PRINT THIS PAGE Institutional Investor Profile: Bernd Kreuter, Head of Alternatives, Feri Institutional Advisors23/07/2008. Source: AltAssets.
Bernd Kreuter on hedge fund indices, on portfolio construction, on the rise of the emerging markets, on the appeal of niche strategies and on the dangers of over-crowding.  Founded in 1988 as a research house, Feri Group now offers asset allocation and investment services to high-net-worth individuals and institutional investors. Feri provides customised solutions in the areas of private equity and hedge funds.
Feri Institutional Advisors has over €10bn of assets under management, with more than €2bn dedicated to alternative assets, across both private equity and hedge funds.
Dr Bernd Kreuter is head of alternative investments of Feri Institutional Advisors, a partner at Feri Finance and responsible for Feri's hedge fund and private equity activities. Before joining Feri in 2001 he worked at a corporate finance boutique and in the financial services division of SAP. Previously, he was an assistant professor for Computer Science at Humboldt-Universität zu Berlin. He holds a PhD in Computer Science, a CFA, and masters degrees in Mathematics from Bonn and Paris VI, and a masters degree in economics.
How did Feri start out in the fund of hedge funds business?
'With hedge fund investments, we initially provided this service for German high-net-worth individuals. We did this to overcome problems with tax, as so often is the case in Germany. We have been investing in hedge funds since the mid-1990s.
In 2000 we decided that we wanted to build up our investment capabilities in the hedge fund sector. We thought hard about what would be a suitable structure for German investors in a long-term set-up. Then, the idea of an index was born.
We came to this conclusion before most of the community became interested in the hedge fund index space. In 2000/2001 we worked out the index methodology and the official launch was on 1 January 2002. We call our investible hedge fund indices ARIX - Absolute Return Investable Index.'
How do you construct these indices?
'We put some very rigorous index construction methodology into place, including both quantitative and qualitative factors. We wanted to ensure that we were not just investors in hedge funds, but rather investors in quality hedge funds. Whereas some of the other indices aim to simply replicate or represent the hedge fund universe as a whole, our aim is to represent the better funds of this universe. We thus have created a diversified, adequate, transparent and ambitious benchmark for hedge fund investing.
In the first step of the fund selection process we filter funds based on some simple quantitative criteria (eg minimum ranking within peer group, maximum drawdown, etc). On the pre-selected funds we then do extensive quantitative analysis using linear and non-linear models. To achieve the goals of representation and diversification we apply clustering techniques based on PCA - principal component analysis. We finally look at the qualitative side, especially at strategy, risk, management resources and institutional framework. The findings are incorporated in a hedge fund rating as we would with our private equity operations.'
How many hedge funds are you invested in currently?
'All in all we are invested in around 100 funds.'
How long can your investment process take?
'It varies. It can take anything up to a couple of years. As with all funds of this nature, you often have to act quickly to get access to the popular funds before they close. We will then have to be very quick, and make decisions in a couple of weeks. We will always go on site, though, and do background checks on the managers.
Typically, the process usually takes a couple of months. Some of the better funds are often spin-off situations, and if they are already known to us, this can speed up the proceedings.'
How much do you usually invest in a fund?
'Again, it varies. We have a number of different strategies in which we invest. We have the main indices, and we also have "side" indices. The main strategies we cluster into equity hedge (long/short equity), relative value (arbitrage strategies - including fixed income arbitrage and convertible arbitrage), tactical trading (global macro and CTAs); and finally event-driven - such as merger arbitrage, distressed debt and special situations.
So we have four main strategies, and then further categories within that. We also have two further strategies, or indices, and these are emerging markets and commodities. On the emerging markets we would usually only invest a few million euros in a fund, while on one of the main strategies we have positions of around €20m or more.'
Could you tell me more about your activities in emerging markets?
'We established the emerging markets indices around two years ago, but had invested in the space before that. In terms of our "side" indices, our commodities index was launched in 2004 and emerging markets was launched in the middle of 2006.
We have been following emerging markets for some time, but the index has only been around for a short while. Recently, there has been a growth of emerging markets hedge funds. We are also noticing that there are some emerging markets funds appearing in the broader indices.
We like the space because you find more inefficiencies, and therefore arbitrage possibilities. We look to invest in mainly local managers; we like to have people on the ground whether in China, India, Brazil, Poland, Argentina or Russia. We feel it is important.'
Do you feel the emerging markets space is on the rise?
'Definitely. There is a growing trend for emerging markets. They are increasingly seen as viable alternative to the main markets. We do not see it as safe, necessarily; rather we see it as a definite opportunity, specifically offering substantial arbitrage opportunities.
Particularly on the equity side, we have been looking at some emerging market hedge funds for a long time. There are more and more arbitrage funds coming through in emerging markets. Most of the funds are still equity-based, specifically long/short equity, with a long bias, and funds with a small short component or maybe with futures overlay, but we are seeing more real arbitrage funds coming up. The space is evolving very quickly across a number of strategies.'
Is there anything you avoid when picking funds?
'We do not want crowded strategies. We are not a $10bn-plus shop, we are a mid-sized operation, so we can invest in smaller managers. We can, therefore, hopefully avoid crowded strategies. The problem with crowded strategies is that they can become highly correlated in times of crisis. As we saw last summer and earlier this year, when there is a global sell-off, you will encounter problems.
You may have a great fund but if everybody is selling the same stuff at the same time, you are in trouble. With crowded strategies there is a significant underperformance and even blow-up risk.'
What sectors or regions are of particular interest at the moment?
'We like niche strategies, although it can be a difficult space. Markets evolve over time, and what used to be niche is no longer niche. We like managers that can seize opportunities. We do not like niches that are too narrow, as these can also be potentially dangerous.
Given the current fundamental changes in the capital markets we like discretionary global macro funds that can profit from these changes.
There are also some strategies that thrive on distressed debt, and this is a theme that we are becoming increasingly interested in at the moment.'
What are the main issues facing the hedge fund world?
'The big issue is volatility; it has increased in the hedge funds space. It comes back to how the strategies are working harder and harder to achieve real alpha, specifically with regards to the fees, and how they can justify these high fees. It is a constant struggle.
The increase in volatility is a big problem. In the past, people could say that while hedge funds deliver almost equity-like returns, they are a lot less volatile. However, since last summer some of the more crowded strategies also incurred substantial losses.
Hopefully people have adjusted. The crisis may not be over but it seems that most hedge funds have adjusted to the current situation. You can see this in Q2: whereas global equity markets posted further losses ARIX Composite was up more than four per cent. Even if the crisis is not yet completely over, people are perhaps beginning to better understand how to handle it.'
Copyright © 2008 AltAssets
|
