Investments can be made in both funds in multiple currencies, including sterling. Current assets under management are $192m. Acropolis Capital’s affiliated family office is the main investor with in excess of $100m exposure in the funds.
Q: We spoke to chief investment officer Cameron Chartouni, and started by asking him to explain the background of the company.
A: Acropolis Capital Partners acts as an investment management company advising on the investment in hedge funds. It was set up in 2002 as an affiliated part of a long standing London based family office to manage the hedge fund investments of that family office, as well as to open up investment to outside investors.
Acropolis Capital Partners resides in elements of the family office and shares parts of their infrastructure, but the investment team is dedicated to Acropolis Capital Partners and the hedge fund investment process.
Q: What was the motivation behind setting up the fund of funds structure?
A: The motivation effectively was to take the expertise and the processes that had been built by the family office in managing its own portfolio of hedge funds, formalising that into its own entity and structure and offering that to outside investors.
Having that capability beholden to external parties as well, imposes additional disciplines on the team process which we think is beneficial overall for the family office as well as for Acropolis Capital Partners. It is a way for us to stay on top and hopefully ahead of our competitors, whereas if we were in a more isolated pure family office environment perhaps that same impetus and pressures might not be there.
Also purely from a monetary perspective of course, if you can derive additional income into the business by doing what you were doing in any event that seemed to make a lot of sense as well. Furthermore, it’s a way to scale the business and build resources on top of that and hopefully produce a better, more robust product.
Q: What was the thinking behind setting up the Multi-Strategy Fund?
A: Philosophically the mandate behind the multi strategy fund, which we launched in January 2002, was to achieve steady compounding capital over time without losing money. The key to achieving that objective is to not sustain large losses at any given time because that makes the job of compounding that much more difficult. To dig yourself out of a deep hole can take a long time and resources.
The specific mandate that we set for the fund was: preservation of capital: generating returns of Libor plus five or better; low standard deviation volatility of returns on an annualised basis of 5% or less.
In addition, we set out to achieve low correlation vis-à-vis traditional stocks and bond portfolios. The logic being that hedge funds should represent a diversifier within a broader and more traditional portfolio of assets and shouldn’t correlate over time versus more traditional assets.
Q: What was the thinking behind setting up the Multi-Strategy Plus Fund?
A: It is essentially the same as the Multi-Strategy Fund but with greater risk. It was launched in September 2005 at the behest of some existing plus potential investors, who liked the risk-adjusted return profile that we had delivered with the original flagship fund but had a greater appetite for risk. To address this need we created the Plus Fund, which simply invests into the original fund so the underlying portfolio is identical but it makes those investments on a leveraged basis.
For every dollar that is invested it borrows money against that to make the investment. It ends up delivering a higher risk and hopefully a higher return. Typically for every dollar that an investor puts into the Plus Fund, that Plus Fund will borrow a dollar and a half to invest into the flagship fund so effectively every dollar has two and a half dollars at work. We target returns for the Plus Fund of Libor plus ten but volatility is obviously higher as a result of that – around 10% instead of 5% - but still with low correlation versus stocks and bonds. That doesn’t change.
Preservation of capital is still relevant but clearly the Plus Fund has a higher propensity to sustain losses because of the enhanced leverage profile.
Q: Have you attracted different types of investors to the Plus Fund?
A: Yes, I would say that there is greater participation of high networth individuals, people that have a greater risk appetite perhaps than some of the institutional investors.
Q: Was a reputation built up with the original fund and do you think that helped to attract those investors?
A: Yes, I do think that was the case. We are in a fortunate position because our largest client is the family office. This meant that the family office was able to seed and start both the original flagship programme and the Plus fund. What that enabled us to do was start a live track record that people could then identify with and as that was developed that naturally attracted new investors.
Q: What is the investment strategy?
A: It is a multi manager fund so we allocate to other managers of hedge funds. The mandate is global so we can look across the globe. It is multi strategy so we can look across different hedge fund strategies and styles. So it is a broad fund of funds mandate.
The style is a combination of both top-down as well as bottom-up. From a top down perspective, it is a question of identifying which strategies and areas are likely to perform well going forward given the risk attributable to those strategies. Given that backdrop what we’ll look to do is use that to help drive some of our bottom-up research in terms of manager selection, and due diligence towards those strategies where we feel there are the best opportunities going forward.
We also have to be comfortable with the mix of managers and the portfolio we have constructed. We have to be comfortable with the balance of risk and return that we’ve built and make sure that we have built up a diversified and hopefully reasonably uncorrelated collection of hedge fund managers and strategies. Certainly historically through our portfolio construction process we have done a good job of diversifying away a lot of the individual underlying manager risks, because of the relatively low correlation that the managers have exhibited to one another.
Q: Do you target any specific sectors?
A: Broadly speaking we bucket at a very high level. We bucket the hedge fund universe into five broad sectors: long/equity short, event-driven, macro, multi strategy, and relative value. We drill down much deeper on a more granular basis into further sub-strategies but at any given time we will have an allocation to all five of those strategies, although the weightings between them will vary at any time.
Currently our view is that the macro strategy is one that is likely to remain attractive for the foreseeable future. It started to perform well in the fourth quarter of last year, and did very well in the first quarter of this year We think it should continue to do well going forward.
That has been driven by a number of factors that have been taking place and we think are likely to continue to persist. Namely, an environment where there is broad de-leveraging resulting in much higher risk premia; a breakdown in correlation between various asset classes which allows macro managers to build much more diversified and uncorrelated books of different assets, and a lot of uncertainty about central bank activity.
I would say that until the second half of 2007 central bank activity was very well read by the market, and central banks telegraphed their intentions quite directly to the market. That whole transmission has broken down because of all the uncertainty where economic growth is going and central banks themselves don’t necessarily know where their monetary policy is going to take them. It’s very data dependent at this time so what that does mean is that it results in a lot of pricing inefficiencies that macro managers can hopefully exploit.
We are focusing very much on macro in the traditional sense of the word: i.e. managers that are focused on fixed income and the currency markets predominantly on a directional basis with a G7 focus.
Q: Are there any strategies you are avoiding?
A: We are currently steering clear of relative value strategies. There are a lot of sub-strategies to relative value but broadly speaking relative value is a strategy that usually employs quite high degrees of leverage. In the current environment there is broad based risk aversion and de-leveraging going on and prime brokers are reducing the availability of funding or margining to their counterparts. Given that backdrop we think it’s not the best time to be running a highly leveraged strategy. Furthermore, generally speaking most relative strategies are quite mean reversionary and given the heightened volatility we’ve seen - and the potential for ongoing continued volatility - we worry that these strategies may suffer because volatility is too extreme. They benefit from some volatility but too much is bad for them. So on a very broad basis we are negative on relative value strategy, at least in the near term.
Cameron Chartouni
Q: What have been the key drivers to asset growth?
A: Asset growth has been steady. Until last year we’d done very little to actively raise assets. Prior to last year we had no dedicated in-house marketing or sales resources and relied on growth either through the family office increasing its allocation and/or long standing friends and contacts via the family office. A steady organic growth was built on that basis.
We realised though that to more actively grow the business we needed to bring in-house dedicated sales and marketing resources. We did that at the beginning of 2006 and we are starting to see the results coming through. There is a reasonably long lead time in this business between when investors start to log and track how the firm is doing and when they start to allocate. But we’re starting to see some results from that.
Q: Is there a particular investment philosophy common to the funds?
A: It’s important for us to not lose money and to generate a steady compounding of money. When we select managers we are looking at individuals who are able to deliver not just an attractive set of returns, but also mitigate and manage their downside. It is important for us that the risk they take is also commensurate with the sort of return profile that they will deliver. We are very cognisant about the types of risk that we are taking within the portfolio, and ensuring that we are taking risk in areas where we think we will be rewarded for it.
One of our risk tools is to assess the potential downside impact to our fund from any one of our underlying hedge fund investments. We look at worst historical losses incurred for each of our underlying hedge fund managers; we may further amend these if we believe they understate downside risk. For any given underlying hedge fund investment, we can asses what the potential downside impact is on the total portfolio should that hedge fund have sustained its worst historical loss. We will seek to size positions so that the potential loss impact on our portfolio is commensurate with our expectations for performance for that hedge fund. We further stress the overall portfolio by aggregating the worst historical losses for all our hedge fund investments, assuming that these occur at the same time and assessing the overall loss impact."
Q: What sets you apart from other multi-strategy fund of hedge funds?
A: The family office connection is an important one. What it clearly marks is a very strong alignment of interest. The family office represents a very significant proportion of the total assets. Investors coming in are investing on a completely equal basis to the family office so they know that effectively we are eating our own cooking.
We tend to run a portfolio that is slightly more concentrated than many fund of funds. We will typically have 20 – 25 underlying managers. This means that the manager selection has an impact on the end result, rather than getting washed out among too many managers which can be the result of being over-diversified. We avoid the danger of over-diversifying and what that does do is force you to ensure that the portfolio represents your top picks, rather than simply adding new names and leaving dead weight within the portfolios. It means we are forced to make sure that the portfolio is working as hard as it possibly can, in terms of generating returns.
The size of the fund, and the fact that we are concentrated plus the family office backing, means that we can be quite nimble. We don’t feel that we have to have an allocation to a strategy just because the strategy exists in the hedge fund universe. If we don’t think a particular sub-strategy is going to be attractive we have no issues with not owning it. We are quite happy to redeem out of it if it’s in our portfolio and replace it with something that we think is more attractive. We can be more nimble than some of the largest fund of funds.
From an investor transparency perspective, given that this is a small organisation, investors appreciate the fact that they get better access to myself, and the portfolio investment team. With some of the larger platform fund of funds perhaps that interaction is only via investor relation/marketing. It’s hard for them to get the responses they need and access to the right areas should they need that information. As we are our own biggest investor we can appreciate that investors do want transparency and need access to information.
Being independent and effectively running only a single portfolio of hedge funds with one underlying fund of funds by default means that has to be our best ideas portfolio. We’re not managing multiple fund of funds and single client accounts where we would have to distribute ideas across a range of different funds, which could result in a watering down of our best quality selections. Instead it all goes into a single pot so investors know that what they are investing in is absolutely our best ideas. There are no conflicts vis-à-vis managing other accounts.
Returning to the family office issue: it is very important for us that this does well and continues to do well because there is a significant proportion of the family office account tied up in the fund. It’s hard to emphasize enough how much a difference that can make. It becomes less about being a fee generating business but also ensuring that performance is up to scratch and continues to do well to make sure our principal fund is performing as well.
Q: Does this affect the attitude to getting new investors if you’re relying on the family office? Does it make it less of a priority?
A: It doesn’t make it less of a priority but what it does do is give the business stability. We are still very keen to grow the business and build our resources further. We’ve not set specific limits to assets under management. We are currently running just short of $200m. We think we can readily scale that with what we have in place because the underlying positions we have are scalable. The work has been done and the process continues to run.
But having that cornerstone investor does bring stability to the business. It allows us to build up the business without necessarily worrying whether that next dollar is going to come in, or whether on the margins some money might be losing. It helps afford infrastructure stability which we think is also a positive.
Q: What are your thoughts about risk management?
A: We don’t think we can make investment decisions and separately treat risk as a different assessment. They go hand-in-hand for us. When it comes to manager selection and ultimately portfolio construction risk is integral to that whole process, and we are constantly reviewing that.
It’s not just a simple assessment of the numbers, crunching them and kicking out typical risk numbers such as value at risk and stress limits. It is also on a more subjective qualitative level about having an understanding of what you are invested in, the managers you are invested in, where you think risks reside, and how they might play out in different market environments. And if you have an intuitive understanding of that, it goes a long way to helping you understand risk within the portfolio and also how to construct bucketing in your portfolio and building a portfolio of diversified risk.
It is always insufficient to simply look back at recent history and say given correlations have been as they have for the last two years we think that’s how things will play out. You always have to look at how things might change or be different, in particular vis-à-vis risk during periods of stress or distressed as we’ve seen in the last quarter using historical correlations doesn’t necessarily help. Correlations tend to break down and spike in periods of stress.
We think that in addition to running all the numbers having a qualitative overlay and understanding of where risks may reside and a common sense approach is also very important.
One other topic to touch on is liquidity risk which is a critical issue within risk management. I think in many cases fund of funds don’t spend enough time assessing liquidity risk. There are a couple of perspectives that are important.
Firstly, ensuring that the liquidity of the underlying investments largely tie up to the liquidity of the end investors. That is something we are always cognisant of, and built models around to ensure that we are not building a mis-match between our assets and our liabilities.
Secondly, it is critical from a portfolio construction and management perspective, because if you have a highly illiquid portfolio and you need to affect changes to it that makes affecting those changes that much more difficult because you’ll need time to build those changes into the portfolio. We do try and keep a reasonable amount of liquidity in the portfolio to ensure that it’s consistent with meeting investor redemption requirements. It also means we can have flexibility in how we manage the portfolio, and can make changes as and when we see fit. When we make less liquid investments into hedge fund managers we need to make sure that we are also being rewarded effectively for taking on that illiquidity risk.
Q: Do you have any market predictions looking ahead?
A: It’s likely to continue to be a challenging year for the markets as a whole. We think volatility will continue. We will see further bouts of risk aversion, perhaps some of the worst elements are behind us but there may be more shocks in store.
Having said that there are certain elements coming through that we think are quite positive for hedge funds as a whole and certainly for some hedge fund strategies. In particular, we think as a result of a lot of the de-leveraging that is going on and heightened risk awareness there is a much greater differentiation between high quality and low quality assets, and high and low quality securities. For a good hedge fund manager that should present good opportunities from both long and short perspectives. Broadly speaking, and I’m coming at this from a very high level backdrop, that should be a good environment in which to generate alpha rather than beta, which we feel had been a much bigger driver of hedge funds performance up until the first half of 2007.
In that respect we think our portfolio is well positioned. Hopefully when some of the extreme volatility that we’ve seen through the first quarter of the year has abated the portfolio and many of the managers should be well positioned to exploit some of these two-way opportunities in the marketplace.
We think macro should continue to perform well. In the equity long/short space managers, who run lower net exposures with less market beta to what they do and who have strong stockpicking ability on the long side but also on the short side, should be able to exploit that sort of environment as well. Within the event-driven space selectively there are also opportunities and in the credit arena too.
We’re not very constructive on relative value, although within relative value convertible bond arbitrage is the one area where we are constructive. And then with regard to multi-strategy, the larger well-established well-diversified multi-strategy managers should be well positioned to exploit some of the mis-valuations and anomalies that may have been created over the last six months or so.