Institutional Investor's Alpha Magazine - October 2007 - (Page 8)

more often than not been effectively transferred to banks’ balance sheets — not forced sales,” he says. Furthermore, several hedge funds holding structured paper have closed off redemptions to avoid ﬁre-sale liquidations. Still, Brownstein, who began studying the mortgage industry on his own in the late 1980s while working as a philosophy professor at the University of Kansas, remains optimistic that as margin calls continue to rise, ﬁrms will be forced to sell. And clearly he is not alone in his thinking, with investors such as Citi pursuing the same idea. The 63-year-old Brownstein began his investment career in 1988 at Franklin Savings Association — a Kansas savings and loan institution that was seized and liquidated by the government during the 1980s S&L crisis — after teaching for two decades. There he helped develop quantitative methods for managing mortgage-backed securities. His intricate knowledge of the industry has already been a boost for the SPM Credit Fund. When Santa Fe, New Mexico–based Thornburg Mortgage, an owner of triple-A-rated securities, was forced to unwind positions, the fund was quick to strike. Brownstein believes that such buying opportunities will be plentiful. “As the reality of the subprime situation becomes clearer, the market will gradually begin to price in ultimate values,” UPDATE Michael Hintze C 8 • INSTITUTIONAL INVESTOR’S ALPHA • OCTOBER 2007 STEVE FORREST / INSIGHT-VISUAL / PANOS PICTURES onvertible-arbitrage expert Michael Hintze is feeling bullish about energy investing, and nothing — including the recent turmoil in the credit markets — has dampened his enthusiasm. The founder, CEO and senior investment officer of London-based CQS is seeking new ways to diversify his $8.7 billion business and broaden its investor base. When Alpha last spoke with Hintze (January 2007), he and his investment team had just launched the CQS Rig Finance Fund, the ﬁrm’s ﬁrst publicly traded, long-only investment vehicle, on the London Stock Exchange’s Alternative Investment Market. Since then, CQS has taken a quantum leap forward by acquiring New City Investment Managers, a natural-resources and energy investing boutique founded in 2004 by Richard Lockwood and Andrew Ferguson. Although New City, with a team of just seven and £300 million ($613 million) under management, is young and small compared with CQS, which was founded in 1999, the ﬁrm has earned a solid reputation in London for its work designing unusual energy funds — including the first dedicated to uranium and nuclear power. Since its July 2006 inception, the aptly named Geiger Counter has delivered a cumulative return of more than 87 percent. Such innovative thinking caught Hintze’s attention. During a chance encounter with Lockwood at a fundraising event this summer, Hintze started talking business. Lockwood, 64, wasn’t necessarily looking to sell New City, but the pair quickly realized they shared a common ambition: Both wanted to diversify and broaden their businesses through the strategic development of new, highly specialized energy and natural-resources funds — speciﬁcally closed-end funds not subject to the same potential redemption pressures as those of limited partnerships. “I was telling Richard, whom I’ve known for years, that we had built a great operational platform for our business but we were still looking for peo- Michael Hintze of CQS ple to help us expand our investment activities,” says Hintze. “And Richard said — putting it the other way — he had great people and aspirations to expand but needed a more robust operational platform and back ofﬁce.” Thus the idea of the acquisition was born. Announced in late September, the deal received swift regulatory approval and was finalized earlier this month. Though Hintze declines to discuss the terms, the combined firm will have a team of more than 200 and assets of $9.3 billion invested across an array of credit, convertible, asset-backed and even equity strategies. Hintze’s aim — to build out his firm by expanding into adjacent, closely related investment strategies — is not without precedent. Multistrategy managers like Citadel Investment Group and Highbridge Capital Management began as convertible-arbitrage experts. As the once-arcane strategy has become increasingly competitive and commoditized, its practitioners have started searching for new ideas. Unlike many of its peers, CQS emerged from the subprime crisis relatively unscathed. Its flagship Convertible and Quantitative Strategies Fund, for which the ﬁrm was named, was down 1.5 percent in August but has rebounded, ending September up 2 percent net of fees (it’s up 8.23 percent for the nine months ended September 30). Hintze remains sensitive to the external business risk. Over the past several years, he and his team have been quietly transforming CQS, adding strategies complementary to the firm’s two core portfolios — the CQS Fund and the CQS Capital Structure Arbitrage Fund. Since 2005 they have added an asset-backed-securities fund, an aggressive directional opportunities fund in convertible arbitrage and credit, two collateralized loan obligation funds, an Asia-based convertible and quantitative market-neutral equity longshort fund and the rig finance fund, which helps ﬁnance the construction of deep-sea oil rigs by buying the companies’ high-yield debt. The fact that CQS already had a team of energy analysts, plus a back office worthy of an investment bank, helped convince Lockwood that the sale made sense. “We’ve been good at designing products that people want to invest in, but we’ve reached a crossroads,” he says. “Joining CQS will give us the staffing we need, but no one on our team is going to lose their identity.” — Loch Adamson

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - October 2007

Institutional Investor's Alpha Magazine - October 2007 Contents Letter from the Editor Longs & Shorts Pension Corner: Applied Knowledge The Good Guys: Autism Advocate Interview: Nerves of Steel Cover Story: Ivy League Education Alpha Awards: Top Service Providers: Trying Times Strategies: Passage to India Profile: The Oracle of Irvine Alpha Bytes: Futurama Research Center: Funds of Funds 50 Unhedged: Commentary: Crisis? What Crisis?

Institutional Investor's Alpha Magazine - October 2007

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