not friendly”. Instead, there is more distribution in the Middle East, Latin America, and Asia. SkyBridge has been well rewarded for its decision to focus on Asia three years ago, with quarterly visits to the region and a native speaker on the ground in Korea helping to attract heavyweight investors: “Clients include sovereign wealth funds, and other institutional investors in Japan and Korea” says Nolte. Most managed accounts run pari passu with the comingled fund of funds, though sometimes funds of one request more or less concentration or can exclude certain sectors.
Separate from SALT, SkyBridge has started putting on smaller, more exclusive, invitation-only symposiums that are not promoted or advertised. These are held in Asia and Europe each year to target institutional investors, and are structured largely as business development events and less so as industry platforms or educational forums like the flagship SALT Conference. Yet SkyBridge still flies in thought leaders for keynote sessions, with Ben Bernanke and John Paulson attending recent events in Tokyo which were attended by 100 institutional clients from all over the region.
Scaramucci thinks the firm could run $20-30 billion and expects this to come from a mix of strategic acquisitions and organic growth. But the multi- strategy product is not being used to seed new strategies. “In-house standalone strategies, such as our dividend value fund, will not be invested in by the comingled product due to an inherent conflict of interest” Nolte confirms, and stresses that the portfolio managers of standalone strategies are treated as distinct from the analyst team running the fund of funds. In 2013, SkyBridge hired Portfolio Manager Brendan Voege from SunAmerica to create a product that expands the firm into the long-only mutual fund space, offering investors access to additional portfolio allocation strategies inclusive of increased fixed income options. Voege launched the SkyBridge Dividend Value Fund (SKYAX) in Spring 2014 and in its first year achieved a number one ranking on The Wall Street Journal’s category kings list of “total return for the top 10 funds ranked by year-to-date performance as of Apr. 30, 2015.”
Short memories and longer perspectives on hedge fund investing SkyBridge may be dynamic in making tactical allocations, sometimes with a multi-month view, but the manager is informed by decades of financial market history. “Interest rates cannot stay at zero forever and the current forces of deflation may unwind into other things” Scaramucci expects. One of his favourite soundbites is that “We are actually in the fashion business. Ten years ago investors took a 75 year view like college endowments. Now they take a 75 minute view”. This should not be
interpreted literally to indicate SkyBridge is keen on short term traders, and the firm has no high frequency traders. The message is more that many people in the industry today have short memories. Scaramucci reflects that “a whole generation only lived in the post crisis era, and few remember that rates can get tightened, with one in seven Wall Street professionals never having seen a rate increase as the last one was in April 2007 before the first iPhone”. In contrast Scaramucci and Nolte take pride in being able to remember exactly where they were 28 years prior to the date of THFJ’s interview. On ‘Black Monday’, October 19th, the day of the 1987 stock-market crash, Nolte was on his honeymoon while Scaramucci had a job interview at the Charles Hotel.
Though SkyBridge’s own performance has exceeded that of the wider industry, SkyBridge makes the case for hedge fund returns at a time when the six year bull market in equities has left some investors losing patience. Its latest thought leadership paper, “Why Investors Should Allocate to Hedge Funds”, is publicly available on the SkyBridge website, and revisits rationales for investing in hedge fund strategies - which will be familiar to THFJ readers though not necessarily to the general public. Diversification is one. “Hedge funds do not benchmark to equities or bonds, and you should consider hedge funds to diversify away from those two, and combine different return streams for a more efficient portfolio” Nolte states.
SkyBridge also points out how hedge fund portfolios can dampen portfolio volatility and compound at an attractive rate because “everyone is a long term investor until they have short term losses” Nolte reflects. Drawing upon the lessons of behavioural finance, he observes that “human nature is to sell at inopportune times’. Indeed, it seems to be a truism that money-weighted returns tend to fall far short of time-weighted returns for most funds. But a smoother ride means investors are more likely to stay the course. What should investors expect from hedge funds? SkyBridge has delivered “return streams over the last decade roughly the same as the S&P with one third of the volatility and a low but positive correlation to equity”. This steadier return profile should give investors more comfort to more fully deploy capital. Deep drawdowns also arrest the compounding process. The asymmetry of drawdown recovery means it is harder to recover large losses – as a 50% loss (as seen in global equities in 2008 or 2002) can only be recovered with a 100% gain whereas a 20% loss (as SkyBridge incurred in 2008) is recovered with a 25% gain.
SkyBridge acknowledges that post-crisis hedge fund returns have been lower but does not expect all of the reasons for this to persist. Granted, Regulation
FD is here to stay (at least in the US), making it harder for equity hedge fund investors to obtain informational advantages. But other regulations could even be helpful. The Volcker Rule brings two benefits for hedge funds. “Proprietary trading desks are no longer there as shock-absorbers so the downdrafts are so much more violent, creating better opportunities” Nolte expects. A less well known benefit of new US rules is the strengthening of minority shareholder rights: the threshold for requisitioning a board meeting and putting questions to boards is now lower, according to Nolte.
Moreover, the higher correlations between stocks, sectors and countries that made life harder for stock-pickers are already giving way to greater dispersion, increasing the potential for alpha generation. Macro has also suffered from higher correlations but should benefit from macro divergence as the major economies are at different stages of their economic cycles with some tightening while others are loosening monetary policy. If interest rates do also normalise, the various long/short, market neutral, and less cash-intensive strategies will once again receive a positive return on their cash, adding to their investment returns (or offsetting any investment losses and sometimes keeping overall returns positive).
SkyBridge’s future projections for broad hedge fund industry returns are of the order of 6-10%, which they think is far more than investors can expect from bonds at current yields, though also less than their 10% forecast for equities. Though many US pension funds and endowments still, controversially, have high single digit return targets, a growing number of institutional investors are quite content with mid-single digit returns, given liquidity better than private equity or real estate.
A Broader Asset Management Firm SkyBridge started in March 2005 in the hedge fund seeding business, raising $330mm and in 2008 sold a stake to Australia’s Challenger Financial Services Group Limited. The firm entered the crisis with $450mm of assets but redemptions and some losses returned it to $350mm. Post-crisis the firm has opportunistically reoriented its focus by launching the SALT Conference; building one of the world’s largest 20 funds of hedge funds, and adding a mutual fund along the way, taking total assets to $13.4bn. A long only dividend value strategy added two years ago is “part of SkyBridge’s transition to a broader asset management firm” says Nolte, and more strategies – both traditional and alternative - may be added. SkyBridge is one of the biggest brand names in the industry for a reason, or two. THFJ
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