PRINT THIS PAGE Institutional Investor Profile: Harry Wulfsohn, Director, Stenham28/05/2008. Source: AltAssets.
Harry Wulfsohn on the importance of transparency, on the rise of indices, on over-correlation and on asset allocation.
 Stenham was established in 1901 as a two-family family office. In the 1970s the firm became a multi-family office and currently has a client base that comprises 40 per cent family offices, 40 per cent private banks and 20 per cent institutions. Stenham manages approximately $6.5bn across both multi-manager fund of hedge fund portfolios and property funds.
Harry Wulfsohn is a director at Stenham. He joined Stenham in 1997, initially to open an office in Johannesburg for the Group. He returned to London as COO of the Asset Management division and is now head of the Institutional Business Development division. He and his team are focused on building a client base for Stenham in the UK, the Channel Islands, Europe, Latin America and the Middle East, working with private banks, trust companies, asset managers and select institutions.
How have Stenham's funds developed over the past few years?
'In 1988 we began investing in hedge funds. We now specialise in two main areas: multi-manager hedge fund portfolios, via funds of funds and discretionary portfolios, and we also run a range of property funds, where we are the fund manager investing in actual bricks and mortar.
Our client base has evolved to now include UK, European, Latin American and Middle Eastern private banks and other private client asset managers as well as select institutions.
Currently, our assets comprise around $2.5bn on the hedge funds side and $4bn in property funds.'
What funds do you manage on the hedge fund side?
'We have 12 funds of funds and a discretionary portfolio service, Pinnacle.
We have three diversified multi-strategy funds: Stenham Universal, Stenham Universal II and Stenham Multi-Strategy. All three of these funds have the same investment objectives and the same asset allocation.
We also have a range of equity funds: Stenham Growth (global), Stenham Asia and Stenham Select.
Finally we have a range of macro and commodities funds: Stenham Global Macro, Stenham Quadrant, Stenham Trading, Stenham Gold, and Stenham Global Resources.
We recently launched the Stenham Managed fund, a portfolio of Stenham's range of funds of hedge funds, with the active asset allocation decided by the CIO and Investment Committee. We decided not to charge for this fund, sometimes called an F3, because we earn our fee at the underlying FoHF level.'
What was your strategy behind developing your range of funds?
'A combination of an increasingly sophisticated client base and identifying opportunities in the hedge fund universe where we believed, on a forward-looking basis, we could deliver excellent risk adjusted returns.
20 years ago the clients just wanted a multi-strategy diversified fund that would preserve their wealth. As the client base became more sophisticated, they in turn looked to us to identify opportunities that can deliver stronger returns but, having said that, they always want an element of downside protection.
With single-strategy funds, we set them up based on a forward-looking perspective of the hedge fund universe and the overall macro environment. We look where we can both increase value for a client, but at the same time construct a portfolio that will have low volatility. As an example, the Stenham Gold fund was launched in 2003 from the compelling factors around gold at that time. Instead of buying gold directly we constructed a diversified fund of funds that has delivered returns similar to the gold price with two thirds of the volatility.'
What where the first funds to be established?
'The first funds where Stenham Universal and Stenham Trading, in 1992 and 1993, respectively. Stenham Universal is our multi-strategy fund and Stenham Trading is a global macro fund. We really focused on those two areas until seven years ago. We launched our Growth fund, global long/short, in 2000 and our Gold fund in 2003, launching our Asian, Global Resources and further global macro and multi-strategy funds after that.'
Can you tell me about your investment process?
'We aim to achieve consistent superior returns with low volatility through a combination of active strategy allocation and skilful manager selection. Emphasis is placed on managing risk by diversifying geographically, using non-correlated alternative strategies. Our investment style is conservative with a focus on capital preservation and minimising downside risk.
While the quantitative aspect is an important part of the decision-making process it is the qualitative research undertaken that drives the process using a combination of top-down and bottom-up research.
We recognise that no single manager can excel in all investment arenas. Accordingly, our investment approach is based on accessing the expertise of the best alternative investment managers globally. Client funds are allocated to a number of these carefully selected independent investment managers blended together as a portfolio to achieve consistent, superior returns with low volatility. Each manager represents ''best of breed'' in a particular area.'
Has the process changed much over the years?
'It has evolved a lot over the past 20 years. The investment processes used to focus more on manager selection. Now it is much more about strategy and asset allocation.'
How do you hear about good investment opportunities?
'One of the best ways is through our many manager meetings. We have eight analysts here who spend their time travelling the world, almost continuously. The best ideas come from these trips; meeting managers, networking, asking managers about the competition and just finding out who goes where.
We are good long-term investors, so when someone leaves to set up a new hedge fund they will always give us a call. They often call us when they are setting up funds, to ask us our opinion, in terms of strategy, liquidity, leverage and concentration. I am not sure if they listen, but they definitely ask our opinion.'
What do you do once you have established your allocation?
'We use a quantitative screening process to generate a peer group for each strategy.
The investment team is broken down into three teams: the investment research team, the operational research team and the quants team. Once we have a peer group of around 15 managers per strategy, the investment research team will go and meet each manager, initially to get an understanding of their investment approach.
If we want to take it to the next stage following this initial meeting, each team will then carry out more detailed research on that manager. The investment research team will go back again and carry out a more detailed analysis with this second process, looking at ideas generation, portfolio construction, added value and sustainability.
The operational team does all its own work independent of the investment team and the quant team does all its own analysis. Each team produces their own independent report for the investment committee and each team has a veto on subsequent investment decisions.
Our process has become much more about asset allocation, based on quantitative analysis with a qualitative overlay, which is looking at the big picture - a forward-looking assessment of the global macro environment and of the hedge fund universe as a whole.
We look to really try and understand the risks that we take on to achieve the returns, in terms of both the strategy and the individual manager, based on a forward-looking qualitative assessment of what is going on supported by detailed quantitative analysis.'
How many investments would you make in an average year?
'There is no set quantity, it is driven by quality. We have a low turnover in our portfolio. We are not trading managers, we like the long term. On average, the turnover is about 15 per cent of all the portfolios over the year and this averages about ten managers a year.'
What is your typical bite size?
'Our investment guidelines do not allow us to invest more than 20 per cent in one manager. Even so, we would be very unlikely ever to get to that level and would be more likely to look at between five to 7.5 per cent. With our multi-strategy fund, the minimum allocation is about $50m. Our single strategy funds of funds have much smaller allocations, for example our Asian fund, as there are fewer managers in parts of Asia and sometimes they are smaller in size.'
Do you invest in distressed debt?
'Back in about 2001/2002, we saw distressed as a good opportunity, and at that time went very overweight, about 18 per cent distressed. We benefited a lot from that strategy for a couple of years. Then, in 2003/4, the cycle changed and we saw that opportunity winding down, so we redeemed some of our distressed debt managers. Right now we are potentially looking at that space again.'
What do you feel are interesting areas going forward?
'Asia. We have invested in Asia through our multi-strategy funds since about 2001. One of our analysts goes out to Asia about five to six times a year as well as our CIO who goes out three to four times a year. It is through the process of understanding the dynamics of what is going on out there, of understanding the areas that offer good value and because we are going there a lot that we have identified good managers and established a good track record.
We are bullish in Asia. We are also looking at some of the other emerging markets, such as Brazil and South Africa. For us, it is as much about the strategies as the regions, and our commodities-based strategies, such as gold and global resources, represent areas where we are currently also bullish.'
Do you invest in first-time funds?
'We have investment guidelines which mean we would be very unlikely to invest in start-up funds. If we were to invest we would have to know the fund manager from somewhere else, and know his track record.
What we do have is a fund called the Emerging Stars Fund, comprising internal capital, which is not open to third-party investors. It is used as part of our research process, where we may allocate capital to a manager to monitor them further until outstanding issues from the due diligence process have been resolved, to get better transparency, to agree capacity, or to monitor where a manager does not have a long enough track record.'
What are the biggest issues facing the industry?
'Everything is fundamentally about risk. There has been a long period of low volatility and good liquidity and I think investors have been buying into assets for their return without really understanding the risks that they are taking on to achieve these returns. I think the events in August 2007 and January this year reminded everyone to think about risk again.
In terms of funds of hedge funds it is really about understanding the risks inherent in a strategy, either because of its cyclical nature or the general macro environment and the risks that an individual manager is taking on, for example in terms of leverage and directionality, or the systems and models they use to construct their portfolio. In August we saw directional leverage managers have a terrible time, as well as more quantitative models. It is also about understanding correlations especially at times of stress, between different strategies and between different managers, to enable one to construct a diversified portfolio that can deliver absolute returns in all market conditions.
Because of the amount of liquidity in the marketplace it has become increasingly difficult to find strategies and managers that are uncorrelated. A lot of things that were previously uncorrelated have become much more correlated, especially in times of stress.
A lot of money is still coming into hedge funds and there are an increasing number of hedge funds being set up, often with increasingly weird and wonderful types of strategies. There is no substitute for experience of investing in hedge funds to be in a position to fully understand the risks inherent in all these different strategies. At Stenham we generally focus away from managers that do not have a long track record, or that use strategies that are inherently risky, such as leveraged strategies, with possible issues over their directionality or illiquid aspects to their portfolio.'
How can you see the hedge fund universe developing in the coming years?
'I think the fund of funds indices will increasingly play a role in portfolios, in part because they help resolve capacity issues. Very much like the equity markets in the 1980s, where people started buying into the indices to get beta and buying into high quality managers to get alpha. I think the hedge fund industry will probably go in the same direction, where people will increasingly start buying into hedge fund indices, to get hedge fund beta then identify high performing high quality fund of funds or hedge funds to deliver the alpha.
At Stenham, our client base is increasingly becoming institutional. We will look for more institutional-type mandates and clients going forward. Compared to our peers I believe we are more focused on risk. We are much more concerned about wealth preservation and delivering returns uncorrelated to equities. When selecting our strategies or managers we do not mind avoiding areas we think are too risky, whatever the upside.
With all our portfolios and funds, even the more directional ones, such as the Asia and commodity funds, we are still very focused on finding ways to mitigate risk through the diversification of portfolios. Going forward we will increasingly focus on constructing specialist portfolios that we think have value, whilst also being mindful of the risks we are taking on.
We are very transparent as we think it is important for investors to understand what we are doing. We like to be transparent. For us it is also about explaining the investment process. In the old days, clients would invest on the basis of personality without actually understanding how you make a return, these days it is increasingly important to be able to demonstrate the investment process so investors understand our added value and how it is sustainable going forward.'
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