PRINT THIS PAGE Institutional Investor Profile: Catherine Cripps, Investment Manager, GAM14/05/2008. Source: AltAssets.
Catherine Cripps on manager selection, on monitoring the hedge fund universe, on portfolio construction and on why emerging managers have a space in GAM's portfolio. GAM delivers active investment management to private clients, institutions and intermediaries. The company manages $75.8bn in total, of which $28.1bn is in funds of funds.
Catherine Cripps, a qualified accountant, oversees GAM's fund of hedge funds, investing in market neutral and equity long/short strategies. Cripps is also head of research for GAM's multi-manager team. She joined GAM in 2006 from multi-strategy fund of hedge funds manager Aida Capital, where she was CEO. Prior to Aida Capital, she held various positions at Credit Suisse, Chase Manhattan, ING Barings and Bankers Trust.
Please tell us a bit more about your team and its responsibilities.
'At GAM we have a multi-manager department which specialises in selecting hedge funds for inclusion within GAM's fund of hedge funds. There are about 120 of us globally and most of the team are based in London, with three investment managers plus a group of analysts in New York and Hong Kong. We have 20 people dedicated to building IT applications.
We conduct research on managers, make investment decisions and manage the funds that we have in our portfolio. We estimate that the hedge fund universe consists of approximately 6,500 funds. It has always been a somewhat fluid number as new players set up very frequently. Our extensive resources allow us to monitor over 90 per cent of the hedge fund universe by number of funds. Of those, we will meet with around 1,000 managers each year, 800 of which will be subjected to an in-depth assessment.
How many funds an individual team member looks at depends on their seniority. Less experienced researchers tend to look at all funds, whilst analysts will search through an already filtered list of funds to identify whom we should see face-to-face. We obviously try to meet with as many managers as possible to ensure that we make the correct decisions and we have not dismissed a fund for the wrong reasons.'
How do you select the best hedge funds?
'The selection process is very labour-intensive and we are lucky to be able to be very well resourced. There is so much data involved and that forces us to always have the right applications in place to make our job as easy as possible. A dedicated operational risk team focuses on documents and processes alone.
It is all very well when you are investing in funds and everything is going well, but in the, hopefully unlikely, event that things do not go so well, we need to refer back to the basis on which our investments have been made and check that it still relevant.
We start our process by going through the initial documentation and presentation. Basically, we do the first collection of information and then decide whether or not to meet face-to-face. If the first meeting goes well then several more meetings will follow, concentrating on what drives the manager and how and why they have performed to date. A good manager should be driven by generating returns rather than solely by building a large business. Team and remuneration are very important factors too.
From the start we sit down with the manager and discuss performance expectations. This is not a formal agreement; it is just a discussion with the manager. The aim is to learn about each other's expectations and intentions. We are interested in building relationships with managers on an individual basis.
If we like a fund we typically put a small allocation into that fund and monitor its performance. After a while we increase our allocation. If we know a manager particularly well and they launch a new fund we might feel more confident to put a larger position in from the beginning.
Funds that drop out of our due diligence process receive another visit from us again at least once every three years to check whether things have changed.'
You have got a complete portfolio. Why is it necessary to allocate extensive resources to finding new investment opportunities?
'While we are very happy with our portfolio, we understand that we need to continuously monitor the market and be prepared to bring fresh talent in. It only takes a small change such as a key person leaving a team and we are left with a hole in our portfolio. Often, when such a change happens, we may not need to exit immediately, but we do need to exit fairly quickly if we think the investment case is changing. We always have a number of smaller positions that we can increase at any time.'
Do you prefer newer or more established managers?
'The vast majority of managers that we have invested in were early stage managers at the time when we made our initial investment with them. This guarantees us access to the very best managers.
We are known in the market for investing in funds in early stages of their development. Again, our resources are key to this strategy. Due diligence carried out on new managers requires a great deal more depth than it does on established or proven managers. Our processes help us identify which of the emerging managers are the most likely to succeed.'
How many investments do you make per year?
'We may make 50 to 80 investments in new funds, possibly a bit more than that. A lot of these end up being very small investments that we just put into our portfolio as "ideas in waiting".'
What is your typical investment size?
'It varies from $5m to some several hundred million dollars, depending on factors such as the size of the fund and its risk and return profile. Our investment size also depends on the space we have got left in our portfolio.'
What is the composition of your portfolio?
'The main flagship portfolio, diversity multi-strategy fund of funds, generally consists of around 70 managers. There are many other investments in funds that do not feature in diversity so that overall the $27bn that we manage is spread across around 190 funds at any one time.
Who are your clients?
'Our investor base consists mainly of European high-net-worth individuals, intermediaries and, to a lesser extent, institutional investors. We are becoming more widely known in the US and we also have a reasonable client base in Asia.'
What piece of advice would you give to a new investor in hedge funds?
'Do not follow the trend and do not follow the herd. Also, keep an eye on liquidity, which should give your portfolio and your returns stability.'
Can you see convergence of hedge funds/private equity funds?
'There has always been a grey area between hedge funds and private equity funds. Sometimes, managers tap into new areas such as private equity when they are not seeing as many opportunities in their own space as before. As a fund of hedge funds investor, we actually do not like that. We want to run a multi-manager fund with very good liquidity and we prefer not to have assets in our portfolio that are less liquid.'
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