PRINT THIS PAGE Institutional Investor Profile: Rian Akey, Vice President, COO, Cole Partners Asset Management25/06/2008. Source: AltAssets.
Rian Akey on the advantages of a niche investment strategy, on emerging managers, on peer-group analysis, on liquidity and on the volatile nature of the commodities space.  Cole Partners was founded in Chicago in 1998 to evaluate and market alternative investments, and expanded with the founding of its investment advisory arm, Cole Partners Asset Management, in 2003. Cole Partners Asset Management manages Tellus, a fund of hedge funds dedicated to commodity and natural resources investment strategies.
Rian Akey is responsible for overseeing Cole's research, operations and compliance. He joined the firm in 1999 as the firm's director of research. Prior to that, he was employed in a product development and marketing capacity with Thomson Financial and in a marketing role for a Fidelity Investments subsidiary.
What is your focus as an organisation?
'Cole Partners started specifically as a marketing organisation working with hedge funds and CTA strategies to help raise capital for investors. Brad Cole established the firm in 1998. He has a trading background, but most recently he raised assets and worked in a marketing capacity internally for Sjo, a Chicago-based CTA.
On the marketing side we are used to dealing with emerging managers, as nobody with $500m under management and a five-year track record is out looking for marketing help. As such, we focus our investments on young emerging talent and I feel we have brought a good skill-set capability there in terms of manager selection.
Here in Chicago, we are surrounded by a number of multi-billion dollar funds of funds. We are realistic in terms of our size and scale relative to these groups. Historically, we always looked at how we could get involved in a fund of funds capacity but in a way that did not necessarily interfere with our existing activities, and provided something that was unique to what the large groups were doing.'
What makes your firm stand out from your peers?
'What we do is in some ways special and certainly different from what the other big players are doing. In early 2004, we started to see some increased attention to natural resources, particularly on the supply-side. To us there were a number of characteristics about that space that we thought were very attractive for a specialty fund of funds to grow into the space, particularly given our background with CTAs and emerging managers.
The idea that you can bundle a lot of these very high volatility strategies and diversified independent trading styles into a portfolio that looks attractive on a risk-adjusted return basis, in an area that is not followed nearly as much as equity or fixed-income, was compelling to us. We really felt there is still some potential in this space to get some edge.
Initially, we started to spend some time putting research together to see if this was viable and ultimately we launched our fund in February 2005, Tellus.'
What is the size of that fund?
'It is over $100m.'
How many hedge funds do you have in your portfolio?
'Right now we are running a 22 hedge-fund portfolio. It will probably increase to 24 or 25 over time. We may also look to include a few more satellite types of positions that are smaller, but offer us greater diversification.
Our approach is really one of diversification. We find this works well with the commodities space in particular, because of the volatility and certain characteristics of commodity prices over time, and indeed the macro-relation markets.'
How do you find managers?
'Our approach here is research-based. There is a macro overlay but there is also something of a bottom-up perspective. We look at long/short equity managers and, of course, the whole argument of active over passive.
In the commodities space, where there are so many more inefficiencies, it is much less crowded, even though there has been plenty of development in the last few years. It takes a very idiosyncratic sense of knowledge to follow these individual markets - be it managers that trade in only Scandinavian electricity or water-related equities etc. It can be very specialised, and needs to be.
We try and identify all of the managers that would fall into this group. At our first effort, we were able to find about 125 managers; these are CTAs who are trading only in the physical commodity market; trading in energy, metals or agricultural products for example.
We also look at hedge funds who may trade other instruments such as equities, essentially debt securities, but have a particular resource focus, for example in energy equities, metals, water, utilities - anything that has a natural resource focus, but executing this through equities or other instruments.
So initially we looked at about 130 managers. This has approximately tripled in four years from both an asset and quantity standpoint.
Going back to 2004, before we started the fund, we spent a lot of time looking at the space and really testing whether this was an opportunity.'
How do you get to hear about good investment opportunities?
'We have around ten people who work on the fund in different capacities and who are constantly looking around for new opportunities. We get new information flow from prime brokers and other service providers, customer databases and screens. We tend to be fairly active on the conference and educational circuit as well, so that allows us to meet a lot of people.'
How do you conduct your due diligence?
'This is a space where you cannot really have artificial hurdles. It is very difficult to demand a three-year track record because not very many people have been around this long. We will look at anybody. We are looking for that edge, we are looking for ideas and we are looking for strategies that capture those inefficiencies and idiosyncrasies that are out there in the individual markets.
We have a fairly primed process there. We get information from the managers, qualitative information on deal flow, and we are able to bundle like managers from an intuitive standpoint, so that we can always be aware of managers that are in the better part of the peer group. We also do quantitative peer grouping and data-only analysis. We look at how a manager varies relative to other managers with relatively high correlation.
We also look at who are the best managers from a bottom-up basis. We identify the strong candidates based on performance, based on the pedigree they are bringing to the table, based on their uniqueness. We like to see special qualities that are completely and utterly unique to the rest of the hedge fund universe.
At the investment committee level there is also a top-down approach as well, from a macro standpoint. There is an ongoing funnelling process both up and down in terms of taking a shortlist of candidates and identifying where we want to get to in the process. We look for complete understanding of the strategy, personnel and ongoing quantitative reviews of the strategy, performance, performance persistence, performance relative to their peers.
Due diligence and personnel background checks are very important. We also look at recommendations and presentations. We like to see how a manager or a fund generates an idea from inception onwards. We look at all of these kinds of operational facets as well as the business strategy outside of that. We are really looking for someone with a defined edge, and also experience through different market cycles, from both a trading perspective but also from the conversion side.'
What are the most interesting areas going forward?
'I think we are looking at an environment where risk managers are increasingly looking at risk coming on the downside, and I think this could be a good thing.
The commodities space is subject to a great deal of fluctuation. We are seeing continued global population growth, destabilised weather patterns, very tight supply and demand equations in a number of the agricultural markets, particularly in the grain markets - all which have the ability to cause dramatic price hikes.
We also have the whole food versus fuel dynamic going on, with the issues with biofuels and ethanol. The commodities space is certainly going to be seeing a lot of changes, and is definitely an interesting area right now.'
What is the most pressing issue facing the industry?
'There is a lot of discussion currently about a commodity "bubble" and I do not know whether many investors have structured their commodity investments accordingly. With political issues in the Middle East, government regulatory issues, etc, the price of the price of oil can increase significantly in a very short period of time; but could also decrease. From a tactical standpoint, we try to put together something that has a bit of a collar profile, to capture some of the long term trends, but also hoping to capture some of the short term volatility to the upside to create profits from a potential downside. This allows us to be less dependent on the price of any one individual sector or market.
When we have interest in the theme from more of a whole market standpoint, we are always looking for a manager that understands that you can have the long term absolutely right, but you could still lose 40 per cent in the short term if you are not tactically astute about the volatility and conversion of the space.
I think that what happens today with the US economy is going to be a big issue; both in isolation but also in terms the world economy is becoming less and less reliant upon what is going on with the US domestic economy. How this plays out is going to be a big issue.
Beyond that, there is the mortgage issue in the US and how is this going to continue to affect things like the liquidity episodes we saw last August. Is it going to get less volatile or are we going to have ongoing periods where we are burying our heads in the sand for three months until the next shock or liquidity event? Does the US have the ability to manage the downturn?
I think one needs to think about it from the standpoint of whether this is the time to chase risk or whether it is a risk-adverse environment, and how is this ultimately going to affect people's decision-making in terms of what strategies they want to be in and what strategies to avoid. I think liquidity is going to be a big issue, as is pricing, which goes hand in hand with liquidity to some degree, certainly in terms of different strategies.'
Copyright © 2008 AltAssets
|
