Family office opens its doors

Eliza Lau, CIO for SAIL, the fund of hedge fund business launched by Robert Miller''s Search Group, discusses strategy.

Search Investment Group is the Hong Kong-based family office of billionaire Robert Miller, who is best known for founding the Duty Free Shop chain. In 2003, the Search Group spun off its fund of hedge funds business into a new fund management company, SAIL (Search Alternative Investment Limited), and opened the funds to outside investors.

Eliza Lau, CIO, joined SAIL in 2003 from Singapore-based hedge fund, JL Capital. Previously, she spent 12 years with Salomon Brothers, initially in equity and fixed-income research in New York, and later managing global discretionary portfolios and setting up of the group's Asian hedge funds.

What's the rationale behind Search Group setting up SAIL?

Lau: SAIL was launched in 2003 to assume management of Search Group's fund of hedge funds portfolio and to enable the funds to welcome like-minded third-party investors. The rationale behind this is to build up scale in our operations, which in turn will enable us to continue to attract top-notch talent, both increasingly important criteria as the hedge fund industry continues its rapid expansion.

Since launching SAIL in 2003, our investment team has grown from three to 10 people. We now have a total of 30 people focused on the fund-of-hedge-funds business and are continuing to expand our team. In addition to our flagship global fund of hedge funds, which has been running for several years, we have also widened our suite of products with the recent launch of our Asia-focused fund of hedge funds, the Pacific Explorer Fund, in January 2004.

The Asian fund of fund had a good year in 2004 returning 10.6%. What s the driver behind this?

Sticking to our rigorous investment process and maintaining a well diversified portfolio were important contributors to our good returns and low volatility we experienced in 2004. We adopt both a top-down and bottom-up approach in our investment process.

We seek to identify winning strategies within our macro outlook, and managers who meet our risk return targets. From a top-down perspective, we already foresaw the equity markets were getting relatively expensive at the end of 2003. While we continued to take the benefit from the equity markets in the first quarter of 2004, we also realized that valuations were stretched and began to increase our allocations to relative-value strategies, which helped us during the difficult months in the middle of the year.

Our fund saw only one negative month in May. In the later part of the year, we increased allocation to our long-biased managers in anticipation of another run-up in the equity markets. Yet, we don't need to trade our portfolio too actively since it is well diversified. For example, last year our turnover was less than 25%.

We also have a very rigorous bottom up-process for selecting the best managers. Aside from applying the qualitative and quantitative approach in selecting the best risk-adjusted managers, we undertake a thorough due diligence process.

Ultimately, our performance comes down to selecting the best managers who've done exactly what they are supposed to do.

How is your portfolio positioned at the moment? In which strategies do you see returns going forward?

Oil prices are at an all-time high, inflation is kicking in and interest rates are rising. This is not a friendly environment for long-biased managers. We've balanced our portfolios to cope with this by looking at more relative-value and market-neutral strategies during this time period.

Looking forward, we see inflation and interest rates are increasingly being priced in and our focus at the moment is analyzing the impact this will have on corporate earnings. Oil prices and commodities movement are important for fundamental managers. If we are not comfortable with the market environment, we could put an overlay on our portfolio to protect against any potential downside.

For this year, the strategies we think may drive return are the catalyst-driven special situation and more technical trading strategies. These tend to be less correlated with the market and underlying companies. In Japan we've seen some great performers in this sector. It is likely that we may begin to see more opportunities in the equity long/short space in Asia and the emerging markets in the 2nd half of this year.

Distressed will be another good performer, we've been ahead of the game on this and have filled up our allocation to this strategy already. We're also paying more attention to niche players, taking a closer look at credit funds and convertible funds, for instance.

What trends are you seeing in the Asian hedge fund industry?

Equity strategies are still dominant in Asia. But we're seeing a growing diversity, particularly with the arrival of global funds setting up operations in the region. We've see global managers in Asia like Tudor, Ritchie, DKR, Sparx Asia, Highbridge and Ochziff all producing relative-value strategies.

They have an infrastructure advantage over smaller boutique funds and can transfer their expertise and knowledge running these strategies in the US to traders in Asia. They have been sending traders from US to train traders in the region, a healthy development for the industry. We've also seen more sector-focused funds such as property, commodity and small cap funds, which is another interesting trend.

Do you invest in single country Asian hedge funds?

Single country funds normally have higher risk levels but target high returns. We seldom consider single country fund in our global fund, but are exploring opportunities in our Asian fund. We focus on optimizing our portfolio for highest risk-adjusted return. To put a country-focused fund into this picture would mean that its higher risk profile would have to be justified.

Do you invest in start-up hedge funds?

We do look at early stage funds and maintain dialogues with them, but our start-up investments tend to be quite limited. For example, last year less than 10% of our investments fell into this category. If the hedge fund managers have a proven track record in previous capacities we are more likely to invest. However, we are cautious because one of the biggest risks with new funds is operational. Many prop traders may have great performance track records, but they have little experience in running their own business.

We place a strong emphasis on operational due diligence, which we conduct on-site and runs parallel to our investment due diligence. We have a team of five focused on this, and also have a dedicated compliance officer.

What is SAIL's AUM at present? What proportion is open to outside investors?

The flagship fund stands at about $1.2 billion, and the Asian fund at $120 million. About 60% of the Asian fund is capital from Search Group, and the rest comes from outside investors, including other families and institutions, such as banks and insurance companies. So far, most of the interest has come from Asian and European-based investors.

We have a very focused approach to growing assets, and at present see the capacity of the Asian fund at between $300-400 million. Our goal is to seek like-minded long-term investors, who are willing to commit significant amounts to the fund. We aim to provide our investors with the best service and will control number of investors in the funds.

What distinguishes SAIL's Asian fund of funds from competitors?

Our experience and our disciplined approach. The Search Investment Group is one of Asia's longest standing investors in alternatives. We have a history of investing in private equity and hedge funds that goes back over 30 years.

Our funds have a proven track record of performing in difficult market environments. The global fund has returned an annualized 11.3% with volatility of below 5%. Our Asian fund, launched in 2004, returned 10.7% with volatility of 4.8% for the year.

We are also unique in that our set up ensures that our interests are fully aligned with those of our investors. Unlike other fund of funds in the market who may be motivated by asset gathering our main goal is to deliver returns.

In addition, we have a proven ability to access otherwise hard closed funds. The relationships of our chairman, Robert Miller, open a lot of doors for SAIL that are otherwise not accessible to other funds.

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