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Interview with Edward Cartwright of KGR Capital
Eurekahedge

September 2005

Established in late 2002, KGR Capital provides specialist management and advice on investments in Asian hedge funds. Its flagship fund, KGR Capital Asia Pacific Absolute Return Fund, is a diversified multi-strategy, multi-manager portfolio of Asian hedge funds.

  1. It is some time since we caught up with KGR Capital. What recent developments have there been?

    On September 1st this year, we launched our second fund, the KGR Capital Asian Dynamic Absolute Return Fund. It differs from our original fund, the KGR Asia Pacific Absolute Return Fund, in that its target return is higher (15-20%) as is the expected annualised volatility (7-10%). Accordingly, it will focus on hedge funds and hedge strategies in the region with slightly higher target returns than those in Asia Pacific Absolute Return Fund.

    We are also planning to launch a London-listed investment company, KGR Capital Absolute Return PCC, with Dresdner Kleinwort Wasserstein Securities acting as sponsor and distributor. We anticipate this new issue being launched and listed during the 4th quarter.

  2. Why are you planning to launch a London-listed closed end fund?

    We have been urged to do this by our investors (as well as those UK investors who have been unable to invest in our offshore funds) for some time.

  3. Why have your investors asked for a UK closed end fund?

    It is an ideal vehicle for UK private wealth managers and others with UK tax liabilities to consider because it is much more tax efficient. Gains are taxed as capital rather than as income which is the case for nearly all offshore hedge funds and funds of hedge funds. Also, the fund offers price transparency with market makers providing daily liquidity. Several global funds of funds have already raised money from UK investors in this way. We are absolutely delighted to be pioneers in this field.

  4. While the benefits of a London-listed closed fund are understandable, what about the perennial problems with prices falling to discounts relative to net asset values?

    Recent developments in the UK investment trust market have addressed this issue and, I think, have ensured that investors need not be too concerned about this. In common with other companies, we would propose that the new company would have the power to redeem up to 25% of the outstanding shares in issue at the directors' discretion every six months from 30 June 2007 onwards. In addition, the board would have the power to buy in the market up to 14.99% of the shares in issue in the period up to the annual general meeting. It is expected that this authority will be sought annually and actively employed. Frankly, if one looks at the funds of funds already listed in London, a bigger problem is that many of them trade at a premium. That's great if you bought at new issue but not so good if you are considering investing in the secondary market. In order to combat excessive premia, the board will have wide powers to issue new stock. Hopefully, this will give market makers the comfort to make a price near to net asset value.

  5. How large are you now and what is the capacity for your funds and Asian fund of funds in general? And specifically, how has your flagship Asia Pacific Absolute Return Fund performed and grown since its launch in August 2003?

    Our total assets under management including advisory accounts amount to about US$160 million of which just over US$80 million is in the Asia Pacific Absolute Return Fund. This time last year, our total assets were US$58 million. Since launch just over two years ago, the fund has given initial investors an estimated USD annualised return of 10.22% per annum until the end of September, with a volatility of 4.03%. 20 out of 26 months have been positive in terms of performance.

  6. How many funds do you have in your portfolio at the moment and what % of your assets are in Asian funds that are managed outside of Asia?

    We currently have 32 funds in our flagship fund. 25 of the 32 key trigger pullers are based in Asia.

  7. What was the rationale behind the launch of your new high-volatility fund of funds, KGR Capital Asian Dynamic Fund? How does the launch affect the investor make-up of your existing fund(s)?

    Having become comfortable with our ability to select talented hedge fund managers in the region, several early stage investors asked us to consider launching such a product as they wanted to commit assets to a fund with a slightly higher risk measure targeting enhanced returns. As our investment team covers nearly all hedge funds in the region, the creation of this second portfolio has not been particularly onerous since we have not had to expand our scope of coverage significantly. In other words, we already covered the sub-set of the universe that we need to analyse for the new fund. We see the Asian Dynamic Fund as a natural bedfellow and extremely complementary to our original fund.

  8. The Eurekahedge Asian Hedge Fund Index has returned 25% from August 2003 to date and the Eurekahedge Asian Fund of Funds Index has returned 18% over the same time period. Do you feel the difference indicates a lack of quality Asian fund of funds managers or just a general conservative approach to manager selection?

    I cannot really comment on our competitors' methodologies. However, from KGR's perspective, our funds are very much multi-strategy and driven by the production of returns that are lowly correlated to equity, credit and interest rate markets. Accordingly, our exposure to equity hedge strategies is probably lower than the percentage that they constitute within the Eurekahedge Asian Hedge Fund Index. Trying to compare a conservative absolute return fund of funds with your index is, I think, like comparing apples with pears. By its nature, the index pays no regards to the riskiness of particular strategies.

  9. If the latter then is it more difficult for Asian fund of funds managers, employing a conservative approach, to build assets considering investors often look to Asian hedge funds to provide high vol/high returns in their portfolios?

    We have not found it difficult to produce consistent low volatility returns with the universe of Asian hedge funds available. There is such a huge diversity of different hedge strategies that to try and generalise about investors' expectations is very misleading. In Asia, markets are less efficient and opportunity sets are bigger for sure. I think it is more the case that investors expect funds of Asian hedge funds to provide a premium return to global fund of funds equivalents given the inefficiencies and general groundswell of economic optimism in the region. Accordingly, we regard this moment as an opportune one to launch a higher targeted return product.

  10. Considering our previous comparison between Asian hedge funds and fund of funds performance, and also considering that there are 1,800 fund of funds out there and growing, how do you differentiate yourself and who do you feel are your main competitors? And what are your views on the growing competition?

    The most obvious differentiation is that we are Asia Pacific specialists. Within our team, there exists over 160 years' of experience in Asian capital markets. We have put together an extremely complementary group that includes country and strategy expertise. When it comes to the genealogy of asset managers in the region or the strategies they are undertaking, we have a profound knowledge that is hard to replicate. Such intimate knowledge of the region and the fund management community is the key to our success. We think it is very early days in the development of the Asian fund of funds business but feel well positioned relative to the competition as it stands today.

  11. Recent Eurekahedge research suggests that Europe and US-based Asian funds underperform their Asia-based counterparts but still attract the majority of assets. In your experience do you find this to be the case and do Asia-based managers have to produce better returns in order to attract assets as they are further away from the main investor centres?

    There is no doubt that the average Asian hedge fund based outside Asia is larger than its equivalent within the region. Part of the reason is that many investors want local access to their managers more than on an occasional basis. There is greater familiarity with hedge fund management in the West and it is still easier for managers there to raise capital compared to the East. We expect this to change over the course of time. It is still very early days in the development of the Asian hedge fund industry.

  12. And lastly, there is much talk of consolidation in the fund of funds industry. What are your thoughts on this and the impact on your business?

    We are Asian specialists and only feel qualified to comment on the Asian fund of funds industry. At present, rather than consolidation, we are seeing several new Asian funds of funds starting up. Frankly, we welcome these new entrants. With the current high growth in the number of Asian hedge funds, there is definitely room for others. However, KGR Capital has been honing its processes and systems for the past three years so we like to feel that we are at a distinct advantage when compared to those who are starting up now or quite recently.

Contact Details
Edward Cartwright
KGR Capital
+44 20 7823 2932
edward.cartwright@kgrcapital.com
www.kgrcapital.com

 
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