The Elevator, Private Equity Magazine Editor, Patrick Gruhn discusses the impact of the current world financial crisis on the Alternative Investment fund Industry with Julian Stockley-Smith, Joint CEO of Geneva based JP Fund Services SA

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Pro Polo turns an old
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I N T E RV I E WI N T E RV I E W
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I N T E RV I E WI N T E RV I E W
well in the current turmoil, the industry
has not been immune to plummeting
values. Research indicates that
alternative investment funds in 2008
have (on average) borne losses equating
to 18 – 20% of assets under management
however this looks rather good when
compared to financial market indices,
for example the S&P 500 and the CRB
commodities index were down around
40% on the year. There have been
casualties and there are estimates that
the assets in alternative investment
funds will decrease by 30 – 50%
compared to the beginning of 2008 from
a combination of market losses and
redemptions. Anecdotal evidence
suggests that many investors are
withdrawing from funds not because of
poor performance but because it is one
of the most liquid parts of their
investment portfolio. Combine this with
the bad press surrounding rogue
managers like Bernie Madoff, even
though he wasn’t running a fund, and it
still looks challenging for the industry
going forwards.
From a business perspective, as a service
provider, we still find many investment
managers looking to establish hedge
funds but are generally waiting to see
where the markets are going to settle,
there is an additional challenge to
secure investment capital. However,
we also see opportunity as investment
managers look for lower cost solutions
and to outsource activities previously
undertaken ‘in house’.
There seems to be mixed press
about alternative investment
funds, is it warranted?
There are a couple of points to
note; the alternative investment
fund industry in general does not
run an effective public relations
campaign and it is restricted by law from
any form of mass marketing. Couple
this with the fact that fund managers
often revel in the mystique and air of
complexity that surrounds the industry
and the result is a target for media
sensationalism, disgruntled investor
groups and politicians looking for
someone to blame for the demise of
financial market stability around the
world. Assets in alternative investment
funds only equate to around 10% of
assets in global equity markets, not all
use leverage in their trading strategies
and their role in affecting equity market
drops by short selling is questionable; in
downfall of
the Masters of the Universe
Editor, Patrick Gruhn discusses the
impact of the current world financial
crisis on the Alternative Investment
fund Industry with Julian Stockley-
Smith, Joint CEO of Geneva based
JP Fund Services SA
words: patrick gruhn
In Tom Wolfe’s 1987 book “Bonfire of
the Vanities”, lead character high flying
investment banker Sherman McCoy is
a self stylised ‘Master of the Universe’.
Wolfe recently describes how the mantle
has shifted from Investment Bankers to
Fund managers in a New York Times
article (September 2008) and we can
reflect on whether they are likely to
suffer the same fate as those from the
investment banking industry.
Most people with investment
experience have a clear
understanding of the role of
mutual funds but it appears there is
some confusion to what an alternative
investment fund is; can you give a brief
review of the differences?
A mutual fund is a pooled
investment structure normally for
retail investors. It is restricted in
what it can invest in, for example ‘long
only equity’, and is subject to strict
regulatory and reporting obligations and
definitions that differ depending on
jurisdiction.
Alternative Investment (Hedge) funds
were developed 50 years ago to give
more flexibility to investment strategies
using derivatives and other trading
instruments; in return they are restricted
to investments from sophisticated or
accredited investors and not subject
to strict regulatory oversight regarding
trading strategies. The use of the word
‘Hedge’ in the name is rather misleading
as they generally are not set up as
‘hedged’ investment structures; another
reason ‘Alternative Investment Strategies’
is increasingly being used.
Well, it’s an understatement to say
the financial markets are in
uncharted territory. As a service
provider to this sector what are your
observations on how the current financial
crisis has affected the Fund industry to
date and how has it affected your
business?
Alternative investment fund
performance has broadly reflected
trends in the global financial
markets and although some managers
employing contrarian investment
strategies have generally performed very
downfall of
reality they are probably more a victim of
system failures like others, rather than
causing it.
Are we seeing the beginning of
the end for the alternative
investment business?
No; and even in these market
conditions, it appears that fewer
‘alternative investment strategy
funds’ are closing than expected.
Pension and superannuation funds,
institutional investors and high net
worth private investors will continue to
need avenues of investment in the
future, ‘’alternative investment
structures’ are currently important
vehicles to make it possible to target
specific sectors in an efficient and
increasingly transparent manner. Some
pundits estimate there is around 3
trillion dollars of investable cash awaiting
appropriate timing to re-enter the market
place. We have been pleasantly surprised
by the consistent level of inquiry for new
funds from managers looking to take
advantage of opportunities exposed by
current markets
There are suggestions we need to
see stronger regulation over hedge
funds, do you agree with this
approach?
We would be very supportive of
more sensible application of
regulation in general; on one hand
we’re overburdened with compliance for
money entering funds as many investors
are excluded from a full range of
investment choices for their own
‘protection’. If we assess the
effectiveness of the global regulatory
environment encapsulating mutual
funds, many investors argue that if
current results reflect effective
regulation, they’d rather do without it.
It is interesting to observe the generally
overzealous nature of regulators
and burdensome costs forced upon
professionals who follow the rules while
regulators often bypass those who ignore
all common standards of honesty and
decency. New York Democratic Rep.
Gary Ackerman, summed up many
people’s thoughts through his comments
related to the Madoff inquiry and the
role of senior SEC officials when he
stated “You couldn’t find your backside
with two hands if the lights were on...
You have totally and thoroughly failed in
your mission,”...
PROFILE:
Julian Stockley-
Smith, Joint CEO,
JP Fund Services
SA Switerland
Julian started his finance
career in the early 1980s
with Godsell, Astley and
Pearce, a subsidiary
company of EXCO
Plc, as a spot foreign
exchange broker. After
a number of years in
London, Wellington and
Tokyo including time
as a regional director
for Exco Plc in the Asia
Pacific, Julian completed
an MBA before trading
financial markets from
a base in Australia.
In 2002 Julian and
business partner, Philip
Griffiths commenced
representing Saxo
Bank in the Asia Pacific
region where they
were successful at
establishing a significant
presence, particularly
in the institutional
environment. In 2007,
Julian relocated to
Geneva and is actively
involved in analysis,
trading and targeted
corporate finance
projects along with the
core JPFS business.
Wewouldprefertoseemoreenforceduse
of independent directors, independent
fund administrators and independent
brokers; just as entry barriers for investors
are excessive, controls over investment
manager accountability are worryingly
absent. Investors should be sure that
adequate, independent safeguards are in
place before they invest.
This is an opportunity to improve a
successful industry; a fund is the only
way to develop a scaleable investment
pool into which people can invest.
Given that you expect the ongoing
success of this sector of the
industry, what changes do you
anticipate and where do you see
yourselves in this?
It is clear that there is increased
cost consciousness in setting up
and running alternative
investment funds. Some elements of the
industry are complacent and poor
returns are exacerbated by the high level
of establishment and running costs of
funds precisely the premise upon which
our business is built . From an
investment perspective, managers are
likely to take a cautious approach to
investing with lower levels of leverage
and less focus on chasing pure alphain
illiquid assets; redemption terms will
more accurately reflect the liquidity
available in difficult market conditions.
Investors, on the other hand, should
conduct significantly increased
due diligence on investment
managers, investment structures and
documentation; greater transparency
will be essential.
From a macro perspective, the industry is
likely to trend towards a concentration at
top end and bottom end levels of assets
under management with larger multi
strategy funds and increasing numbers
of smaller single strategy or asset class
funds.
Our company is ideally placed to service
the new breed of hedge fund manager
who will demand a reasonably priced
structure in a short amount of time.
We are also ideally positioned with our
ability to provide the requisite, well
regulated independent administration,
auditing and banking services that will
become market norms.
JP Fund Services is a boutique
Fund service provider specialising
in offshore structures for all types
of asset managers