PRINT THIS PAGE Institutional Investor Profile: Christopher Peel and Madilean Coen, Founding Partners, Blacksquare Capital LLP02/07/2008. Source: AltAssets.
Christopher Peel and Madilean Coen on Blacksquare Capital's focus on sector-specific funds of funds, transparency and being open with investors, global diversification and on the importance of putting in place and executing a clearly defined investment strategy.  Blacksquare Capital, founded in 2005, is a London-based alternative asset management company. The firm has launched three fund of hedge funds products to date, a Caxton-only fund, a global macro fund and a commodity fund. The team consists of five investment professionals and nine staff in total.
Christopher Peel previously spent the majority of his career in the fixed income division at Salomon Brothers International. He later joined alternative asset management group FIM, where as a managing director he was responsible for all fixed income investments, and then the fund of hedge funds business at Cardinal Asset Management.
Madilean Coen began her career at Prudential Securities working in the futures and commodities division. Later, as a portfolio and CTA analyst, she used evaluation tools to select, analyse and optimise multi-manager funds for high-net-worth clients, institutions and retail funds. As a part of the Managed Futures division, she was responsible for helping grow the Managed Futures and alternative fund of funds business. In 2000, she joined Scudder Investments in London as regional sales director for Europe and the Middle East. Following the merger between Scudder Investments and Deutsche Bank, she became a director and head of European retail distribution for Deutsche Asset Management.
Why did you found Blacksquare Capital?
'Between the two of us, we have previously worked with many of the world's top hedge funds. So in addition to having trading experience with the managers, we also have long-term relationships built over the last 20 years.
We launched our business with a Caxton-only fund of funds on 1 March 2006. We opened and closed that fund, called Blacksquare Capital Access Fund, very quickly, allowing us to set up strong distribution channels. However, our business plan always was to go into what we see as our competitive advantage, namely sector-specific, focused funds of funds. We thought another diversified fund of funds product would be of diminishing interest to investors. This space is crowded and the correlation to the equity markets of the large and overly diversified large funds of funds is 0.8, according to recent statistics. We think the sweet spot is ten to 15 managers in a portfolio, as more than 20 can begin to perform like an index.
When we defined our business philosophy and looked at multi-strategy versus sector-specific fund of funds, we remembered why alternative strategies originally made it into portfolios - it was for overall portfolio diversification, which is becoming increasingly important in the current economic climate.
What makes us different from some of our competitors is that we are fully transparent. We believe that investors, certainly in the hedge fund space, have the need and should be able to know who and why a manager is in the portfolio. We disclose our entire portfolio to our investors and cannot mask over an under-performing manager behind another sub-section that is out-performing.'
Which funds have you launched since 2006?
'On 1 January 2008 we launched our second fund of funds, the Blacksquare Capital Global Macro Fund. Most people know who the top global macro managers are, there is no mystery about that, but many of these funds are closed. Our relationships have allowed us to invest in nearly all of the managers that we want in our portfolio. We expect to grow the fund over the rest of the year and once it reaches approximately $300m in size, we will close it, rather than dilute our core positions.
On 1 June, we also launched a commodity fund of funds, the Blacksquare Capital Commodity Fund, which is comprised of many top-performing commodity hedge fund managers, many of which are also currently closed to new investment. Again, the fund will be comprised of ten to 15 managers and we do not expect it to be much larger than $300m. Once we get to that size, we will launch a second-generation fund, should there be demand.'
Who are the investors in your fund of funds?
'We only really work with financial intermediaries, including wealth managers and private banks, and they distribute our products to their individual clients. We do not sell directly to the public or high-net-worth individuals. Of course, along with our own money, we have friends and family invested in our funds and the few high-net-worths that have come to us directly are in the financial services business and understand the portfolios and the managers.'
Are your portfolios geographically diversified?
'We try to choose managers based in different parts of the world as they tend to view the world in a way that is specific to their region and subsequently trade differently. The mindset is really important. When you are based in New York or London it is easy to be focused on the banking crisis, which is very real. For a trader based in Singapore or Hong Kong, who is looking out of the window and seeing all these ships waiting to offload cargo on its way to China, the situation is very different.'
How do you select managers?
'We have an extensive database of hedge funds. There are certain filters, such as the assets under management, performance, volatility and correlation to equity markets.
Managers typically have to have at least a three-year track record and it is important to us that they use blue-chip service providers.
We review all of the fund's legal documentation and also speak to a variety of sources in the industry including the fund's prime brokers to help form a rounded opinion. When we conduct our due diligence meeting, we always look for reasons not to give a manager money, and they have to convince us that they are a good investment proposition for us. We really only invest in funds where everything fits together nicely, and that includes how they represent themselves, as well as the managers' backgrounds.'
When you started out, the environment was very different from what it is now. Did you adapt your strategy?
'We have not found ourselves in a position where we had to change our strategy. We started out using our own money. It set a signal to our investors that we cannot just walk away from the firm if things get tough. Starting a fund is always going to be challenging, in any kind of environment. It definitely helps that we are working with people who have known us from our previous careers, people who trust us. It also helps that all of the three funds are up year-to-date.'
How competitive are your segments of the market?
'There is always competition for money. The best way to deal with it is by focusing on what we do best. Everyone has a different business model and different strategy.'
What is your opinion on emerging managers?
'We have not invested in new managers yet, but we would never say never. A spin-out situation would be a possibility, for example. We need to be able to see the previous internal track record, know the manager well, and be sure that they have the infrastructure in place to work independently. We certainly track all emerging managers within our sectors of allocation with interest.'
And on emerging markets?
Local expertise is very important to us, for example we have a global macro manager focusing on Asia and they have offices in Hong Kong and Singapore. Not that Hong Kong and Singapore are emerging markets, but the Asian region contains many emerging markets of interest and localised knowledge is certainly preferable to managing from a distance.'
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