Opalesque Exclusive: As Auriel tests the asset raising waters with an external launch after returning +13% in 2008, what are investors looking for?
Friday, February 20, 2009 From Kirsten Bischoff, Opalesque New York

With CASAM reporting the culling of the hedge fund herd by almost 1,000 funds in 2008 and UBS predicting further additional asset declines across the industry the outlook seems dire. But for managers with their sights set on sidelined cash, the present time may provide just the opportunity they have been waiting for.
"While 2009 is still tough times, we feel that we have something pretty compelling," Gregory Neumann, Managing Director at Auriel Capital Ltd said, referencing the launch of the firm's third strategy, the European Equity Market Neutral Fund.

Auriel was founded in 2004 by Deutsche Asset Management alum Larry Abele, Anoosh Lachin and Asif Noor. The firm, which started running a global macro systematic strategy and then added a currency strategy, has steadily grown its assets to more than $1bn.

In 2005, the managers began to look at unpacking 6 of the Continental European indices used as part of the firm's macro program to increase the opportunity set. In June 2007, after researching and building models which focused on European equities the team concluded it had the foundations of a new fund and made the decision to launch it internally and allow it a year before introducing it to investors.

As quant strategies hit the first bump of the financial crisis in August 2007, Auriel's European Equity Market Neutral Fund was able to maintain positive performance. But as the target external launch date approached, investors were still leaving quant strategies and the credit crisis was beginning to tighten assets across the industry.
In this environment, Auriel's managers made the decision to extend the fund's incubation period.
Systematic funds like Auriel's European Equity Market Neutral Fund (which describes itself as fundamental systematic) had an optimal environment in 2008, taking advantage of trends on the way up and on the way down. Another subset of quant funds - those which trade at a high frequency, are also dipping their toes into the asset raising waters after strong 2008 performance.

"By and large, the high frequency quants did well through the August 2007 turmoil and throughout 2008," says George Hessler of brokerage firm Lime Brokerage LLC, which caters to such types of high frequency traders.
"The high frequency niche is very unique - typically it doesn't require much outside capital, and it has been growing for some time." Hessler adds.

That ability to launch and manage a portfolio without needing to ramp up assets in the short term may indicate that quant funds using 2008 to build track record may be gearing up to set their sights on the first investors looking to re-allocate. "We continue to see new entrants in the space, including big-firm quant groups that are moving out on their own," said Hessler.

What are investors looking for?
Positive performance after 2008 may be an initial attention getter, but managers venturing back into the asset raising waters need to be aware of the changes in investor attitudes towards allocating funds.

Investment trends which fueled strategies in 2008 may not be expected to continue into 2009, and yet investors may have difficulty keeping the trends of 2008 from affecting their allocation decisions.

For example, while distressed debt is experiencing its turn in the limelight, "Investors we speak with who are watching distressed opportunities in the private wealth/family office market concede privately that clients have nudged them towards lower volatility, and more liquid strategies," says Lee Hetfield, Director of The EastSide Group which combines fund presentation writing and production services with an investor introduction service focused on the offshore investor market.

Getting investors who have stepped back from hedge funds to re-allocate will certainly require one large change within the industry. Investor demands for increased communication from the managers to which they have allocated has been echoed throughout 2008. The recent Preqin survey determined over one-third of investors are not satisfied with the quality of information and fund reporting they receive from managers.

An increase in investors' levels of fund analysis through additional manager communication and fund transparency will likely drive many of the changes the industry will see over the next few years. "Investors want transparency, fund liquidity that is consistent with underlying investment liquidity (i.e. no lock-ups for equity long/short funds), and will pay full fees for alpha, but not beta," says Neumann.

"Managers are having to sell clients on their world view and their strategy both better, and more often, as many investors we speak to went heavily into cash and are going to be slow in making allocations back into the alternatives universe over the next few quarters," says Hetfield. "Funds are really having to sharpen up both their image and expand their willingness to communicate to investors."