Monday, 9 November 2009

A difference between long only and hedge - Schroders for example

At a series of presentations by senior Schroders executives recently one of the differences between long-only and hedge fund management came through forcibly. Gary Clarke, Head of European Equities, gave a good pitch about how well they had done in the last couple of years. And indeed the Schroders ISF European Equity Alpha Fund is first quartile amongst the European equity funds domiciled in Luxembourg universe, according to Micropal.

The Fund is ahead of the index by about 10% in the last year or so. So Schroders have done a very good job on the European equity side versus the competition by weighting the sectors appropriately in the last couple of years.Gary Clarke said such good differential performance was achieved whilst “of course, we were fully invested.”

That was the shock statement to me. I’ve been in the hedge fund world for so long that that casual conditionality thrown out by a long-only manager that he is structurally fully-invested came as an icy blast of wind in my face. The fund balance sheets are Long 100 Short 0.

At this point it seemed a very artificial, not to say limiting structure. Of course, there are advantages in staying long-only. My old boss at Clerical Medical, Robert Walther, whom I admired enormously, used to say that portfolio managers couldn’t time markets. In his mind they were better off concentrating on picking sector and stocks and letting him allocate between asset classes and geographies. Given his talents he was probably right in that case. Schroders are following a pattern set in the 1980’s and which I had thought, in my naivety, had disappeared ten years ago.

For quite a few years into their hedge fund management expansion Gartmore used to run hedge funds which followed the template of Alphagen Capella. So the funds had a limited net exposure to markets – this makes the return stream driven off alpha much more than market beta. With this structure the hedge fund managers don't have to have a distinctive talent to time markets. Amongst Gartmore’s hedge funds that have been successful recently are hedge funds that utilised a wider band of net exposures, including running net short last year. Gartmore has moved on.

It struck me listening to Schroders presentations that they have some good equity selection alpha. They could at least run limited net hedge funds to start with. Schroders have a fine fund of hedge funds operation in NewFinance. They have a credit hedge fund that is in its ninth year and manages $106m. Schroders recently announced that they are launching a regulated, transparently operated platform for UCITS III funds designed to give investors easier access to hedge fund expertise. The first Fund available on the platform is exposure to European hedge fund pioneer John Armitage’s Egerton. Egerton Capital has a good performance record, however Schroders as a business would be much better off developing its own single manager hedge fund products.

p.s. If you want help in doing this, Alan Brown (Schroders CIO), give me a call – that is the kind of project my consultancy Enhance Consulting gets involved in.


  1. nice piece, Simon. Remind us how much the Schorders fund was down in the period that it beat its index by 10%. I know you cant eat relative performance but readers will be pleased to know that Sharp and Sortino ratios are highly edible, such is the beauty of hedgefundistan! Doug, London

  2. Just met management of Schroders - and my thinking was exactly like yours - if you look at their Alternatives assets they got more in commodity and property than can it be that a house that proud themselves as a equity expert can not manage to come up with some decent long/short and market neutral equity funds?? Their private bank only have 20% invested in their own products as a consequence of having few capital perservance products... There is a huge opportunity here if they hired some smart hedgefund PMs. Martin Deurell - PM & Partner Abaco Financials Fund