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for markets” Nolte expects. His reasoning belies SkyBridge’s frustration with Obama: “the current administration is perceived as so anti-business that whoever the next President is, they will be more business friendly than the current administration”. In the meantime, Nolte takes heart from the two trillion dollars of cash sitting on US corporate balance sheets. Though some of this is overseas, it is effectively being defeased through debt issuance. The cash mountain could be transformational if it were deployed into the economy instead of being returned to investors. “Capital spending and R&D are more stimulative than buybacks or dividends” Nolte reckons. If this finally releases the inflationary genie, he could even start getting excited about CTAs again.


Late 2015 is unusual in that SkyBridge’s portfolio is more diversified by strategy than it has been for many years, as Nolte’s view is “When we look at the market today we do not see any single strategy as a huge standout. There are opportunities to potentially achieve 6-10% or 8-12% returns. Opportunity sets coalesce in similar areas, and we then add diversification, by allocating to managers with similar risk and return profiles”.


Operational Due Diligence (ODD) And Risk Vetoes Operational and risk chiefs have veto rights- but have virtually never exercised them. When SkyBridge starts researching a manager, the operational specialists are alerted and will typically identify any concerns early on that result in the process being discontinued. “Fund proposals with ODD reservations should die before they get to the manager selection committee so that everyone does not waste too much time if it is a dead duck” says Nolte. On the operational side, examples of deal-breakers for Partner and Head of ODD Kenneth McDonald, could include inadequate controls over cash movements, such as insufficient signatories being required; concerns over valuations or trade settlements; inadequate separation amongst front, mid and back offices; or a lack of independent auditor, administrator or prime broker. On the risk side, Partner and Head of Risk Management Tatiana Segal (previously of Cerberus) looks closely at risk profiles, policies and procedures to ensure they meet SkyBridge criteria. The potential for overcrowded positions amongst managers in similar strategies is one reason why SkyBridge gets monthly position level data, analysed using Imagine Software, to avoid undue position concentration.


Partly as a consequence of these operational and risk criteria, SkyBridge thinks its investible universe is probably around 2,000 funds as 7-8,000 hedge funds are really “personal trading accounts masquerading as businesses” in Nolte’s view. The


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2,000 at the top of the funnel drop to 300 that are met and around 30 funds that capital is deployed to. At any time SkyBridge could have a buy list of 100 or 120 approved funds, though multiple funds from the same company mean that the number of management companies is smaller.


Fund Liquidity: Finding a Happy Medium SkyBridge’s dynamic strategy shifts - with portfolio turnover as high as 70% in 2014 for instance - clearly require some degree of liquidity and here a happy medium needs to be found. Nolte does not think that ‘liquid alternatives’, which he defines as daily dealing vehicles, under the as ’40 Act, are ideally suited to the strategies and managers SkyBridge invests in (though he does seem open minded about the possibility that some of them could fit into a twice-monthly dealing UCITS structure).


This does not mean that SkyBridge is going to the other extreme and following a ‘Yale Endowment Model’ approach of seeking to capture long haul illiquidity premiums that might be associated with strategies that have multi-year lock ups, such as direct lending. SkyBridge recognises that “alternative income is a huge growth area given the continuing hunt for yield, and ongoing evolution in shadow banking driven by excessive regulations on traditional banks” Nolte notes. But alternative income does not meet SkyBridge’s liquidity requirements (and insurance related securities and catastrophe bonds are also avoided as they are short volatility strategies). Direct lending is “very interesting but not liquid and if we want to exit at an inopportune time we have to go through foreclosures or workouts, so direct lending is only good in healthy environments” Nolte reckons. Similarly “two to three year activists are a hybrid with private equity. We may do a one year soft lock with an option to pay fees to exit early” says Nolte. SkyBridge might invest via exchange listed closed end funds, if discounts break through 10%, though Nolte has worries about the ability to exit without pushing the discount wider.


Alignment with SkyBridge’s own fund terms is the over-riding concern. “We offer investors quarterly liquidity so we do not want to run a big asset/ liability mismatch and try to keep to quarterly or better, with a few one year lock ups. We paid out approximately 35% of our Flagship fund as redemptions in 2008” Nolte remembers.


SkyBridge has developed at least two tactics for obtaining shorter effective liquidity terms than would normally be implied by open ended fund terms. Prospectuses sometimes prohibit or penalise revocations of redemption notices, but SkyBridge uses its relationships with managers to negotiate more flexibility. SkyBridge creates a rolling series


of staggered options on redemptions, by pre- emptively submitting notices that can either be enacted - or revoked if SkyBridge decides to remain invested. This modus operandi relies on an open, pro-active and regular dialogue with managers to keep them in the loop of SkyBridge’s thinking so that the managers should not be surprised when SkyBridge does finally decide to redeem, and will still have had some notice. The dialogue is perhaps made easier by another of SkyBridge’s means of getting better liquidity. Investing in managers that have families of similar funds lets investors above a certain size, including SkyBridge, “swap and switch between vehicles within the same family, without putting in notice” Nolte reveals; (some managed account platforms (MAPs) also offer this facility across much or all of their range, though here Nolte has different concerns about some MAP feeders underperforming fund feeders).


In addition to SkyBridge’s ability to obtain liquidity from predominantly monthly or quarterly dealing funds, Nolte is prepared to acknowledge a more pragmatic reason why some hedge funds, including SkyBridge, avoid launching more liquid products: cannibalisation. “If you replicate your flagship in a liquid version, with lower fees, you cannibalise your higher margin business” he warns. SkyBridge nonetheless recognises the hundreds of billions of inflows into UCITS and ’40 Act liquid alternative funds as partly “an outgrowth of fear around the financial crisis as investors want the liquidity as an extra level of comfort”.


Multi-Faceted Marketing Strategy Choosing appropriate fund vehicles is only one example of the thought and effort SkyBridge has put into its global marketing strategy led by senior partner Jason Wright. An accessible and open image is one driver of SkyBridge’s highly successful, multi-faceted, asset raising strategy that covers four continents. ”We want to reach out to a wider audience than institutional and high net worth investors” says Nolte, and asset growth has come partly from lower minimum tickets of $25,000 but, contrary to some reports, not from broad retail investors: US investors must be accredited, which typically requires a minimum net worth of $1 million and other criteria. The US fund structure is specifically designed to appeal to individual US investors, and not only tax-exempt ERISA plans that may otherwise go for offshore vehicles.


SkyBridge has some distribution partners in Europe, mainly private banks in the UK and Switzerland, with two people employed in Switzerland, but echoing concerns about an increasingly protectionist ‘Fortress Europe’ Nolte admits “the product is not distributed it most European countries because the regulatory environment is


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