 funds Japan only fund, however,
not all are investible. Some are closed or they do not
have a Yen share class. There are many new funds with
track records under three years. So we do have a larger
proportion of relatively new managers in our Japanese
portfolios as compared with our other US portfolios. However,
it is not so much the limited number of funds, there are
many good managers to choose from, but rather the lack
of diverse, non-correlated strategies that make running
a fund of funds in Japan difficult. We have 12 managers
in the portfolio at moment, but the exact number depends
on a number of factors. I would not want to start a new
portfolio with less than eight but could go up to 15 or
maybe 20 in a more mature fund.
Do you invest in start ups? If so what are your selection
criteria and what % of the fund is balanced with those
of managers with a proven track record? How often do you
trade the funds in your portfolio?
It depends on the background of the manager and whether
he has run similar strategies elsewhere. We have seeded
new funds but only where no similar strategy already existed.
I would not want to have more than around 25% of the fund
in early stage funds. We do not trade funds, and portfolio
turnover has been very small. Moreover, changes are not
always for performance related reasons.
- Are you finding any interesting Japan launches in
Yes, particularly in new strategy ideas other than long
- A typically risk averse investor will only look at
hedge funds with AUM greater than 50m and with a 2 year
track record. How does your due diligence process effectively
scrutinize start ups?
I am not so concerned about $50 million aum. That is
really a constraint on large fund of funds because they
do not want to be too much of a new managers assets, It
is much easier for me to allocate $5-10 million. Moreover,
I do not think demonstrating growth in assets proves anyone
is a good money manager, rather that he has employed or
is himself a good marketer. I would much prefer to find
a great manager running $10 million than a so-so running
$50 million. At the moment we have 3 funds in the portfolio
with less than 2 year track records but all the managers
have run similar strategies before starting these Japanese
Typically fund of funds are targeted at investors
new to the alternative market. How do you persuade more
knowledgeable investors that paying performance fees twice
is a good thing?
Our clients are all experienced Alternative Funds investors
and know there is no "no cost" multi-strategy
solution for them. Someone has to do the due diligence,
monitor the managers and protect the investors' interests;
there is a cost to doing this and so therefore a justifiable
fee. A performance element in the overall fee structure
is good for the client as it reduces the overall fund
expenses at times of modest or negative performance. High
water marks mean recovery from drawdowns should be quicker
as performance fees are not paid. It also reflects the
fact that this is a competitive market with limited capacity
and the difference in performance between very good and
very poor managers is extreme compared to index benchmarked
long only funds.
- You have recently launched a capital guaranteed version
of your Japan only fund of funds. How does this differ from
the Ichibanboshi Fund?
The Shinsei Protected Japan Trust has 15 underlying managers,
whereas the ISA Ichibanboshi Fund has 12 managers. The
Trust is pretty much the same in portfolio composition.
The target return is slightly less as part of the portfolio
is always held in cash.
- How has the capital raising been for this product?
It has gone very well. We recently announced that our
client, Shinsei Bank, has just closed a second tranche
for the Shinsei Protected Japan Trust. We now have approximately
$50 million in the product.
- Do you see an increased interest in these products
in the future? What is the investor profile for a capital
guaranteed alternative product?
If it continues to be successful, we expect to be able
to continue raise money for further tranches. Shinsei
has marketed this product particularly to their high net
worth client base in Japan, but a non-protected version
could be sold to other types of investors in the future.
- How do you see the expansion of hedge funds in Japan
as compared with the rest of Asia in 2003?
Japan is a homogeneous market: one currency, one monetary
policy, one economy. It is still the second largest economy
in the world albeit the stockmarket is in a 14 year long
bear market and there are some liquidity constraints.
However it is still a comparatively inefficient market
and hedge funds tend to thrive in inefficient market environments
so I expect the number of funds to continue to increase
and for good funds to perform well regardless of market
direction. Asia is slightly different it is a heterogeneous
market which by nature is more difficult to hedge effectively
and is therefore more opportunistic. I think it does require
some sort of turnaround in market sentiment and performance
in order to be able attract significant new investment
and funds. We have had interest in our First Light Fund
which is an Asian Fund of Funds product and by virtue
of the nature of the Asian markets as I mentioned is somewhat
more market directional than our other products albeit
still a hedged product.
- How do you see the appetite from global investors
in Japan only funds?
Global Investors are generally underweight Japan and
Asia which is not surprising when you realise the average
Japanese mutual fund has returned minus 29% in the last
12 months. However even the most cynical foreign investor
knows that the Japanese Authorities cannot allow the present
situation to prevail much longer without instability and
will therefore be forced to implement some sort of change
to protect the market. For the investor the question is
then how to preserve ones capital during these intense
bear markets but still remain exposed to the opportunity
to purchase the "crown jewels" of the Japanese
economy at once in a lifetime opportunity prices. Over
the past 13 months we have been able to demonstrate a
modest positive return with extremely low volatility while
the general market represented by the Topix and Nikkei
225 have fallen 23% and 28% respectively. Multi strategy
hedge funds are a new concept in Japan but many global
investors are following what we are doing domestically
in Japan and watching how we do. I am confident that if
we can continue to do what we are doing and demonstrate
that we can make money in less ferocious market conditions
we will attract considerable interest from global investors.
Another factor which should not be ignored by global investors
is that a number of prominent Japanese companies have
begun share buyback programmes at a time when research
by foreign investment banks is on the decline. This domestic
recognition of "value" is a fundamental and
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