Chief investment officer of Basis Capital, Steve Howell, runs two multi-strategy Asian focused hedge funds. Here he discusses the firm's strategy, his views on capacity restraints and the trials of fund raising.
FinanceAsia: Your stated investment philosophy is to identify mispriced securities. Just how easy is it to do this in Asia?
Howell: It is made easier if you have the necessary skill set. Our team is made up of people who have investment banking backgrounds and have lived and worked in Asia during various periods in their careers. The best way to seek out these opportunities is to put Asia-Pacific in the context of the rest of the world and avoid swimming in a fish bowl. You have to ask: if there is a convertible bond offer in Asia how does it compare to a CB offer somewhere else in the world? You have to be looking at the big picture to find the best value opportunity. And the Asia-Pacific region certainly has a lot of inefficiencies which is why our fund is up 13.2% annually.
FA: So you deny that there are capacity restraints for hedge funds trading in Asia?
Howell: There might be if you are trading a single strategy in a single market. By having a multi-strategy approach we can add value by looking at every opportunity and allocating risk capital on a balanced basis. We trade long/short convertible bonds, equities and fixed income as well as asset-backed securities.
FA: Some people would say that you can't do everything well and that multi-strategy funds are in danger of being jacks of all trades.
Howell: True, which is why you need to have detailed risk controls in place so that your capital is used efficiently, with a commitment to low volatility and with the minimum of risk. I think our results speak for themselves. There are also a few tricks to getting a multi-strategy approach right. One of these is not to duplicate research. We get a lot of research supplied to us by the major investment banks and then we overlay this with our analysis. We have our own risk trading and monitoring systems and our experience shows that if you get the downside right and protect yourself from losses then the upside takes care of itself. That is why we have had only one negative trading month in the last 18.
FA: Who invests in your Pacific Rim fund?
Howell: We have $20 million invested from fund of funds, high net worth individuals and family offices. Some of our investors include Rothschild, Colonial First State, Harcourt Investor Services and others. Funds under management has grown 200% in 12 months.
FA: What is your target figure?
Howell: We plan a soft close at $100 million which we expect to reach within 12 months and then we will give extra capacity to existing investors up to $500 million. But we will assess the situation as we grow.
FA: Is $500 million the optimal size for a multi-strategy fund?
Howell: It's what we would be happy with given our risk/return targets. But the market could certainly accommodate more. We are only running 70 positions at the moment and the fund is leveraged two times. Trade size could be 10 times bigger before we would come close to a market parcel size.
FA: Does being based in Australia affect your fund raising efforts?
Howell: We encourage transparency and invite investors to visit our operation as often as they want. We do suffer a bit from the tyranny of distance by being in Australia which is why it will take a little bit more time to reach a close. If we were based in Europe, given our risk adjusted returns, we would be inundated with cash. The good news is that the Australian hedge fund market is about to be opened up to retail and wholesale investors through the master trust networks and this will give us access to much more funds.
FA: How do you market yourself?
Howell: By getting our name out there and getting in front of the people who influence funds of funds and independent financial advisors. We have been rated by InvestorWeb and given a "strong buy" rating which is their highest category. We have also just been assessed by the independent research outfit called Sovereign Investment Research which gave us a very positive report. Over time the asset consultants will play a big part in encouraging pension plans to invest in hedge funds so we have to be in front of them as well.
