Peter Warren is a member of the executive committee of asset management firm CQS. Before joining the firm in 2008, he spent 14 years at Goldman Sachs. He is co-portfolio manager of the CQS diversified fund with James Peattie.
Can you tell us about CQS?
We were founded by Michael Hintze 12 years ago and are now a global multi-strategy asset management firm with approximately $12 billion of assets. We provide investors with actively managed hedge fund and long-only portfolios in co-mingled and custom formats. We have been in Hong Kong since 2004 and have regulated offices in Hong Kong, London, New York and Sydney, with a presence in a number of other locations.
During the past year, we have grown to around 240 people by selectively hiring in portfolio management and research, operations and risk infrastructure, and sales and client service.
What are the main features of the diversified fund you’d like to highlight?
The diversified fund has a single manager, multi-fund structure which provides exposure to a range of CQS-managed hedge fund strategies. Investors have a choice between a Cayman Master fund and a London-listed feeder vehicle, the latter feeding into the Master fund. The notice period on the open-ended fund is 95 days.
How has the performance been?
It has delivered an annualised net return since inception in March 2007 of 8.2%, with volatility of 7.8%. The fund has a credit bias and we think it has generated significant positive returns in what has been an intermittently hostile environment for credit.
Who are your investors?
The fund’s assets under management have grown significantly during the past two years to $608 million and the investor base is now diversified between institutions, private wealth managers and private banks.
The fund is also 7% owned by CQS staff.
What is your investment philosophy?
Fundamental analysis is at the core of our alpha generation and a significant part of our investment team comprises research analysts focused on the analysis of corporate credits, security structures and the related collateral. We seek asymmetry both in individual positions and also in the overall positioning of our funds.
We believe that the interconnectivity of our various teams helps our investment process and this team approach reflects Hintze’s philosophy of investing. We also see our trading skills as a competitive advantage.
Another element of our alpha is our comprehensive risk and liquidity management framework and operational infrastructure designed to support portfolios and client liquidity.
What is your investment process and what factors determine your allocations to the underlying funds?
As portfolio managers of the diversified fund, we are mandated to make allocation decisions on an independent basis. These allocations to the underlying strategies are actively managed on a dynamic basis. Furthermore, weightings between strategies are adjusted monthly. In making these adjustments, the investment team takes into consideration quantitative inputs such as correlation and volatility analyses, scenario and stress testing. We also incorporate qualitative considerations, such as fundamental research, market insights and macro perspectives, as well as inputs from our CIOs. In addition, we assess risk parameters for each underlying fund including the volatility of returns, VaR, jump-to-zero exposures and excess margins. The investment advisory committee meets monthly to formally review and affirm allocation decisions although informally, there are many discussions during the month.
We believe an important differentiator is that the firm has a strong and integrated risk management process that includes committees, risk teams and risk limits. “We are in a complex and risky world and this economic, fiscal and political situation is likely to take some time to resolve”
What has driven any strength or weakness?
We believe one of the fund’s strengths is that it provides exposure to several strategies that have historically exhibited a low correlation with one another. During the past twelve months, the best performer has been the credit long/short fund, which is short-biased. Since inception, the biggest drivers of returns have been the CQS directional opportunities and CQS ABS funds.
The directional opportunities fund combines thematic and opportunistic positions. Thematic positions are based on fundamental views and are typically maintained to maturity with tolerance for short-term mark-to-market volatility, whereas opportunistic trades are idiosyncratic in nature and are usually entered and exited on shorter term horizons. The strategy has a degree of mark-to-market volatility, but is one where we have deployed significant resources and have conviction.
The credit long short fund invests in individual corporate credits principally through long and short positions in credit default swaps and corporate bonds.
There is a focus on investment grade and high yield credits primarily in North America and Europe. The fund has had negative correlation to many risk asset indices.
Having been a source of losses in 2008 when the diversified fund was down about 7%, convertible arbitrage strategies have performed well during the past three years and we expect this to continue. We believe the asset class is attractively valued now and has a better balanced investor profile, given the exit of many leveraged market participants from the strategy.
The ABS fund is a global asset backed securities fund that invests in long, short and relative value positions in ABS, RMBS and CMBS, and related instruments. Our analysis suggests the asset backed securities market presently offers significant opportunity on the long side with a stable return profile, given what we believe are pretty pessimistic assumptions being priced into the market. Additionally, we also seek to hedge within the ABS fund through protection strategies in certain names, which we will also trade tactically to capture volatility and generate returns.
What is your outlook, and how will you position your fund accordingly?
We are in a complex and risky world and this economic, fiscal and political situation is likely to take some time to resolve. With such an uncertain growth environment, we believe interest rates are likely to remain low and market volatility is set to continue.
We tend to take a gradualist approach to changes in strategy weightings. During the past twelve months, we have actively increased allocations to the credit long short fund as a result of its diversification benefits for the diversified fund in an environment where shortbiased and long volatility strategies have performed relatively well.
The fund has a credit bias and the recent market dislocations have been particularly felt in credit, which could continue for a while. Recent directional moves have led to the emergence of idiosyncratic opportunities and we view the opportunity set as good.
WARREN’S TOP THEMES
1 Global uncertainties will elevate volatility
2 Fundamental research can identify idiosyncratic opportunities
3 Profit from active investment management and strong risk management