Hedge Fund Interview with Jeremy Charlesworth, CIO of Moonraker Fund Management

Moonraker Fund is a new investment management firm based in London. Moonraker specialises in the management of hedge funds of funds and wishes to attract high net worth and institutional investors. On 1 June 2008, the firm launched the Moonraker Commodities Fund, a commodities fund of funds, offering exposure to exchange-traded and non-exchange traded commodities. The fund will be invested in approximately 25 managers and will aim to beat commodities indices with half the volatility. Simultaneously, Moonraker launched the Global Opportunities Fund, a thematic hedge fund of funds globally diversified across approximately 30 managers. This fund will aim to produce returns of 12-17% per annum with an 8-10% volatility range. The manager will select the themes he believes will be the most profitable on the long and short side, and will select managers best positioned to express those themes. In a nutshell, it is a fund of specialist hedge funds.

Jeremy Charlesworth is portfolio manager of the Moonraker Funds. He was previously responsible, among others, for BDO Stoy Hayward Investment Management’s TRF Fitzwillam Commodity Plus and TRF Fitzwilliam Growth Funds. The first won an award for the “Best performing European Commodity/Energy fund of funds” while the latter was consistently ranked in top decile according to numerous surveys. He and his team intend to replicate their previous success. Prior to joining BDO, Charlesworth was part of the investment committee at Sedgwick, managing a long-only fund from 1989 until 1997. In 1999, he worked at the Farfell Coffee Estate in Zimbabwe, gaining first hand experience of the commodities sector and the logistics and supply/demand issues it faces.

The two Moonraker Funds were launched on 1 June 2008, with the contributions of a seed investor and several independent asset managers.

  1. After a healthy run between September 2007 and February 2008, the Eurekahedge CTA/Managed Futures Hedge Fund Index finished two consecutive months in negative territory. What do you make of the recent movements seen across the commodity markets, and how do you reckon CTA/managed futures hedge funds would fare in the months to come?

    We believe the recent movements were predictable. We also think CTA’s will continue to do well. Most CTA’s are trend-following, the commodity trend continues and therefore I expect CTA’s will continue to participate in the trends. However, the period of September 2007 to February 2008 experienced tremendous price acceleration. Periods of acceleration are normally short-lived, followed by a sharp pull back and then a period of consolidation which may last many months. If there was something unusual about the September 2007 to February 2008 period, it would be the broad depth of the rally. Nearly all commodities within the energy and grains sectors participated, notable exceptions from the commodity space were really in the base metals – zinc and nickel come to mind.

  2. How does your fund differentiate itself from other funds of funds focusing on commodity-investing hedge funds? What competitive advantage, if any, does it offer its investors?

    Our fund has three major characteristics. First, it is managed from the top-down, while most of our peers appear to manage from the bottom-up. Second, the fund allocations will not be static. Instead, the fund will be dynamically rebalanced every month and even sometimes intra-month. Finally, it will have a larger allocation to commodities futures/physical as opposed to commodities equities.

    The advantages are numerous:

    • A top-down view allows us to overweight strategies where opportunities lie, whilst also avoiding strategies where the risk/reward ratio is less favourable. Although we believe the current commodities bull market will continue for the long run, the different strategies will not behave the same way at all times. At some point, long-biased funds will do better than relative value strategies and similarly, there will be periods where equities-based strategies will perform better than futures or options-based strategies. We intend to invest in a minimum of six strategies at all times, but will always overweight those strategies which we believe are more likely to perform in the immediate macro environment.

    • We will actively rebalance the portfolio to add value. During a secular bull market, commodities repeatedly tend to rise steadily, then accelerate and correct sharply. These patterns create multiple opportunities since the different commodities will not behave that way at the same time. We intend to dynamically shift our portfolio towards those commodities that suffered a correction and to underweight commodities which prices are accelerating. The process will be repeated during the cycle, thus increasing chances of better returns.

    • Most investors already have a significant exposure to equities and seek commodities as a way of diversification. We intend to limit our allocation to equities to a maximum of 25% of the portfolio and generally favour futures, options or physical holding whenever possible.

  3. How do you plan to diversify your portfolio across different regions? Would you rather invest in single managers having broader regional mandates, such as ‘global’ or ‘emerging markets’, or would you prefer investing in country-specific hedge funds – such as those that invest only in the US, or only in China, for instance? Why?

    The latter reflects most our investment philosophy. We intend to look for opportunities on a global basis but as with all strategies, most opportunities lie in less crowded spaces. While our commodities fund does not seek geographical diversification per se, we will aim to invest in managers offering local expertise only if we believe opportunities exist. We will also prefer managers trading in their own regions/countries. Local knowledge of markets participants, trade customs, sources of information and local market hours are definite advantages over someone located in a different time zone (London or New York City, for example), especially when it comes to less liquid commodities.

  4. What would your portfolio breakdown be like, in terms of instruments that underlying hedge funds invest in? On what basis and to what extent would you diversify across funds focusing on commodity-related stocks, commodity-linked derivatives, physical commodity holdings, etc?

    We intend to keep an allocation of 75% to futures/physical commodities traders and 25% to equity commodities traders. The allocation within the equities will be determined according to two factors: availabilities and opportunities. First, we will seek equities exposure for those commodities which are not traded on exchanges (cement, coal, fisheries, renewables, fertilisers, etc). Second, we will seek such exposure at times when the equities valuations present a large disparity from their corresponding commodities (eg junior gold miners versus price of gold).

    Within the futures/physical commodities allocation, we will shift the allocation according to our view of risks, availabilities and opportunities. Included in the process are behavioural theories, as many market participants in the commodities markets will push prices in spikes over the cycle.

  5. Does the manager’s location play any significant role in your hedge fund selection process?

    Yes. As a rule, we prefer managers located nearby the markets they trade, especially for thinly traded commodities or for physical transactions. Australian power, Russian utilities, South African wheat or Malaysian rubber are examples of commodities plays on our radar, for which we would prefer a local and specialised manager.

  6. On an average, how many hedge funds would you be exposed to at any given point in time? And normally, how often would you review and/or shuffle your investments?

    Twenty-five to 30 managers is a mix that we believe is optimal. Investments are reshuffled mainly on a monthly basis (or even intra-month if liquidity allows) and the extent of any reshuffling is entirely dependent on events. If things change, we react immediately!!

  7. What kind of research and scrutiny is a hedge fund subject to, prior to you investing in it? Do you conduct any kind of due diligence as part of the pre-investment process?

    We have been developing a research and due diligence process since 2003 and adapted it for commodities hedge funds managers in 2006. We maintain a database of commodities managers with their expertise and trading styles. Our preferred process starts with the onsite visit of the manager. Key qualitative topics will be assessed, but the details of our process are unfortunately proprietary. In a sentence, due to the opacity of commodities markets and its quasi-nascent hedge funds industry, commodities managers due diligence must be flexible to allow for many peculiarities.

  8. Could you describe the risk management measures you have in place for your fund?

    We believe that risk management is a tool to guide the investment manager in building a portfolio. While we do not believe strict portfolio optimisation and backtested returns provide valid insight in what is coming, we pay attention to individual risks and extreme events. Our philosophy is to position the portfolio towards the strategies which will profit the most from the imminent economic scenario. Thus, we are always looking forward rather than backwards and cannot rely on extensive backtested analysis to support our investment decisions.

    Where risk management is the most useful in our process is to quantify idiosyncratic risks and to assess the impact on the portfolio of stress events; our aim is to have risk management drive the portfolio construction process but not interfere with aspects which are not quantifiable.

    We use risk management tools from an online platform designed especially for funds of funds risk management. These include the ability to assess performance and risk statistics against the peer group, strategy benchmarks and also market indices. A liquidity timeline is also monitored so we can liquidate roughly 60-70% of the portfolio within three months.

  9. What are the types of investors (high net worth investors, institutional investors, etc) that best suit the characteristics of your fund? And, what time horizon would you suggest them to have, in order to be exposed to a fair balance between potential returns and risk, while invested in your fund?

    My career in this industry started in 1982. As an office junior it was my task to send out client portfolio valuations. What I remember of those days is how much exposure clients then had to commodities and basic materials. From memory, every client had Shell, Rio Tinto and a host of other names which have now become history. I even remember a few portfolios with positions in tin and some held investment-grade diamonds lodged with banks in Jersey. Most portfolios seemed to have a commodity exposure in the range 20-25% at a time when the last commodity ‘bubble’ was coming to an end. By 1986 commodities were absent from client portfolios as the ‘bubble’ had then bust. My guess is that the average retail investor has no exposure to commodities, if he/she does – it is by accident rather than design. High net worth investors were reluctant to ‘buy’ the commodity story in 2005 and 2006 but attitudes are changing. With wealth managers now actively recommending commodities to their clients, I would guess that some clients may now have exposures approaching 5%. In years to come and with the benefit of hindsight, my guess is that many clients will wish they had invested three times that amount. In our opinion, our fund is suitable for all types of investors, but will appeal mostly to institutions.

    Some commentators have written that commodities are now in a bubble. We have no doubt that this bull cycle will end in a bubble, but we will know that the end is near when the office cleaner shows you his krugerrands.

  10. Could you give us your near- and medium-term outlook on the commodity markets? Also, where do you see commodities like as crude, gold and silver heading, in the months to come?

    My first investment in this cycle to oil was in February 2004 with a price in the region of US$32 pb. If you had asked me then what my prediction for oil was in five years time, I very much doubt I would have said US$135 pb. Looking at a long-term chart of the oil price, I must confess to be suffering from some vertigo at these levels. A pull back to US$100 pb would keep the trend in tack. However unless there is a change in the production/demand equation, it’s difficult find an argument as to why the price should fall to say US$60 pb. My guess is that we will see US$150 pb this year, US$250 pb and above in future years, but the price is now at levels which will change consumer behaviour and ultimately government policy. As for gold and silver – US$3,000 gold and US$40 or US$50 silver – I think will be with us within five years. Typically the precious metals have a quiet time in the summer, demand is generally lower. However if a real oil shock hits the world this year then the precious metals will correlate.

Contact Details
Lynn Nathan
Moonraker Fund Management Ltd
+44 (0)783 150 0523