Gentle meander in choppy waters

Dubai: It was a brutal week on global equity markets. Investors may liken the week to the around-the-world sailor reaching Cape Horn. The waves are at 20 feet already with the knowledge that entering the Southern Atlantic means that bashing waves will not recede.

Market commentators are predict that equity markets will remain volatile whilst deliberations persist on whether or not the US and world economies are on the brink of recession. Deliberation and uncertainty means volatility. Investors should expect capital markets to take their boats to the crest and back. It is great fun for those who enjoy rough rides.

Investors need to be in the water. More land-loving investors will be seeking out more placid waters; anything that sells diversification and "volatility control". Hedge funds are again to the fore.

Enter Ken Kinsey-Quick, captaining the Thames River hedge fund-of-funds ships. Kinsey-Quick took the helm in early 2003 when assets totalled $50 million.

The Hedge FOF-AUM are now worth in excess of $2 billion, out of a total Thames River flotilla of $13 billion. The boutique has turned into an institution. More importantly, as Mother Theresa might say, "It's the journey that counts, not the destination". The Thames River hedge flagship funds have enjoyed fairly smooth rides.

Two flagship funds capture the Thames River hedge philosophy. The Sentinel Fund targets low risk (and therefore low volatility) as well as bond-beating performance. "If we are going to compromise with a target, we would compromise with the return target rather than the risk target," says Kinsey-Quick. A boat suited to placid waters; designed to protect wealth.

The Warrior Fund is built for the low seas; designed to create wealth. "We look to provide consistent double digit returns," says Kinsey-Quick. With interest rates on the wane on the one hand, and high equity volatility on the other - consistent 10 per cent per annum results would be a dream return.

Investors need to accept some risk, this is targeted at between five and 10 per cent standard deviation. You have to expect some volatility out at sea. Compare that to indices bobbing around at two to three times this standard deviation target and the risk is put into perspective.

The box provides the critical numbers that distinguish the two different approaches to risk management. So what makes Thames River different from other hedge offerings? This is the question I put to Kinsey-Quick. Three "unique selling points" are brought to light.

Selling points

The first travels under the heading "innovation". The problem with all markets is that, as soon as lots of information abound, they become more efficient. Efficient markets provide lower return opportunities. Kinsey-Quick presents an interesting formula of balancing the apparent risk of finding "first mover" hedge fund strategies, by using established fund managers with innovative ideas, and seeding these ideas. The risk of the "first mover" is being reduced by the proven track record of the manager.

"It means we need hungry fund managers," says Kinsey-Quick, "these are often guys from bigger hedge funds who are now suffering as big funds become efficient and underperform smaller funds. We look to capture their new ideas". New ideas packaged into smaller boats being more nimble than the big liners that the bigger funds become.

A second "USP" travels under the heading of "staff retention". The Thames River brand appears to be one that is attracting fund management teams through one door without losing them through the backdoor. Both Credit Suisse and Blackrock have recently lost teams to Thames River. Moves that led to the creation of Nevsky Capital, which Kinsey-Quick expects to become a leader in emerging market asset selection.

The final USP, according to Kinsey-Quick, is "performance". "We are a modern risk management company with a stern focus on performance. We only select the best-of-breed from each asset class, and we only recruit highly experienced people at all functional levels". Whilst this might sound like what you would expect a fund manager to sound like, the proof is in the performance pudding and, currently, that tastes quite nice.

- The writer is chairman of Mondial Financial Partners.