EXCLUSIVE INTERVIEW: Event-Driven Hedge Fund Manager Says It Has A Different Angle

Tom Burroughes

15 October 2012

There are a lot of market-stirring events at the moment so a hedge fund business that seeks to exploit the mis-pricings caused by mergers, legal shocks or other big developments should have plenty of work.

The Cube Global Opportunities Fund, a Caymans-registered vehicle which has been running since May 2009 and has $100 million of assets, was recently opened to outside investors. Its manager reckons this portfolio has a particular swerve on how to make the most of events.

“We have tried to do something substantially different. We typically operate in sectors with lots of events. A traditional event driven fund focuses on publicly announced events (such as mergers) that form the exit for their trade; we focus on events that create very good entry opportunities,” Nick Linnane, portfolio manager at Cube Capital, told WealthBriefing in a recent interview.

“In particular, we focus on companies or sectors where there are disruptive events that change the perception of risk and influence the stock or bond prices. These disruptions often cause instability to the investor base as many of the traditional investors conclude that the new risk factors are not ones they are prepared to tolerate; this can lead to sharp falls in prices as some investors seek to offload their exposures at almost any price,” Linnane said.

This approach means that unloved sectors can be worth a look, Linnane said. Take the case of European financials.

“While a lot of what is going on in Europe is creating a lot of anxiety around the financial sector, in the long term we consider that a lot of the underlying trends in the financial sector, whilst mostly negative for equity, are actually positive for credit. Bank deleveraging and the pressure on banks to hold more and more equity capital are simple examples of this,” he said. Cube has bought the debt of several UK banks, for example. “Those investments have moved up in price this year.”

“We look at both equity and credit. We have tended to do more on the credit than equity side. We have been particularly active in the subordinated debt of banks and insurance companies in Europe,” he said.

The fund has also bought into areas such as Japanese residential house building, a sector that had been hit by the long drawn-out problems in that country’s real estate market.

Another example Linnane gave of interesting events were of Chinese firms, listed on the US Nasdaq, that got indiscriminately pulled down in the aftermath of fraud discovered at a US-listed firm called Sino Forest Corporation. There are about 200 such businesses listed in the US.

From family office to funds

Peter Madsen, director of sales and marketing at Cube, who joined Linnane for the interview, points out that Cube has its origins as a family office in 2003 and changed over time into becoming an institutional alternatives firm which now runs fund of funds, an in-house hedge fund and a real estate business. In 2010, the firm started marketing in Europe and did the same in North America in 2011.

This shift from family office to hedge fund business goes against the trend of some hedge fund businesses in the US that have turned into family office businesses to avoid falling foul of new legislation. Renowned hedge fund investor George Soros recently took this step, for example.

“The transfer and evolution from a family office to a business offering a full suite of alternatives products has happened a few times but it is not a common path,” Madsen said.

His colleague, Linnane, is an experienced hedge fund practitioner. Before joining Cube Capital in February 2007, he worked at Citigroup Alternative Investments in its New York and Tokyo offices in strategy and business development roles for four years. Prior to Citigroup, he worked for seven years at Boston Consulting Group in its Melbourne, Kuala Lumpur and New York offices on a range of industries but with particular focus on financial services.

Time horizon

Linnane pointed out that with the CGO portfolio, investments can be held for as little as three months to up to around 18 months. The fund’s breadth and liquid nature of investments – it has exposure to up to 10 sectors or themes – means it can offer monthly liquidity to investors and a 90-day redemption notice period.

In capacity terms, the fund, which has around $100 million of assets, could expand to $500 million in capacity, or more, he said. Also, CGO has UK reporting status and issues shares in dollars and sterling; fees are below the typical hedge fund split of 2 per cent annual charge and 20 per cent performance haircut. The fund, which targets returns of 15 per cent, takes long and short positions in equity, debt and derivative securities, and takes a global perspective. (As it is an offshore fund, performance cannot be disclosed.)