The Alternatrend Fund is a long/short fund of hedge funds which invests in superior managers worldwide. The fund aims to outperform the MSCI World Index signifiantly over the long-term with lower volatility.

Interview with Charles E. Abrecht

1. Can you describe what is unique about the Fairway Group's investment philosophy as represented by the Alternatrend fund?

   Unlike most funds of funds managers, The Fairway Group has an extremely focused investment approach, concentrating on long/short equity managers in three strategic regions: U.S., Europe and Asia. The fund is not strictly an absolute return fund, but generates alpha by outperforming the global equity benchmarks with significantly less volatility. We have always viewed the global equity markets as the best playing field for long-term capital appreciation.

   Within this arena, our careful manager selection and portfolio construction provides for a very favourable risk/return pattern. We have always invested side-by-side with our clients and believe deeply in our investment approach, rather than offering "the hot product" of the month, quarter or year. This commitment to our fundamental principles has allowed us to build a solid long-term track record, which has avoided the pitfalls of difficult hedge fund markets of 1994, 1998 and 2000-2002.
   

2. How are the underlying hedge funds selected?

   Via a combination of quantitative and qualitative due diligence processes, aimed at ascertaining the suitability of a particular manager for investment at the fund level. The main due diligence criteria are:
   
   

   1. Investment style and discipline
   2. Organisation
   3. Size and structure of assets
   4. Fee structure
   5. Investment process
   6. Risk control
   7. Performance
   8. Liquidity
   9. Communications and transparency
   10. Other tangibles and intangibles
   11. Structural issues
   
   

3. Can you describe your due diligence process and what sort of models do you employ?

   Using proprietary quantitative models, we conduct analyses on the following:

   1. Absolute track record
   2. Relative track record
   3. Correlation to other managers in different market environments
   4. Volatility of returns
   5. Ability to preserve capital
   6. The "story" behind the numbers
   
   
4. What about your qualitative processes?

   Using a proprietary qualitative research site and the full extent of our 45 years' industry expertise we gauge the following:

   1. The quality of the people
   2. The values of the manager
   3. The manager's subjective view of the business
   4. The manager's financial commitment to the fund ("eat their own cooking")
   5. The manager's ability to grow the organisation and manage that growth
   6. Can we invest with these people? (= smell test)
   
   
5. What strategies do you employ and where are the majority of the funds invested?

   The focus is only on the long/short equity strategy, applied on a global, regionally diversified basis. Currently, in the Alternatrend Fund the weightings are 37% Europe, 54% U.S., 7% Asia, and 2% Cash.
   

6. How long do you monitor a hedge fund before making an initial investment?

   The answer depends on the individual hedge fund. If we know the manager(s) well from previous investments/funds, the time period can be relatively short (1 month or less). In the absence of any prior experience with the managers, the initial due diligence period will take anywhere between 2 to 6 months. The challenge is to recognise good managers early on, as they will close their funds relatively early if they are successful. Our long experience with the qualitative side of the due diligence helps us deal with this challenge.

7. Generally how large are your initial allocations?

   Historically at the Fairway Group, initial allocations to a new manager range between US$500,000 and US$3,000,000. Our maximum required capacity per manager is approximately US$10-15,000,000.
   

8. How often do you visit the underlying managers?

   At least once every semester or more often, depending on our familiarity with the manager and the investment approach. Questions cover the main due diligence categories a) to k) outlined in Question #2.

   And at least three meetings prior to investing, plus follow-up due diligence on the firm and the supplier network. Approximate minimum duration of initial due diligence - one to three months.

   Every following year: a) at least two visits; b) one long telephone conversation every quarter; c) one or two additional phone calls every month; d) ongoing due diligence calls with providers; and e) checking notes with other investors, with personal network etc.
   

9. What are your risk management processes?

   Risks to be managed include a) leverage, b) lack of diversification, c) liquidity, d) transparency, e) lack of downside protection and f) all risks covered by the qualitative due diligence process mentioned above.
   
   
   1. We avoid leverage at the fund level. We also pick long/short managers who do not rely on leverage to generate returns. We monitor exposure risk on a manager-by-manager basis and on a fund level, using proprietary software. At present, the fund is 90% gross long and 32% short, i.e. 122% gross exposed and 58% net. The gross exposure of the Alternatrend Fund is rarely above 125%, while the individual managers' exposure rarely rises above 150%.
      
   
   
   2. The portfolio is diversified over 10 to 20 managers. A single manager rarely exceeds 15% of assets under management
      
   
   
   3. All managers invest only in liquid securities. Funds are not dependent on broker-dealers to price their portfolio positions. Also, Fairway is rarely a significant investor in a fund as measured against the fund's total assets. We further avoid funds whose investor base is too concentrated. Also Fairway has more liquidity within its fund (often monthly liquidity, some daily) than it gives its investors.
      
   
   
   4. Transparency with long/short managers is better than most other hedge fund strategies. Top ten or top 20 positions, gross long and gross net exposure is received on a weekly or monthly basis. On our on-site manager visits we get full transparency of the portfolios.
      
   
   
   5. As part of our due diligence process, we ascertain that the manager truly has the skill and the know-how to provide downside protection in difficult markets.
      
   
   
   6. See above. Includes full transparency checks with The Hedge Fund Administrators.
      
   
   

10. What distinguishes the Fairway Group from other fund of fund managers?

    1. We (through the Stafford Fund, our initial fund of funds) have an almost 11-year track record, applying a consistent investment approach, within the same investment vehicle. That is a longer track record than most funds of funds we know of. In 2003, the Stafford Fund was shortlisted for the European Fund of Funds award in the over 10-year category (Best Long Term Achievement Award).
       
    
    
    2. Our funds tend to perform extremely well during adverse market conditions, for example in 1994, 1998 and in the 2000-2002 period.
       
    
    
    3. We are investors, not just marketers. We believe deeply in our Global long/short equity approach and almost 100% of our liquid assets are invested in the Stafford Fund, the Stafford Global Equity Fund and in the Alternatrend Fund.
       
    
    
    4. We "stick to our knitting" and focus on one area of the hedge fund world - long/short equity. While this approach leads us to have more volatility and correlation with the equity markets than many of our peers, we believe that it also gives us more longevity. By avoiding leverage, concentration, and illiquidity, we did not get trapped in liquidity-driven hedge fund disasters such as LTCM and its repercussions (1998).
       
    
    
    5. We are relatively small (€150 million in long/short fund of funds). Our size allows us to concentrate on the best managers. We believe that we can successfully grow our strategy to approximately €500 million. Larger fund of funds have to over-diversify (50 plus managers) thereby diluting the performance of their best managers.
       
    
    
    6. The transparency in terms of gross and net exposure is higher than many of our competitors, due to our focus on long/short managers.
       
    
    
    7. We probably have a more concentrated portfolio of managers compared to our peers.
       
    
    
    8. Our business network is extremely comprehensive as a result of our years of experience (45 years in the investment business, 11 in the funds of funds business) coupled with the focus on a well-defined strategy. We also are less likely to be swept up by the next hedge fund "fashion of the week". We are not "trigger-happy" and have trust the long-term benefits of our investment research and due diligence.
       
    
    

11. And lastly can you give a little background on the managers

    Charles E. Abrecht (Founding Partner) has held key positions in international financial institutions since 1979. His professional background includes international asset allocation and money management, global corporate finance and mergers and acquisitions work at First Boston and Brown Brothers Harriman & Co. in New York and at Les Fils Dreyfus & Cie in Basel. With his expertise in international capital and financial markets, Charles has advised clients on investment strategies, international corporate finance and M&A transactions. Charles has an MBA from Harvard Business School (1983) and an economics degree from the University of Basel (1979).

    Francesco A. Andina (Founding Partner) has worked in the field of global asset management and private banking since 1973. With his diverse experience and knowledge of global financial markets, as well as his understanding of tax and estate considerations, Francesco has guided many private clients and institutions in structuring and managing their assets. From 1989 to 1991 he managed the multi-billion dollar private banking division of Bank Vontobel in Zurich. In the course of his career, Francesco has opened and expanded branch offices in New York for Bank Julius Baer and BIL Management Inc., a subsidiary of Bank in Liechtenstein. Francesco has a law degree from the University of Bern (1973).
    

Contact Details
Fairway Investment Partners
Switzerland
+41 1 225 7030
www.fairwayfunds.com