Services

Specialized

Multi-Manager Vehicles

At BCM, we believe our management team’s extensive knowledge of the hedge fund industry gives us a unique advantage over other Fund of Hedge Funds. We have proven our ability to identify the most talented managers and to secure capacity before their funds are discovered by large institutional investors.

Our niche, specialized funds of funds invest with our stated investment philosophies in mind:

  • We look to invest in “non-brand name” managers.
  • We look for “right-sized” managers, that is to say,
    a fund’s size is appropriate given the particular
    strategy they are employing.
  • We seek to Identify managers that can take
    advantage of unique opportunities in structurally
    inefficient parts of the market
  • We are agnostic to the length of a fund’s track
    record. As a result, we will often invest earlier than other
    institutional allocators though either funds are not dedicated emerging manager vehicles.
BCM Credit Opportunities Fund

The BCM Credit Opportunities Fund consists of 8 to 12 hedge fund managers dedicated to investing in the credit markets. Our philosophy on fund size is particularly relevant within the BCM Credit Opportunities Fund, where the most attractive investments are often niche securities that require the appropriate liquidity standard and test managers trading discipline. We utilize a variety of long/short credit strategies within the fund, with a particular focus on High Yield, Distressed Debt, Emerging Market Debt, Event Driven/Special Situations and Structured Credit strategies that encompass a global opportunity set. We believe experienced and talented credit managers have the potential to profit in any market cycle.

We seek to construct a portfolio of experienced credit managers who not only understand the complexity of credit instruments, but also have the necessary attributes to effectively navigate what are often opaque markets and search out opportunity sets that may not be easily accessible to the broader investment community.

Hedge Fund

Advisory Services

BCM Hedge Fund Advisory Service offers investors the ability to build a direct custom hedge fund portfolio and/or provide extensive oversight to existing hedge fund portfolios. We construct and monitor direct portfolios, handling all aspects of the due diligence process, quantitative and qualitative analysis, and ongoing performance monitoring and measurement. Each client portfolio is uniquely tailored based on the client’s risk tolerance and return parameters.

Before constructing a sound hedge fund portfolio for clients, a consultative review allows BCM to understand the investor’s financial needs. Working with our clients to determine their specific investment objectives, risk tolerance, and time horizon are important first steps in creating a hedge fund portfolio that is truly custom tailored.

Only then do we begin recommending funds for the client’s consideration that we view as well-suited strategies for their investment needs. While the following overview is intended to highlight the breadth of BCM’s approach and the unusual approach we utilize in tailoring custom hedge fund portfolios has exceeded client expectations on all possible fronts.

BCM has always tailored our approach to meet our clients’ needs. BCM can provide our full suite of services to support a clients’ hedge fund portfolio or the “à la carte” approach where only a portion of our capabilities and services are requested. BCM Hedge Fund Advisory Services currently handles customized mandates for family offices, ultra-high net worth individuals, charitable foundations and endowments.

Custom Liquid

Alternative Portfolios

BCM has identified alternatives to the traditional hedge fund investment products that can complement a hedge fund portfolio. We view liquid alternative strategies as Alternative Mutual Funds (“AMF”).

What exactly is an Alternative Mutual Fund (AMF)? An AMF is a registered mutual fund overseen by the Investment Company Act of 1940 where the investment manager utilizes investment strategies typically seen in alternative vehicles. These strategies may include, but are not limited to, shorting securities, holding concentrated positions, buying and selling options, pairs trading and hedging portfolio risk using market indices. We have seen significant recent growth in AMFs as hedge fund managers recognize the need to offer more flexible vehicles. BCM expects the trend to continue for the foreseeable future as investors become more educated on the opportunity set.

At BCM we look to include both AMFs and traditional hedge funds within our client portfolios. BCM’s Alternative Mutual Fund research process is conducted in a similar manner to our traditional hedge fund research process. In most cases, AMF’s are used in conjunction with hedge fund investments. We recognize that there are pros and cons to traditional hedge fund structures and in our view AMF usage can address many of the issues present in hedge fund investing. Many investors may be reluctant to lock-up capital while others may balk at hedge fund fee structures, or both. Our expertise navigating the liquid alternatives universe allows us to craft custom liquid alternative portfolios for investors to meet investment objectives.

Liquid Insurance

Dedicated Fund

The Balter ’40 Act Alternatives LP is an Insurance Dedicated Fund (IDF) that is only available within Private Placement Life Insurance and Variable Annuity policies. For further details on PPLI structures please contact us directly.

The fund’s objective is to generate a tax-advantaged, absolute return, utilizing liquid Mutual Funds (aka ’40 Act funds) that employ techniques typically found in traditional hedge funds. The Fund intends to provide a portfolio of managers and strategies, specifically constructed to generate strong risk adjusted returns specifically constructed in a concentrated format with the intention of generating strong risk-adjusted returns. BCM believes a number of today’s existing hedge fund strategies can and should be accessed via a ’40 act structure.

Customized

Alternatives Research

BCM performs customized alternatives research for clients seeking analysis of existing or potential investments in hedge funds and alternative mutual funds. Clients who utilize this service include both individual investors, institutional investors, family offices, consultants to family offices, and consultants to institutional investors. These engagements are long-term and ongoing, but typically are front-end loaded, where BCM will analyze an existing hedge fund portfolio, subjecting each fund to BCM’s rigorous due diligence analysis. Clients may also submit potential funds for due diligence analysis, or request BCM’s recommendations among other funds. Clients typically engage BCM for full due diligence on all metrics. Results will be provided in written format, and consultants who wish to keep BCM’s involvement confidential are welcome to rebrand BCM’s research as their own.

Our Research

Capabilities

Our research capabilities across the spectrum of the non-traditional investment landscape know no bounds. We are well equipped to distill the simplest to the most complex of strategies. We can craft solutions to each clients needs, whether it is through a “à la carte” services or a customized mandate.

Short-biased Equity
Short-biased Equity

In the most simplistic terms, the most common type of hedge fund is the long/short equity fund, where the manager can monetize his view on both underpriced securities (by going long) and overpriced securities (by going short). While the addition of shorting equities in a portfolio generally has the added benefit of offsetting some of the market risk in the portfolio, the short exposure will also reduce the contribution to the portfolio from the market’s return (reducing the “Beta” of the fund). For that reason, combined with generally rising markets, the vast majority of long/short funds are long-biased, where the portfolio is tilted toward a larger long book that is positively correlated to the equity market.  However, there is a very small subset of the long/short equity universe where the reverse is true.  These short-biased (or even short-only) equity managers focus their research efforts primarily on identifying opportunities on the short side. What long exposure they have, if any, is often to reduce the pain of a market rally while they wait for their shorts to play out. However, the negative correlation of being net short creates a large headwind for short managers in rising markets, causing many talented short managers to go out of business during extended bull markets. Over the last decade, our team has conducted research on fundamental short equity managers to get a better understanding of what makes a good short opportunity and what the potential pitfalls are. Regardless of whether we utilize a dedicated short seller in our funds or not, the insight from this research is extremely valuable when assessing traditional long/short equity managers. Pitfalls common on the short side of traditional long/short managers include sizing shorts too large, investing in shorts with high short interest (which increases the chances of getting “short-squeezed”), excessive borrowing costs that are not being accounted for when constructing the portfolio, and not fully appreciating the asymmetric risk profile of being short. Short books also require dynamic rebalancing as exposures organically grow or shrink in a different way than long books do. Opportunities on the short side, much like the long side, can be very diverse; Industries in meaningful flux can generate as many short opportunities as long opportunities, as can differences in a manager’s growth or earnings assumptions compared to the market consensus.  The short side, however, has the extra benefit of being able to seek out and monetize “accounting shenanigans”, sometimes where there is outright fraud. These opportunities, which are often ignored by traditional long/short managers, not only have the ability to generate attractive returns, but also investor infamy for a short seller. For example, Jim Chanos of Kynikos is the most famous dedicated short seller, partly due to being the first hedge fund manager to uncover the fraud at Enron. Many short managers have since tried to make a name for themselves by publicly sharing their research on fraudulent practices they have uncovered. More recently, short seller Andrew Left has achieved notoriety for accusing Valeant Pharmaceuticals of accounting fraud.  Notably, he even compared the company to Enron. This widespread release of research is a more recent development in the short-only space and can also serve as the catalyst for the stock to drop.  As a result of the above-mentioned headwinds for a short-biased portfolio, more and more dedicated short sellers like Andrew Left are moving toward a business model where they sell their research to other funds.  But some short sellers are also beginning to raise capital for funds dedicated to specific short ideas. We have invested in at least one such fund already and are always evaluating the benefits of adding a short specialist into our portfolios.

Trade Claims
Trade Claims
Structured Liquid IDF
Structured Liquid IDF
Distressed Emerging Markets
Distressed Emerging Markets

As part of our core credit manager research, we have always maintained a keen focus on specialized managers who focus on distressed debt investing in the emerging markets. Distressed emerging market managers primarily focus on investment opportunities in under-analyzed and inefficient markets, primarily in the corporate debt sector of small, troubled companies as well as on a sovereign basis as we believe both segments complement each other in portfolio construction. They typically will provide liquidity to investors inexperienced in emerging market restructurings while identifying and purchasing undervalued distressed assets. In addition to distressed emerging markets being a structurally inefficient market, the asset class requires a unique set of skills that include credit analysis and restructuring specialists as well as an understanding of the macroeconomic backdrop and its potential impact on a particular corporate or sovereign credit. We have historically preferred managers who have low correlation to developed and traditional EM strategies, maintain a concentrated portfolio of high conviction investments, and do so without the use of leverage. We maintain a short-list of managers who meet the necessary criteria for investment.

Asian Asset-based Lending
Asian Asset-based Lending

Direct lending, or Asset-based lending is a strategy focused on a business loan made to a company primarily secured by a form of collateral, typically by inventory, accounts receivables, or other balance sheet assets. Loans vary in terms of duration as do the interest rates on the loans (that are ultimately the “carry” component to the fund); managers often structure additional concessions into the agreement, including make-whole interest payments if loans are paid in full prior to the maturity date, additional guarantees, and equity warrants as potential kickers. The strategy primarily exists as an additional avenue of financing for companies. Historically, there has typically been very little volatility associated with the monthly returns of the strategy and as a result was a particularly popular strategy prior to 2008. However, many direct lending funds were caught up in the declining loan values and investor redemptions that came along with the financial crisis. Nonetheless, given our observation of direct lending funds and funds of direct lending funds during the period which ultimately gated investors due to a mismatch in liquidity (offering investors monthly liquidity when underlying direct lending funds had much more stringent terms), in our view it is particularly important to match the liquidity of the underlying investments with that of which is being offered to investors. When one of our investors approached us with a desire to invest in asset-based lending strategy targeting the niche private credit markets of Asia, we were able to apply our in-depth knowledge of asset-based lending strategies in the context of Asian small and medium enterprises (SMEs). To also further understand the nature of direct lending in Asia, we touched base with a local manager in Asia that we greatly respect whose firm and its principals has observed in the pre-2007 days deals that were being done – mainly because multi-billion hedge funds had too much capital to invest in the public credit markets in Asia (it was fairly shallow at that point, potentially resulting in too much concentration for one firm). Direct lending is known more as private credit or private lending in Asia and is widely discussed topic given SMEs’ difficulty in accessing financing from banks along with the inherent desire for both swift and in particular discreet financing. While many firms are beginning to issue bonds, there are still many SMEs who are going the private route. After conducting meaningful research on the strategy in the context of the region, we felt that at the time the opportunity set was compelling and we found the uncorrelated nature of its returns against other asset classes appealing. We do not however feel that these types of investments fit in a hedge fund structure, and have felt that it was necessary for managers pursuing this strategy to be taking the appropriate steps to address the mismatch in liquidity of direct lending managers that blew up in 2008 by offering terms that match the duration of its investments.. While the strategy in our view has its merits, it requires like-minded investors who have the ability to endure a longer-time horizon than one may be used to with hedge funds that tend to have far more advantageous liquidity.

Discretionary Global Macro
Discretionary Global Macro

“Global” reflects the fact that the strategy will seek opportunities throughout the world.  “Macro” refers to a manager’s use of macroeconomic principals to identify trading opportunities.  Global Macro is a strategy that seeks to produce returns by investing long and short in equities, currencies, interest rates, and commodities.  It is a strategy that encompasses the broadest mandate possible given its ability to utilize a variety of securities and instruments. However, it is important to note that there are two sub-categories; Discretionary and Systematic. Discretionary funds are managed by portfolio managers that are conducting their own research. We have always favored discretionary global macro given its wide mandate – it is a category that seeks to invest long and short in virtually any security around the word. When conducting research across the universe of discretionary global macro managers, we approached the strategy with a particularly high bar given that one of our team members previously worked at a discretionary global macro fund.

Structured Credit
Structured Credit

Structured credit is a strategy focuses on bundles of debts such as residential mortgages, commercial mortgages, car loans, credit card receivables and student loans that are then “securitized” – that is sliced into securities - offering different levels of risk and exposures to losses. This then offers a steady stream of interest payments. We conducted research across the entire spectrum of structured credit managers, and while we were agnostic about asset size we ultimately found the highest conviction with highly experienced structured credit managers who previously spent their careers at large banks structuring the credits themselves. Additionally, we favored those that encompassed a relative value, “multi-strategy” approach to investing in structured credit – that is, investing in residential mortgage backed securities, commercial mortgage backed securities, and asset backed securities. – that could best allocate capital to where opportunities are the most attractive across the spectrum. Lastly, we also favored managers that were capacity constrained due to their exclusive focus on more esoteric structured credit. This led us to make an investment in a single structured credit manager that we believe had significant potential to outperform its peers.

Sector Focused Long/Short Equity
Sector Focused Long/Short Equity
European Regulatory Capital
European Regulatory Capital
Physical Rhodium
Physical Rhodium

One of our sophisticated clients approached us about an interesting opportunity to invest in rhodium. Rhodium is one of the platinum group metals (PGMs), which consist of platinum, palladium, rhodium, iridium, ruthenium, and osmium. It is a metal that is found in very few places on the planet, and is only found alongside platinum, with the majority of the mined rhodium from South Africa while Russia is the second largest producer. Approximately 80% to 85% of the total annual supply (mined and recycled) is used in auto catalytic converters. Remaining supply is used in chemical applications, electrical, and glass applications. Our client was interested in an advantageous entry point given that in 2009, the global recession caused a dramatic decrease in car sales in many of the world’s largest markets, resulting in a glut of rhodium that caused a meaningful price dislocation. Since then, strong auto sales in 2011 diminished that supply but in 2013 demand once again exceeded supply. With the onset of far stricter emission standards in Europe and in China, it was believed that this would create a shortage in the rhodium market. It is important to note that while PGMs platinum and palladium are substitutable, rhodium is the only known element that breaks down nitrogen oxide emissions, requiring that every new gas or diesel burning vehicle on the planet (including hybrids) required rhodium. Additionally, when assessing the potential for substitution, there is an approximately 1:5 ratio between rhodium and palladium. As demand is expected to exceed supply, this dynamic is expected to become even further exacerbated as stricter emissions standards are adopted.

Life Settlement Structure Finance
Life Settlement Structure Finance

A niche subset of the structured finance strategy, a life settlement is a financial transaction in which a life insurance policy is sold on the open market for a value greater than the policy surrender value (the amount the insurance company will pay to “repurchase” the policy), but less than the policy face value”. The investor then becomes the policy owner and beneficiary, and is therefore responsible for all future premium payments (that were previously paid by the original policy holder). It is facilitated to be a win-win scenario for both the seller and the buyer, as the seller is able to extract value from an otherwise illiquid asset, and they can also use such proceeds to fund retirement or purchase other financial products that may be more appropriate for them. The buyer on the other hand is able to realize excess returns as result of the arbitrage that is created by an adverse health problem that was not originally anticipated by the insurance company when the policy was underwritten. The arbitrage exists due to universal life policies in existence that have lapsed, or are surrendered without insurance companies ever paying a death benefit to anyone. As we were approached by one of our clients who desired due diligence on non-correlated bespoke life settlement strategies, we researched managers who were able to capitalize on the opportunity by selectively diligencing and buying policies that would otherwise lapse. The manager then becomes the owner and beneficiary while paying the policy premiums until maturity, when the benefit can be collected.

Synthetic Collateralized Debt Obligations
Synthetic Collateralized Debt Obligations

Synthetic CDOs are derivatives that aggregate CDS initially structured to pool high quality corporate risk, and were issued by banks. The viability of the strategy is based on low defaults that will not impair cash flows, and the opportunity previously existed for two reasons – because 1) IG and HY credit to a greater degree have traded down indiscriminately along with the issues surrounding energy complex and 2) market’s issues of concern do not lead to widespread defaults that has pushed market implied default probabilities too high. Additionally, the natural buyers on the buy side no longer exist as the Volcker rule has down most prop desks. So while this has affected the mark to market pricing, it hasn’t affected the underlying bond cash flows – what we care about is 1) Runway/Default Rate and 2) Maturity. With regards to the runway/default rate there is an opportunity to arbitrage the risk that the market perceives an underlying company will default (which is represented by credit spreads, which further represents the market-implied probability of default), vs. what a manager sees based on the fundamental analysis – i.e. “looking under the hood”. This results in mispriced risk where they are able to arbitrage what the market thinks vs. what the manager has analyzed in terms of a company’s default – they are looking for a greater likelihood of how long a company can stay solvent, or how long their runway is before they default – as long as that is after their expected maturity date, that is all that matters. With regards to maturity date, sCDOs, like bonds, are obligated to mature at par while collecting monthly cash flows. Synthetic CDO strategies experience high barriers to entry simply because of the complex nature of the strategy. Given that this is an esoteric and niche subset of structured credit, this is again an area that requires a specialized player with experience in structuring and trading these instruments.

Canadian Hedge Fund Landscape
Canadian Hedge Fund Landscape

The Canadian hedge fund manager universe is fragmented and still somewhat nascent, defined by roughly 100 managers, and a vast majority of them are generally less than CAD $100 million; some managers we noticed are part of Canadian broker-dealer/banking platforms which we believe creates a conflict of interest.  There are perhaps about 10-15 managers in that pool of 100 that are at or are greater than CAD $1 billion in terms of aggregate assets under management.  Those associated with broker dealer’s tend to be the larger entities (which we firmly believe should be avoided due to the presence of a broker-dealer and inherent conflicts of interest). Thus, there is wide dispersion in terms of overall asset size of hedge fund managers in Canada, with a heavy number of managers on the lower end of the AUM spectrum as there is a significant issue in terms of access to capital in Canada.  Canada’s equity market size is approximately USD $1.1 trillion in market cap; there are about 1,549 companies traded on the Toronto Stock Exchange, with 500 companies over CAD $100 million in market cap. There are approximately 220 companies on the Toronto Stock Exchange Composite Index (i.e. the S&P/TSX), with an average market capitalization of C$4.3 billion and an average trading volume of 783,000 shares (approximately CAD $11 million) per company/day. While structurally, Canada possesses the 7th largest stock market in the world there are still considerable inefficiencies; the buy side, and a majority of the sell side research are heavily focused on the top 100 names – these as such tend to get the most institutional attention. Given the nature of the typical Canadian hedge fund manager approach of which we discuss in more detail below (given that most Canadian managers are very long-biased and utilize little short exposure), furthermore, the short side is not well developed and has been underpenetrated, leading to a lower cost of borrow and far fewer short squeezes.  From a regulatory point of view, Canada’s regulatory framework is in actuality much closer to the UK than it is in the US.  Thus, we found that overall Canadian hedge funds are subject to a fairly tight regulatory environment.  If anyone manages money in Canada in a hedge fund format or is any other type of money manager, one must be registered with a Canadian securities regulator, and usually with one of the provincial security administrators. Canada is regulated by 10 different provincial regulatory bodies, with each responsible for regulating its respective province’s capital markets.  For example - if a manager is based in Toronto, that particular manager is registered with the Ontario Securities Commission (OSC), which administers and enforces securities legislation in the Province of Ontario.
On a broad basis, we have found that:
1) The typical Canadian manager utilizes a long/short equity mandate, but tends to have a long-bias and furthermore be natural resource-centric, likely due to the fact that the Canadian markets, despite having 8-10 core industries, is heavily skewed towards oil & gas, metals & mining, cable, and telecom sectors, with little to no exposure to healthcare and gaming for example.
2) There is a fairly bifurcated long-only community in Canada, with the top 5 of 6 banks/mutual funds controlling a large percentage of the assets and below that retail investors and small, boutique money managers. As such, we have found that some hedge fund managers have come from long-only backgrounds and have recently decided to manage long/short vehicles as an offshoot of their research.
3) In terms of sector concentration, as mentioned previously we have found considerable exposure to natural resources; on a market capitalization basis, we have also found that a number of such managers have been more biased towards micro cap and small cap stocks.  Such managers may or may not employ leverage, but have rarely utilized shorting/hedging methodologies and as such tend to be fairly long-biased.  As a result – we will generally see fairly volatile, high octane returns; in years like last year (2008) a large majority of Canadian long/short equity managers produced considerable negative performance; we noted manager drawdowns ranging from -30% to -60%.  
4) More recently, however, there has been an emergence of managers also engaging in other strategies outside of long/short equity, i.e. multi-strategy, distressed, credit, volatility arbitrage, etc.  In our search, however, while we found an abundance of long/short equity managers either with a market neutral positioning or a long-bias as well as some multi-strategy managers with an emphasis on volatility arbitrage, we noticed that there were few Canadian-focused distressed or credit managers.

Distressed Municipal Bonds
Distressed Municipal Bonds

Distressed municipal bonds is a niche and capacity constrained area with very few dedicated hedge fund players. Given its overwhelmingly retail investor base, identifying an experienced investment team to source unique credit opportunities in the U.S. municipal bond market is key to capitalizing on market dislocations. It is a market dominated primarily by retail buyers and mutual funds, and mutual funds generally have few municipal credit analysts, with each covering hundreds of credits. Banks, mutual funds, insurance companies, and other institutional investors in times of stress often sell municipal securities indiscriminately without regard to their intrinsic value. This is due to the lack of knowledge, unwillingness to commit resources, and limited credit expertise to conduct analysis on the simplest securities. In our diligence of researching managers utilizing this strategy, there are few who possess the experience necessary to identify special situations and credit opportunities in the US municipal bond market. Additionally, given the niche nature of special situations in the municipal bond space we also determined that the strategy is also capacity constrained, which typically does not attract many hedge fund managers as it is not a strategy that is not scalable (i.e. they cannot raise unlimited assets). We identified a few specialized players before determining our manager of choice.

Australian Hedge Fund Landscape
Australian Hedge Fund Landscape

The Australian fund management universe is defined by roughly 200 managers, including long-only managers, hedge fund managers, and fund of hedge fund managers. Australia has a well-developed long-only fund management industry due to a government mandated retirement savings regime called “superannuation,” resulting in compulsory contributions by employers on behalf of its employees at 9% per annum.  The hedge fund environment on the other hand is far less developed and is more fragmented; for the most part, it makes up about 50% of the total, resulting in approximately 100 hedge funds that can be part of a larger organization that includes long-only products.  In terms of assets under management, a vast majority of the managers are generally less than AUD $100 million. On the hedge fund side, we also note that an overwhelming majority of these managers service only the onshore market of domestic investors through “Australian Unit Trusts” as the operational costs for running such a trust are low.  While prior to 2008 a larger number of Australian managers had offshore vehicles available to accommodate offshore investors, after 2008 many of these managers closed these funds as their offshore investors either went out of business or needed immediate liquidity.  This leaves in the Australian hedge fund universe approximately 15-20 managers out of approximately 100 that have an available offshore vehicle.  In general – we found that a number of Australian hedge fund managers are fairly content with only servicing the onshore Australian market. Few have gone outside of Australia to do the offshore fund marketing, resulting in little to no growth in the offshore market for Australian managers. To further filter the subset of available managers, there are perhaps 10-15 managers with available offshore funds in the total pool of 200 managers that currently manage greater than AUD $100 million in terms of aggregate AUM, but with varying strategies and geographic focus. Very similar to Canada, there is again wide dispersion of overall asset size in Australia but with a heavy number of managers on the lower end of the AUM spectrum.  Those few with AUM greater than AUD $100 million we have found have tended to be part of larger organizations. Therefore, we found that managers with at least AUD $100 million under management represented relatively large HF firms. In terms of location, of those 15-20 funds with available offshore vehicles, approximately 2/3 of the funds are based in Sydney with the remaining 1/3 in Melbourne. In our research on the Australian hedge fund manager landscape, over the past few weeks we have met with a number of managers spanning different strategies and organizational sizes, ranging from long/short equity (on a regional basis: global, Pan Asia-focused, Japan-focused, and Australia-focused; on a net exposure basis: long-biased and market/neutral), multi-strategy, and global macro/CTA in terms of strategies; and in terms of asset size, ranging from AUD $80 million to over AUD $1 billion.

Insert Your Research Here
European Small Cap
European Small Cap
Brazilian Hedge Fund Landscape
Brazilian Hedge Fund Landscape

In diligencing hedge fund landscapes globally, our focus on Latin American – and namely Brazil-based - managers is one that we have meaningful research experience given our on the ground manager due diligence across a variety of strategies in both Sao Paolo and Rio de Janeiro.  Barring the political climate, many have been long fascinated with the Brazil’s potential, yet remain frustrated with its ability to continuously disappoint. Interestingly, the asset management industry in Brazil is not new and in it is actuality well developed in Brazil, with long-running and robust asset management arms within banks as well as a number of independent asset managers that tally the total of local “funds” to over 700. Only 100 of them however are “investable” from an offshore basis as managers have primarily catered to local markets and the offshore markets have still remain fairly new to them in the last 10 years. Brazil’s hedge funds are called the “multimercado,” or multi-market fund. Based on our on the ground observations, local investors have been viewed as fickle. While many vie for domestic pension fund mandates, in reality it is the retail investors and Brazilian family offices that make up a large portion of the local investor base. As can be expected, there are domestic preferences for no lock-ups with many managers offering daily or weekly liquidity. As a result, equity manager asset bases are generally on unstable footing, and it also makes investing in illiquid investments particularly difficult. With interest rates at an incredible 14.25% at present (compared to 0.5% in the United States) -- investors know they can make a decent return simply by parking their capital at one of their banks. Thus they are indiscriminant if a local manager cannot exceed that, and because of advantageous liquidity will redeem even if the manager has generated good returns in the past. Historically with an investor base that is predominantly local, managers therefore have been highly cognizant of the liquidity of their portfolios, even more so than its US and European counterparts.

In addition, in comparison to its US and European counterparts, the Brazilian hedge fund industry is incredibly transparent as a result of intense regulations stemmed from its volatile years of economic issues. The SEC equivalent in Brazil, Commissao de Valores Mobiliarios (CVM) requires all managers publish daily NAV reports and disclose the fund’s positions monthly. This reduces the competitive advantage of stock pickers who prefer to remain secretive about their holdings. Further, hedge funds are required to strike daily NAVs – something we typically we have only seen with mutual fund managers in the US. This has ultimately culminated into a more recent wave of Brazil based managers raising offshore capital that have higher tolerances for a far longer investment horizon to either 1.) Diversify away from local investors or 2.) Replace local investors. We found considerable talent in Brazil with a handful of managers across strategies, and one may argue that they have fought many battles having managed portfolios through decades of Brazilian economic downturns and turmoil – yet investors still approach the region with trepidation as there continues to be little appetite for country specific strategies. Given our contrarian approach we have often seen it as an opportunistic entry point during transition periods, which is what Brazil is going through yet again today.