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Kiwi hedge fund cooks up tasty profits

By Nick Stride

Friday 1st August 2003

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Whatever you eat for breakfast, chances are it's been handled by the boys at FGI Asset Management in Auckland's Newmarket.

It's not that FGI is interested in wheat, corn, coffee, orange juice, or lean hogs (that's bacon) as physical commodities.

But its business as an "alternative asset manager," or hedge fund, means its key staff get to make lots of trips to Chicago, the trading capital of commodities futures markets.

FGI doesn't claim to be New Zealand's first hedge fund or even its only one but it is probably both.

The company is run by a quartet of former investment bankers ­ founder and managing director Andrew Freeman-Greene, Richard Davies, Stuart Lynskey, and Stephen Ellis ­ whose careers have taken them all over the world.

The common thread is that they all at one time worked at Bankers Trust ­ at that time, Mr Freeman-Greene says, the main gateway to the world for ambitious Kiwi financial markets professionals.

The other link is that they all have young families and returned from London, New York, Singapore and Sydney because this is where they want to live and bring up their children.

Also, Mr Davies says, in the "total returns" money management business it no longer matters where you are geographically, even if it's a country US moneymen struggle to pinpoint on an atlas. You live or die by your reputation and record.

The four recently returned from a trip around the fund managers of Europe and the US with $20 million of investments for their wholesale fund, which now manages $25 million.

It was their first tour drumming up business; they needed a three-year track record and were able to point to the performance of the retail fund, which holds $5.5 million, mostly their own money and their friends'.

Its performance ­ a 35% rise after tax since it was set up in 2000 ­ doesn't seem that dramatic on the face of it. But it's around twice what you would have made investing in bank deposits.

It's also been a whole heap better than global equities, which in recent weeks have recovered somewhat from a three-year bear market that saw the value of the MSCI world index fall by half.

FGI fits into a small subset of the hedge fund industry, CTAs or commodity trading advisers.

As it invests only in futures and options it can, if all goes well, make money regardless of whether markets are rising or falling. And not a fundamental in sight; like the hero of the classic Australian movie The Bank, its managers stick purely to technical trading ­ analysing past trends and programming computers to exploit markets' inefficiencies.

The systems are designed to lose money slowly and make it quickly.

It seems to work. The biggest funds, with five- to 10-year track records, manage up to $US1.5 billion, although as FGI points out, the bigger you get, the harder it is to find markets sufficiently liquid that your own trading doesn't move prices.

Before that, Mr Freeman-Greene says, the lack of cheap processing power and clean historical data made the game a great deal more risky.

And, so far, unforeseeable one-off events such as the September 11 terrorist attacks haven't caused FGI catastrophic losses. It trades by taking a lot of very small risks and so is never unduly exposed to one event.

But, Mr Freeman-Greene emphasises, nobody can claim to know what the future holds. No more than 5-10% of any investor's funds should be committed to an alternative asset manager.

The funds are not for mum-and-dad investors. The minimum investment in the retail fund is $50,000 which, at 10% of an investor's capital, means they must have at least $500,000 of funds.

For the wholesale fund the minimum is $2 million.

FGI charges, at the wholesale level, a 2% management fee and 25% of any profits it makes. That pans out at about 5-7%.

If that seems high by comparison to traditional fund managers, Mr Freeman-Greene says, consider this.

Traditional managers benchmark their performance against indices, which go up and down. Over the long term, they will argue, equity markets trend upward. But that's little consolation if you're down on your original investment and need to cash up to buy a house or a car or to retire.

And they charge you fees even in a year, such as the last three, when their investments have lost value.

FGI makes money only when it makes money for its clients. Charging 5-7% attracts a lot of entrants to the business but few of them survive.

The managers aren't emphasising the retail fund and say they never thought they'd raise much money in New Zealand.

Mr Freeman-Greene says they are constantly amazed at the level of ignorance here about traditional investment managers, who get paid according to turnover, not performance.

It's much easier to pitch to sophisticated US managers who already have part of their portfolios allocated to alternative asset classes. You don't need to explain the entire concept first.

He is aiming for $200 million under management ­ "because we will only get there through good performance and when we get there we'll have made good profits" ­ and expects to get it pretty quickly now.

And yes, the FGI boys have heard the one about the Wall Street whizz-kid who fancied himself a futures trading genius and wound up owning 30,000 live and hungry hogs somewhere in Kansas.

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