COO Connect Editorial: Interview with Tushar Patel of HFIM
Early stage investing in either emerging hedge fund managers or strategies has been slightly overlooked by a number of investors since the 2008 crisis. Investors recently have preferred to allocate capital to larger and more established funds even though emerging strategies have often outperformed their more established peers and generated high risk adjusted returns. London-based Investment firm Hedge Funds Investment Management (HFIM) identifies, researches and invests in emerging strategies and managers. COO Connect Editorial speaks to its managing director and chief investment officer Tushar Patel about what the firm looks for when investing in this space.
COO: What are the benefits of investing in early stage strategies?
TP: Both academic and empirical research indicates that emerging strategies have often outperformed on a risk-adjusted basis in comparison to some of the more established strategies. This is also evidenced internally at HFIM by its own research. We have internally developed indices that track early stage strategies and assist us in identifying new funds. There are also other potential benefits to investors, as managers are often generating returns from new opportunities, applying new investment approaches or investing in new instruments and new markets in their investment process.
COO: How much experience do you expect the managers you invest in to have?
TP: Ideally a background in investment management, trading or research. Managers have typically worked at proprietary trading desks at investment banks, hedge funds or traditional fund managers. The management behind some of the largest hedge funds in existence today has a background in proprietary trading. We are looking at typically more than 3 years of experience.
COO: In terms of the operations, what do you look at?
TP: We generally review the operating structure of the firms, their counterparties, and the skills of the operational team. We also look at how the fund’s assets are held and accounted for - we prefer quality fund administrators and custodians. We are also looking for segregation of responsibilities between trading and operations in the firm. In the early stages, managers often have small teams and they hire consultants or outsource some aspects of their operations. However, with growth in their business, we would expect the business infrastructure to grow internally. In regards to hedge funds having multiple prime brokers, this all depends on the firm’s size, complexity of their strategies and level of assets under management. We will review the system’s infrastructure and how the middle office, front office, prime brokers and custodians interact – that is reporting, calculating the net asset value, managing liquidity and risk management.
COO: What do you look for in terms of fund corporate governance?
TP: This is an increasingly important issue. We generally review the prospectus and identify the board structure of the fund, their experience and the process by which the fund manager’s activities are monitored. Ideally, we want experienced fund directors on boards who can leverage their experience and assist the operation of the fund during stressful situations. I would expect them to be more proactive than they have been in the past.
COO: Many investors who put capital into emerging strategies often expect fee concessions – do you?
TP: We do not generally demand fee concessions because we understand that many of these funds managers are in their early stages. It is better that the managers generate the fees in order to meet operating costs and invest in the operational infrastructure. However, in some circumstances, we may seek a fee concession.
COO: What future investment plans do you have?
TP: We are seeking to move into strategy-specific funds. This includes global macro, market neutral and long/short plus CTAs and emerging markets.
Tushar Patel is CIO and managing director at fund of hedge funds HFIM and has more than 15 years industry experience. He is an associate member of the Society of Investment Professionals, a member of the CFA Institute, CFAUK and formerly an individual member of the London Stock Exchange. He has served on numerous industry committees including the hedge fund committee at the Alternative Investment Management Association (AIMA).