Institutional Investor's Alpha Magazine - December 2008 / January 2009 - (Page 22)

Stanley Fink dustry is in such ﬂux. He is also excited about ISAM’s riskaverse methodology, which reminds him of the approach used by AHL, Man’s commodities trading adviser. ISAM holds familiar promise for Fink, who helped transform AHL from a small division with a few hundred million dollars under management into a $20 billion behemoth (it now runs $25 billion in assets). ISAM runs highly diversiﬁed, tightly controlled strategies. Unlike many of its hedge fund peers, the firm doesn’t leverage the trading instruments it uses, which limits its dependence on investment banks. Best of all, Fink says, ISAM’s use of futures and forward contracts frees up its cash and has helped mitigate the worst of the counterparty risks plaguing the industry. “It means that we don’t require liquidity from a prime broker or the banking market to create structured products,” he explains. “And there is no doubt in my mind that exchangetraded products, which are more liquid and better valued than over-the-counter derivatives, are much safer instruments for our clients.” ISAM has another advantage: Because it trades managed futures, only a small percentage of its client capital is needed to take positions. About 10 percent of the invested assets in a given fund are put up to meet initial margin requirements; another 10 percent are set aside to help protect the fund against market volatility, and the remainder are placed in interest-bearing accounts. What Fink describes as the inherent ﬂexibility and depth of ISAM’s capital is now spurring the CEO to help the ﬁrm develop products that guarantee capital preservation — no mean feat in the current market. potential for new fund structures to emerge and the pleasures of working at a small asset management ﬁrm where he knows everyone by name. Alpha: Will we see a shift in hedge fund strategies in the coming year? Fink: We will. We are entering unprecedented territory on the global ﬁnancial scene, and the hedge fund industry is about as Darwinian a model as you will ﬁnd in asset management. My view is that global macro will make a comeback, and it will be a more diversiﬁed form of macro than it was in the past, when George Soros and Julian Robertson dominated. It will also be more risk-averse. When you trade futures markets, you can absolutely control the risks. You can set stop-losses and expect to hit them because these positions are taken in very liquid markets, many of which trade 24 hours a day — unlike the equity markets, which can suddenly open ten points down and you ﬁnd you’ve missed your target. At ISAM we’ve also eliminated the risk of having to pay for leverage and needing counterparties to provide it, because we simply don’t use it. How has leverage, and its abrupt retraction, exacerbated problems in the markets? “Global macro will make a comeback, and it will be a more diversified form of macro than it was.” — STANLEY FINK Managers running strategies dependent on leverage have been forced to liquidate many of their positions. At the same time, managers who relied on investment banks as their prime brokers have had to meet increased margin calls because the banks themselves are being squeezed for liquidity. The combination of those two factors has affected the underlying securities and instruments themselves — and some managers promptly compounded the problem by putting gates on their funds to reduce the speed of redemptions. Those gates have had a knock-on effect, because funds of hedge funds having problems meeting their own redemption requests tend to redeem stakes in their better, more liquid managers, just because they can. Unfortunately, those managers’ strategies are suffering as a consequence — as they’ve been forced to sell — which only drives down prices further. The hope of reaping uncorrelated returns has proved a mirage for many hedge fund investors. Will everything always correlate in a crisis? Across the hedge fund industry, investors have understandably been disappointed by their managers’ inability to deliver absolute returns in recent months, to say nothing of their lack of capital preservation. The challenges Fink faces are not inconsiderable, and the hours are still long, but he seems to enjoy his new role. He works three and a half days a week, which leaves him enough daylight to pursue such philanthropic endeavors as chairing the 2009 Lord Mayor’s Appeal, which supports two charities named as beneﬁciaries by Ian Luder, the lord mayor of the City of London. In a mid-November interview at his ofﬁces in Knightsbridge with Alpha London Bureau Chief Loch Adamson, Fink took a step back from his new job to discuss the ills plaguing the hedge fund industry, the Long-short equity has become such a dominant strategy in the global hedge fund industry that those correlations are very high. When I ﬁrst got involved in the industry, long-short equity was only about 10 percent of the total invested capital; it’s now about 50 percent, and most of those managers are heavily long-biased. In severe market dislocations even ﬁxed-income managers begin to correlate with equity managers, and so we now have — by my estimate — some 60 to 70 percent of the industry with structurally long beta exposure embedded within their strategies. When I started at Man, we began with the premise that hedge funds should be as close to betaneutral as possible, and the macro strategies that we’re 22 • INSTITUTIONAL INVESTOR’S ALPHA • DECEMBER 2008/JANUARY 2009

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - December 2008

Institutional Investor's Alpha Magazine - December 2008 Contents Letter from the Editor Longs & Shorts Inside the Trade Pension Corner The Good Guys Interview: Stanley Fink Cover Story: The New Regulatory Reality United States: The Usual Suspects Europe: Flirting with Unity Asia-Pacific: What Asian Contagion? In Theory In Focus Strategies Research Center Alpha Bytes Unhedged Commentary

Institutional Investor's Alpha Magazine - December 2008

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