In conversation

Erscheinungsdatum: 20. Mai 2014 | Eurex Group

In conversation

Renaud Huck and Andrew McCaffery

In this issue, Renaud Huck talks to Andrew McCaffery, Global Head of Alternatives at Aberdeen Asset Management PLC, about the impact of EMIR and other regulations on his company and the industry as a whole.

Huck: Andrew, can you tell us a bit about yourself?


McCaffery: Yes, of course. I am currently the Global Head of Alternatives at Aberdeen Asset Management. At Aberdeen we have moved all of our alternative strategies and illiquid asset investment into one division. Our goal is to deliver our capability in all these areas through a combination of direct and indirect allocations, which includes hedge fund strategies, private equity, real estate and infrastructure investments, and access to other niche strategies, to our clients. We are looking to be a “trusted adviser” in this process and work with investors, whether as a manager or adviser capacity, to deliver effective solutions to meet their objectives and needs. Fortunately we work closely with our Investment Solutions colleagues to incorporate traditional and non-traditional investment ideas into a range of client portfolios as well as those managed purely in alternative strategies and assets. My background is not entirely an asset management one, I started my career in the bond markets in the early to mid-1980s.

Through that period I worked primarily for investment banks and finished that part of my career as Managing Director at UBS where I was responsible for the interest rate derivative business in Europe, but also ran the global hedge fund coverage that we provided as a firm across the breadth of investment banking services. When I left I looked at various ideas, and I decided upon a role as CEO for a fund of hedge funds business. Since then I have been involved in the asset management side of the financial industry, with Aberdeen Asset Management today, and prior to my role with BlueCrest Capital Management for just under three years.

Huck: You are the head of one of the biggest asset management firms, how would you define the profile of Aberdeen Asset Management?


McCaffery: I am just responsible for a small part of it! We are very fortunate in that one of the great things about Aberdeen has been its continuity and stability through its first thirty years, driven by the fact that we’ve had a very strong senior management team. Our CEO, Martin Gilbert, is known as a very charismatic and successful industry figure, and it is important to bear in mind that he, and other key members of the management team, are still with the firm today having been here at the beginning and still managing the larger business today. Others such as the Head of Equities, Hugh Young, and Anne Richards, our CIO, bring a great deal of value in their investment and business skills. It is also reflected in the continuity they also bring to the firm overall, along with the overall management team, to support and develop the company’s culture.

“Bainbridge’s activities fall under those two categories: pure alpha generation and dynamic beta participation.”

 

 
 


One of the key things for us is defining our profile and who we are as a firm. As you may be aware we went through, and are continuing, a high profile branding campaign last year to present ourselves as “simply asset management” and the principle of asset management being all we do. We are not affiliated to any other organization; we are independent with a sole focus on asset management and providing a range of investment capability and asset management services to our clients. The culture of the firm is, in my opinion, a very important part of the firm. We are longterm oriented in thinking, very focused on our own fundamental research and our proprietary due diligence processes – whether an equity that we are buying or a hedge fund manager we are allocating to – and it is important to understand the management of the company, have confidence in their approach and develop a strong, professional relationship. In the specific case of hedge funds we must have confidence in their ability to repeat their process, and to demonstrate the ability to make money for us.


Huck: What are your aims for Aberdeen Asset Management and how would you like Aberdeen Asset Management to be regarded in the 21st century?


McCaffery: First and foremost, none of us know exactly what the future holds. One of the skills of Aberdeen has been the ability to adapt and build out businesses through time into a very strong platform, which can generate organic growth and integrate acquisitions effectively. The performance of the company in recent years shows our ability to generate investor confidence and increased asset inflows. The deal to acquire Scottish Widows Investment Partnership (SWIP) at the beginning of April reflects our ambition and our strength to recognize opportunities to become a more successful asset manager. Obviously, given my personal bias, I would love to see Aberdeen recognized as a broader, more diversified asset management business and to be seen as a premier alternative investment provider within that. The SWIP acquisition is a very positive move in that direction for the firm overall and within the Alternatives Division.

“We are not affiliated to any other organization; we are independent with a sole focus on asset management and providing a range of investment capability and asset management services to our clients.”

 
 

This will take the building blocks of clients perceiving us as a global, full service investment manager with a wellresourced and clear structure to deliver the capability we have and that any investors can utilize. One of the key things Aberdeen has built is the strong culture that can sustain this. Another aspect will be our ability to manage and adapt as regulation changes significantly, as this will continue to influence how we manage our business and how we interact with clients. Also, the nature of how investors approach their investment needs will develop further, in terms of how capital will flow as a whole, whether across asset classes and/or differing alternative strategies, the demands around managing their portfolios will continue to evolve.

Aberdeen would like to think that through the 21st century we will continue to evolve with our clients, and hopefully eighty plus years from today the company will continue to demonstrate the ability to respond and deliver for our clients – and that the highest quality service and top rated performance.

Huck: One word is on everyone’s lips – EMIR. How does it impact you?

McCaffery: As an asset management firm that transacts in the exchange-traded and OTC derivatives markets and has a large European presence, then it has had a significant impact. We have had to commit the necessary resources to understand and comply with the initial reporting requirements, and the longerterm record keeping needs demanded. I think that every firm has found certain challenges with this, but it is now in place and we are aware of our obligations to meet the regulations in the financial markets that we invest and trade in on behalf of our clients’ portfolios. It is one thing capturing and reporting information and data, but it is also important to understand why these regulations have been created. The after effects of the “Global Financial Crisis” (GFC) has produced some natural consequences and the way regulators have responded in this example is by seeking much greater transparency in some markets as a start. The burden on the business can be notable, with increased resources required, but it is part of the environment we now have to contend with. However, it is something we have to incorporate as an issue for all participants, and key for us is to ensure that our clients are confident, comfortable and continue to receive positive results from us, whatever the reporting requirements and other demands end up on the regulatory front.

Huck: What is your reaction when you see regulation whether it be MiFID, AIFMD, EMIR, DFA piling up in front of you?

McCaffery: I think that the key reaction is to appreciate that this is part of a process which is still flowing out from a very large shock to the system, i.e. the systemic shock waves from the GFC. This was a very large shock to regulators, as well as to the marketplace, and they have had to adapt as a consequence. The evolution of the regulations is continuing at a considerable pace. However, key for us is the opportunity to have a dialogue with regulators, across various jurisdictions, and participate in discussion plus understand what the regulator is looking to achieve, and assist the regulators by giving measured and useful input throughout the process. In this way we are not only being a “good citizen” but we are developing an understanding of the regulators goals and can provide constructive perspective back on their potential impact, intended and unintended. The harsh reality is that all users of financial markets, and especially managers of investors assets, will have an increased cost burden in a variety of ways but we need to adapt quickly, deploy the necessary resources to overcome initial difficulties and create efficient environments to ensure our clients can continue to work with a high degree of confidence.

“Barriers to entry have increased for new managers, partly as a result of the increased regulation, but also the additional costs of starting with "institutional style" infrastructure to attempt to attract instituional investor flows.”

 
 


Huck: Moving on towards the experience you had with The Hedge Fund Lions Den (HFLD). What did you take from such an initiative?

McCaffery: First and foremost, it was very enjoyable! Enjoyable because it was great to have he opportunity to be involved in something that I think is making a large step forward for promoting new and emerging hedge fund managers. Eurex and Hedge Funds Review should be commended for bringing to light new managers and promoting both education and a constructive profile for the industry, plus the challenges emerging managers face in the industry today. The evolutionary nature of the hedge fund industry is important to maintain and develop, as it has felt threatened in recent times. However, part of this is a maturing of many businesses still labelled “hedge fund managers”. They are, or are becoming, asset management firms with a platform and multiple products and funds to offer. Barriers to entry have increased for new managers, partly as a result of the increased regulation, but also the additional costs of starting with “institutional style” infrastructure to attempt to attract institutional investor flows. Putting the focus back onto the value and quality of some of these people was, in my opinion, a very important aspect that was highlighted in HFLD.With Lord Fink imparting knowledge from his extensive experience, Luke Ellis giving thoughtful and valuable insights throughout, and hopefully my input also adding some value to the process, there was an opportunity for people to hear and see aspects of advice and discussion that could prove very useful for them. Overall, it is important to take away that the challenges are significant but a clear business strategy and investment approach, a stable structure and the ability to produce good returns, will entice investors!


Renaud Huck
Head of Buy Side Relations,
Eurex Group

 
Huck: The series was showcasing emerging portfolio managers; do you think that it is an area of strong development for the asset management industry?


McCaffery: I hope so. However, it has been a challenging environment and the alternatives, for example where a talented trader joins a larger “platform” firm, have become more attractive. Stepping back, it is not just about a trading capability though, it is also about being an entrepreneurial business venture and the appeal and excitement attached to this element.


It will be important to see growing capital made available again to new and talented managers, and there are some signs of hope I will come on to. However, as I have stated, the process to move out “on your own”, and the barriers attached, have become more onerous. Also, investor activity, being mainly institutional in nature and often consultant led, has produced very large and concentrated flows into a limited number of managers, with little “trickle down” effects to note today.


Being more constructive for the future, last year many hedge fund portfolios, e.g. several FoHF products, have notable outperformance versus the headline broad hedge fund indexes of single manager performance. This raises the likelihood of value being found outside the larger managers and gives some hope that capital could flow again throughout the universe rather than just to the very largest firms. The jury is out, but there are some signs of life. Overall though, I am excited to see that we have some new managers, with excellent new funds, that are not just on large platforms. I hope ideas like HFLD, and improving recognition of small/new manager performance coming through, will give the emerging manager category more profile and will provide the momentum for reinvigorating this entrepreneurial and dynamic sector again.

This article was firstly published in our „Institutional Insights“ magazine. Interested in reading more about current trends in the buy side industry, background articles, interviews with experts and more? Then take a look at the fourth edition of our latest Eurex Group publication.

If you wish to receive the complete magazine per mail, please register.

 
 


Huck: What type of strategy do you think investors are looking for?


McCaffery: There has not been one strategy in particular, but there have been trends in hedge fund strategy selection and broader investor needs prompting renewed activity in some areas. Following on from a very strong developed equity market environment in 2013, which prompted greater flows into long-biased equity strategies, long/short equity strategies and kept capital www. moving into “activist” event-driven exposure, we are now seeing subtle changes. First, with dispersion at a stock and sector level that have been attractive, there has been a move into more conservative managers, with an emphasis on less equity “beta” and more on the active management of short as well as long stock exposures. We have also seen more flows towards Europe, as sentiment has improved, with some allocations from other strategies but also from U.S.-orientated exposure, and other developed and developing equity market exposure. Overall, anything with a degree of “beta” has done well but with this kicker and so dispersion, so some hedge fund managers really stood up. This is looking back at markets, however looking ahead, the challenge will be the degree to which that dispersion is maintained so the stock picking, the idiosyncratic performance and the opportunities around that continue in quite the same vein. I think for the moment they can continue, so those managers who demonstrate the ability to manage their portfolio risk selectively and efficiently will do well. However, it is something to monitor closely, along with overall beta risk levels, as markets may see greater tests of the positive expectations that had been built into markets. What will also be interesting at some point through this year is the degree to which global macro and long volatility-biased strategies, show signs of stabilising, and even picking up. Basically, putting some protection, and true convexity, into the portfolio may finally be worthwhile and reasonably well-priced from here.

About the interviewee

Andrew McCaffery is the Global Head of Alternatives, responsible for all alternatives globally, including hedge funds, private equity, infrastructure and property multi manager. Andrew joined Aberdeen in 2011 from BlueCrest Capital Management, where he was a founder member of the Alignment Investors division. Andrew joined the investment industry in 1983, and has held senior roles in fixed income, capital markets and asset management prior to joining Aberdeen.

 
 

In collating these thoughts, I would suggest we are slightly wary about increasing those exposures that would give higher market beta-style risk. When we add in the conversations we are having with many investors it is interesting to see “diversification” being brought up, but versus bond risk as much as equities, which is an interesting challenge for several hedge fund strategies to consider and build a portfolio around. The other topic is general “protection”, some against markets seeing losses and some against longer-term concerns around deflation or inflation. Again, several hedge fund strategies, such as those that are long volatility-biased, could prove interesting.


Huck: What type of strategy is Aberdeen Asset Management interested in for 2014?


McCaffery: Well, I would highlight a move towards fundamental conservative style long/short managers, so again taking advantage of that dispersion I mentioned earlier but avoiding the lighter levels of direct market risk. We have also maintained exposure to mortgagebacked relative value and credit, structured credit especially where possible, with fixed income relative value featuring highly. We think discretionary global macro, where managers are very nimble and manage capacity very conservatively and deploy an opportunistic tradingorientated approach, can be successful with the increasing opportunities appearing across various markets.


However, as per my broader comments before, as we enter the second quarter, we are starting to get a little bit more cautious. Whether activist event-driven, more aggressive equity long/short or even mortgage-backed linked exposure, we are looking to book good relative gains and tone down some of our risk profile where we can. We are very wary that if markets not only started to stall, with global liquidity declining (read Fed actions) and uncertainty over asset pricing increasing as position risk has been built to considerable levels again, but saw more concerted losses, then the environment could deteriorate quite quickly as market-based liquidity, e.g. dealing spreads took a toll on trading activity and risk management. For now, becoming more concerned about the risks to some managers in more market sensitive strategies, but not completely avoiding risk, just taking down and building a little more protection for portfolios where we can.

 

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