Why did you join Albourne Partners, and what's your role here?
Johnston: I worked with UBS in Asia for eleven years, initially on the prop trading side and later got involved with setting up the firm's regional prime brokerage business. I reached a point where I was ready to do something different, and what attracted me to Albourne was the broad range of activities I'd be involved in.
I've known the guys at Albourne since the firm's inception, and joining them has always been an option. My role here is to build out the Asian franchise of the firm's business.
Albourne provides advice to institutional investors on their hedge fund allocations for a flat fee. We advise on manager selection, conduct due diligence reviews and advise on portfolio construction. Our client base is made up of three groups: intermediaries (such as fund of hedge funds and private banks); family offices and endowments, and institutions (such as pension funds and insurance companies).
Each group makes up about one third of our clients. Geographically, about 45% of our business comes from North America, 25% is sourced from Europe and 35% from the rest of the world. With me on the ground in Asia, we're in a better position to advise our clients on investing in Asia-focused hedge funds.
What have you been doing to build Albourne's Asia franchise?
In October last year, we took a group of 10 investors on a road trip to see a pre-selected group of 40 Asian hedge fund managers in Singapore, Hong Kong, Shanghai and Tokyo.
We had a diverse range of institutions on the trip, including one Canadian pension fund, two US and one UK family offices, one Japanese fund of hedge funds and one Russian fund of hedge funds, one Singaporean institution, one Finish institution and one Swiss private bank.
Taking a group of investors on a joint road trip was a new experiment for us, but the concept worked well, particularly because Asia seems so far away and several of the investors had not made any allocations to Asian hedge funds before. We are considering doing a similar group road trip for investors to visit West Coast managers later this year.
What type of Asian hedge funds did the investors find most attractive?
They liked the funds playing the distressed strategy in Asia. Despite the fact that it's been a number of years since the [1997] crisis, investors felt that Asia would still be seeing good returns and ongoing opportunities in this space.
Other strategies with a domestic theme were also popular. Japan long/short funds, particularly the ones that took a more activist approach, were also popular.
Another story the investors found interesting was in the property cycle, although there are only a limited number of opportunities to get exposure to this through dedicated Asian funds. Asian macro strategies also went down well, as their returns generally seemed uncorrelated with other Asian strategies.
And less attractive?
There was some concern over China funds, and other country-focused funds, such as India funds, as it was not clear that these funds were able to control draw-downs during tougher environments. Asian relative value was probably the biggest disappointment. The investors felt that in general, these managers were unable to show that they were uncorrelated with other Asian hedge fund strategies.
Asian relative-value managers seem to be facing the same problems that relative-value managers are experiencing elsewhere in the world, which is the challenge of making returns in a low-volatility environment. Investors also felt that they should proceed cautiously with credit strategies, as they certainly don't want to be long credit at this stage in the cycle and are nervous about the speed and growth of credit derivatives globally, which many feel is an accident waiting to happen.
Have Asian equity long/short managers overcome their reputation of being long-only fund managers that charge a performance fee?
Some of the best in class long-biased Asian hedge funds can make good returns that justify a performance fee. Admittedly investors struggle with the concept of paying a management fee and 20% performance fee for long-only fund managers.
There are only a limited number of established players, such as Ward Ferry and Lloyd George that have proved this to be a valid business model. Some of the newer breed of hedge fund managers is however taking a more market-neutral approach or more actively including a short side to their portfolio.
Asia has become more 'hedgable' in recent years. Stock lending in Korea and Taiwan has certainly made progress and India has a single stock-futures market, while Hong Kong has an H-share futures market.
How many of the investors on your road trip ended up making allocations to Asian hedge funds?
So far, about half of the investors have made allocations since our trip. One investor was so impressed that he has begun raising a separate fund dedicated to Asian hedge funds.
Most of the investors are looking to Asia because they feel that their returns are being compressed elsewhere in the world. They want Asia to provide both a performance boost and uncorrelated returns with the rest of their hedge fund portfolio.
Do you give advice to clients interested in allocating to Asian funds of hedge funds? Or do you see them as competition?
If our investors are interested in exposure of fund-of-hedge-fund managers we'll certainly help introduce them. But we wouldn't comment on or conduct due diligence on funds of hedge funds as it is a conflict of interest with our business model.
We provide our services for a flat fee, so for larger institutionalized clients employing us would be more economical than investing in a fund of hedge funds. Investors are also attracted to us because we provide the benefit of constructing a tailor-made portfolio.
However, we do count funds of hedge funds among our clients as they do use our services to conduct due diligence and form opinions on single hedge fund managers.
