The Billion Dollar Interview:
George Coplit, Principal of LGT Capital Partners
George Coplit is a Principal at LGT Capital Partners. He is a portfolio manager and competence centre head for CTA/global macro strategies. Prior to joining LGT CP in 2007, George worked at Ivy Asset Management in New York where he was head of tactical trading strategies. Prior to Ivy, he was responsible for model development at Stonebrook Structured Products, a registered CTA, which he joined in 2000 following his tenure at Kenmar Advisory Corp. He began his career as a registered representative for Scudder, Stevens & Clark in Boston, following his graduation from Tufts University in 1992, where he received his Bachelor of Arts degree.
LGT Capital Partners Ltd (LGT CP) is a private limited company and is wholly owned by the LGT Group Foundation. LGT Group was founded in 1920 and has been a principal investor in alternative assets since 1994.
Launched in October 2000, Crown Managed Futures (CMF) is one of the world’s oldest CTA/Global Macro multi-manager programs. With over US$1.3 billion in assets under management, it is also one of the largest in the world.
Eurekahedge: You used to manage a portfolio of securities before joining LGT and currently you are managing a portfolio of funds. How have your earlier experiences in asset management helped you in your current role?
George Coplit: Most members of our CTA/global macro team, including myself, have either trading or single hedge fund experience. It is something that is a unique aspect of our research team. Having that experience as a practitioner of the strategies, I think, gives us insight beyond just purely understanding the concepts, which I believe is very valuable and allows us to differentiate between managers.
EH: What are the key factors you look at in investing; specifically at fund managers? What are the key attributes of a potentially successful CTA hedge fund manager?
Coplit: For a successful hedge fund manager we look for proven money making skills, responsible risk controls, unquestionable integrity and full alignment of interest. A successful hedge fund organisation that has developed a clear competitive edge, reinvests revenue heavily back into the business to maintain their edge, exerts high standards of compliance and utilises the highest quality counterparties.
Specifically for CTAs, it is imperative that they have ample resources in research, proven risk and money management techniques, and a robust infrastructure to ensure efficient implementation of their strategies. The most successful CTAs tend to employ strategies that are designed to capture repeatable market behaviour. These are often based on relatively simple ideas or concepts that are founded on sound econometric and financial theory.
EH: How important is it that a hedge fund manager should have his own personal wealth tied up in the fund? Are there many cases where managers do not have their own personal wealth tied up?
Coplit: This is one of the key aspects we focus on when selecting a manager. Alignment of interest is important – it shows that they, the managers, have enough faith in the strategy they have constructed, not only to manage client money but also their own.
EH: You have delivered excellent downside protection as well as absolute returns in the 2007 to 2009 period. What was it that you did differently from other funds of hedge funds that enabled you to deliver this performance?
Coplit: CMF is a unique vehicle. It is not a fund of hedge funds. It is a fund of managed accounts, which is an important distinction. We own the managed accounts. We allow the CTAs limited power of authority to trade on our behalf. What this means is that the managers can never lock up our capital and we can never be suspended or gated.
CMF performs well in an environment where trending markets persist for extended periods of time, as well as in higher volatility environments. This was essentially what we had in the depth of the financial crisis. The second half of 2008 for example, was a very strong period for CMF.
In terms of mitigating losses, we have invested largely in systematic trading advisors employing models that have very robust and very responsible risk management techniques embedded in their strategies. We are not dependent on a hedge overlay, nor are we dependent on account protection that is embedded into the strategies, such as stop-loss and portfolio construction metrics that are designed to diversify and mitigate loss potential.
EH: Have your risk management protocols changed over the last couple of years due to high volatility across different sectors and new requirements, etc?
Coplit: The methodology that we have in place to manage the portfolios has essentially been the same since the inception of the fund. Given the fact that the fund and the underlying managers performed as expected throughout the crisis, we were pleased that the processes we had in place and the managers we had added were as robust as we had hoped.
EH: You spoke a bit earlier about your exposure to different strategies. On average, how many hedge funds would you be exposed to at any point and normally how would you review or shuffle your investments?
Coplit: It has ranged from approximately fourteen managers to eighteen managers in recent years. The decision to add or replace a manager is based on a variety of things. First, if a manager underperforms, or performs out of line compared to our expectations, this would be one reason to redeem a manager. We have predefined return forecasts for each manager and concrete risk guidelines that are monitored closely by the analysts and our independent risk control team. Should any manager breach a hard limit, they would be immediately redeemed. Second, if there is a business risk associated with the manager. For example, if a senior researcher or senior investment professional leaves the firm, that may be a sign that we should question whether we still want to be invested with that manager. And the third would be if we have a better replacement. The majority of our manager changes are based on this point. We are constantly analysing the universe of CTAs to ensure that we have the best manager line up. If we ever conclude that a new manager is superior to an existing one in the portfolio, we will make that change.
What is important to understand here is that we are not adding managers just for the sake of diversification. We do not feel that we need thirty or forty managers. We understand that there are a limited number of unique sources of alpha in managed futures. We believe that we are expressing all of those in the portfolio, and doing so in the most efficient way by employing the fourteen to eighteen best managers in our investment universe.
EH: Coming to something interesting that we noticed in your presentation materials, your fund has never lost money in a fraudulent investment. Have you ever come across a fund that was subsequently exposed as a fraud, and what was it about such a fund that raised a red flag?
Coplit: The risk of a fraud in a CTA managed account is very small. Via our proprietary managed account platform we have full operational control, full transparency and daily liquidity of the invested assets. It would be very difficult, if not impossible, to deceive all parties involved.
Having said this, throughout our due diligence process, we look for red flags that would preclude an investment. These are often raised during interviews with employees and investors, background investigations and reference checks. However, since many frauds are often associated with operational deficiencies such as the quality of counterparties, adequate separation of duties, and independent checks and balances – just to name a few – we also have independent operational due diligence and risk control teams which become part of the due diligence process from a very early stage.
EH: Moving on to the different fund platforms, how do you drive synergy between different funds managed by LGT? Are the same research methodologies applied across different funds and strategies?
Coplit: We believe our activities around CMF benefit greatly from being part of a larger, US$20 billion plus, alternative asset management firm. The stability, vast resources, experience and structure of our firm and processes ensure a good environment and backdrop for our trading competence centre. All invested managers of all styles have to go through our state of the art investment process and benefit from the resources in operational due diligence, risk control and our teams’ network of contacts. LGT Capital Partners’ asset allocation process gives valuable input for medium-term positioning of the portfolio, whereas the day-to-day portfolio management activities are done within the trading team.
Eurekahedge: How do you foresee the amount of stress laid on tightening regulations across the hedge fund industry to affect your fund? Are there any requirements that could potentially affect your fund performance or your manager selection process?
Coplit: It is very hard to comment on this point because it would mean a lot of speculation as to what regulations could potentially be implemented. What I will say is that we are following the different regulatory agencies and those that have control over the futures markets. At this point we have not seen anything that is of a major concern. We are hopeful that the regulators will understand that speculators such as those that are being employed in CMF are valuable to the futures markets, and they will not handcuff their ability to actually provide that liquidity and efficiency.
EH: Did you face any significant redemption pressure in 2008, 2009?
Coplit: We did. While 2008 was a very strong year for CMF, the fact that the fund offered weekly liquidity meant that investors that needed liquidity redeemed. While we did not lose any clients during the financial crisis, we experienced investors significantly reducing their exposure. Since then, we regained new investors and the fund is actually at a peak, in terms of assets, as at the end of April.
EH: The asset raising environment has been hard for other multi managers and also for single managers in the post financial crisis environment. What sort of single manager hedge funds do you think would derive greater capital from investors?
Coplit: At least from our perspective, liquid, transparent strategies such as long/short equity, global macro and managed futures have received the greatest inflows since the financial crisis. The assets of managed futures have eclipsed their historical high as the benefits of liquidity, transparency, and non-correlation to traditional assets classes clearly attracted investors.
EH: Can you give us a rough breakdown of your investors by type and geography?
Our investor base is largely institutional, predominantly from Europe and Asia. The current assets on CMF breaks down to approximately 35% in pensions, 17% in endowments, 12% in insurance companies and independent asset managers, and the remaining 36% in bank platforms.
EH: Could you give us an idea of how the different LGT offices across the globe interact with each other?
Coplit: LGT Capital Partners has its headquarters in Pfaeffikon, Switzerland. We also have offices in London, New York, Hong Kong, Tokyo and Dublin. Having a research presence in some of the largest financial centres in the world provides a global perspective to our research and portfolio management. These offices are essentially our eyes and ears on the ground and keep us close – in terms of culture and proximity – to the investments in our portfolios and to our clients. We have a global infrastructure and integrated systems that allow access to all relevant data from anywhere in the world. It is everyone’s responsibility to make sure that information is being shared, either via our centralised research database or during regular investment team meetings. Specifically to CMF, the managed futures team has scheduled weekly meetings where we discuss the macro environment, analyse performance, set priorities for the team, and have frequent conversations regarding the management of the portfolio.
EH: Can you share with us your near term and medium term outlook of the global macroeconomic situation and the implications for CTA/managed futures funds?
Coplit: The environment is very interesting. There is an increase in divergence between nations around the world. A lot of it is based on emerging and developed markets being at different points of their growth cycles, and on global central banks and governments being in different stages of their monetary and fiscal policy changes. Those divergences create a lot of opportunities not only in terms of market direction, but also in terms of relative strengths and relative weaknesses of different economies and nations. These create a lot of opportunities for global macro and managed futures advisors.
We think that the likelihood of a continued trend of weaker currencies is very high. A lot of people focus on the US Dollar, and I think the US Dollar is clearly under duress. This will create opportunities in the currency markets but also in other markets such as commodities, where a lot of the securities are denominated in the US Dollar; as well as in precious metals, which are actually being used as an alternative to currency.
Beyond those divergences, we also believe that there are inflationary pressures that have begun to build across the world. We may not have seen it yet in the US, except for perhaps oil prices and maybe luxury goods. It has been reasonably contained – but it will happen. And that inflation will lead to not only opportunities in commodity markets, as hard assets are being used to store value, but also in fixed income markets. We do not necessarily believe that rates are going to be higher in the next three or six or twelve months. We are not forecasting when rates are going to rise. What we do believe is that rates have to change, especially in certain nations, because of the inflation aspect that I mentioned earlier, as well as the potential for continued growth in the emerging markets. I think policy makers across the world recognise that as they tighten, they need to do so in a responsible and measured way; the moves need to be much more forecasted than they have been in the past. This measured pace of rising rates could potentially be very attractive for directional trading managers, like trend followers in futures that will be able to capture and capitalise on those trending markets.
We see this as being a very good environment for managed futures strategies and we’re actually very optimistic that at the end of 2011, there will be a lot of directional as well as relative value opportunities for our managers to capitalise upon.