The Credit Suisse fund, which is expected to commence trading with over €100 million in initial subscriptions, will target risk-adjusted returns through active portfolio management. Amongst the underlying fund strategies it will look at are convertibles, fixed income, emerging markets equities and rates, although equities and macro are likely to be the biggest components initially. The fund is being managed by Credit Suisse’s fund of hedge fund management unit, which was founded in 1998 and currently oversees approximately $10 billion in fund assets with more than 150 managers in its portfolios.
Boris Arabadjiev, head of the fund of hedge funds unit at Credit Suisse, feels it has been relatively easy to replicate the firm’s existing approach to fund management using a UCITS-compliant vehicle. “We’re using the same approach,” he confirms. “If we can replicate it, we will do it in exactly the same way. We work with many of these managers on our existing platforms.”
This could well prove to be the key to the success of this product. The fund manager is dealing with portfolio managers and strategies he already understands, and in many cases has been able to stress test those managers under ‘live fire’ market conditions in 2008-09. With the launch of their UCITS products, Credit Suisse can simply replicate an existing business relationship in onshore format. “Our starting point is our existing Cayman universe,” says Arabadjiev.
Despite the concerns expressed by some investors and regulators about whether the liquidity in some credit and convertible funds will be robust enough to endure another market crisis, UCITS or no, Credit Suisse seems upbeat about those credit-oriented funds already in its portfolio. It goes back to the familiarity argument: it has witnessed how these funds performed under credit crunch conditions. It is confident they can weather future storms too.
Arabadjiev says that, as the fund grows, his team may revisit some funds, as they don’t want Credit Suisse to represent more than a certain proportion of the fund.
At the same time, just because Credit Suisse is focusing initially on its existing universe of hedge funds, this does not mean it won’t consider new UCITS launches. “We’re not dogmatic about track record,” says Arabadjiev. “We’re prepared to fund from the word go.” He has also been engaged in discussions with other offshore funds he follows with a view to persuading their managers to also examine the UCITS opportunity. “Some have responded well to our request,” he adds.
The vast majority of the current AuM is accounted for by Credit Suisse client assets. Arabadjiev reports that the fund’s launch has been well received, particularly the weekly NAV and liquidity, but also the fact that it is tax efficient and tax transparent in many jurisdictions. “We do expect a substantial market for this fund, because it will be retail. It opens up the door to this segment of the market,” he says.
It sounds as if Credit Suisse is fully embracing the UCITS opportunity with this launch. The fund will even consider managers listed on the big platforms, if the strategy is right and stands up to the CS due diligence process. The key is the investment opportunity, and whether the manager is convincing about his ability to function within the current UCITS III constraints.
Not only that, but there is a broader universe of absolute return alternative investment funds that are already UCITS compliant. They might not follow the classic fee model of a Cayman Islands hedge fund, but this can only be a bonus for those funds of funds prepared to consider them.
“We would consider an absolute return fee structure,” admits Arabadjiev, referring to the lack of a performance fee or high water market amongst many absolute return funds in the UCITS universe. The key for him is whether the prospective fund is able to go short, and how it achieves this. A passive index derivative approach to a short strategy is not enough: there has to be scope for some form of active alpha component on the short book.
This certainly helps to broaden the number of funds that Credit Suisse can look at, beyond those managers it already tracks. But is the UCITS universe big enough now for its purposes? Some fund of funds managers, like Kairos, have been operating successfully in the market for a while, while others like Strategic Investments Group are building UCITS products out of managed account building blocks. Is the market now mature enough to replicate what is a mature offshore fund of funds strategy?
“A number of participants decided to wait and see how the [UCITS hedge fund] universe would expand,” says Arabadjiev, who feels now there are enough options out there for his Credit Suisse product to fulfil its investment objectives effectively. The Prima Multi-Strategy Fund is launching with 20 managers in the portfolio, and is well-served in the areas of long/short equity and global macro, with more than 20 different UCITS investment options in each strategy bucket. Credit Suisse is currently running the fund with a screened universe of 300 funds to choose from, a universe which continues to expand rapidly.
It all sounds very rosy. But are there any potential problems on the horizon? Arabadjiev feels investors and managers should be paying close attention to the way some UCITS hedge funds are being set up, scrutinising how the strategy is being implemented and the degree of financial engineering being used. “We’re concerned about funds where a significant proportion of assets rely on a handful of swaps with a single counterparty,” Arabadjiev says. “The liquidity profile of such a fund will tend to vary over different parts of the market cycle. Consequently we are avoiding heavily engineered funds, for instance where the entire short book is encapsulated with a single swap. We want to focus our efforts on strategies which are transparent, with easy to price instruments.”
The fund will be open to both retail and institutional investors, and will offer weekly liquidity.
