NEWS 30/07/2019

HedgeNews Africa interview Kevin Gundle CEO Aurum Research Limited

HedgeNews Africa sits down with Kevin Gundle, Chief Executive Officer of Aurum Research Limited, which is part of the Bermuda domiciled Aurum group, a specialist investment manager.

Aurum has been investing clients’ capital alongside its own across multiple market cycles for 25 years, and has assets under management of about US$2.5 billion across a range of Bermudian and Irish-domiciled funds with both comingled and bespoke structures.

Aurum was founded in 1994 by the Sweidan and Gundle families, with an emphasis on capital preservation, and both families’ assets remain under management in Aurum funds today. The group is independently owned with an unconflicted and open architecture.

The Aurum Isis Dollar Fund, which has a track record spanning over 20 years, has recently been approved by South Africa’s Financial Sector Conduct Authority as a collective investment scheme in hedge funds targeting qualified investors under Section 65 of the Collective Investment Scheme Control Act.

What does Aurum have to offer South African investors?

In general, South African investors have priorities, which are different to those of global investors. They are typically very invested in the domestic market and need something not correlated to South African equities.

Portfolio diversification is key and with the potential for rand depreciation, growth with capital protection is critical.

To some South African investors, building an offshore nest egg is part of the psyche. So they have very idiosyncratic requirements – European pension funds and high-net-worth investors don’t necessarily think in the same way.

We think it’s helpful that we understand these dilemmas, with our South African roots. We are pleased to be rebooting our business here, with a specialist product that has a 20-year track record approved by the Financial Sector Conduct Authority (FSCA) in this market.

Does Aurum focus solely on investing in hedge funds?

Yes we do. That focus has allowed us to build extensive industry experience, knowledge and networks.  Which has led us to taking a somewhat skeptical approach to selecting hedge funds, we avoid certain strategies and focus on strategies that benefit from higher market volatility and maintain a focus on liquid trading orientated strategies.

The Aurum Isis Dollar Fund is a global multi-strategy fund of hedge funds, which has proven itself over various market cycles. It is a low-volatility fund with no directional equity-oriented exposure that invests in a range of alternative strategies, including systematic strategies, global macro, event-driven and diversified multi-strategy.

The underlying investments are predominantly market neutral in nature and liquidity is our watch word. We are not long-biased. We do very little traditional equity long/short investing, and have very little exposure to credit and high yield strategies.

Internationally, we offer various other fund of hedge portfolios including our multi-strategy fund, which has been running for 15 years and is slightly more diversified in terms of strategies, and we also offer bespoke portfolios along with our embedded impact solutions.

What is your global outlook?

The global picture is interesting right now. Interest rates are at an inflection point and global growth is not assured. There has been a significant rally in equities globally, but it remains to be seen whether price and earnings match up.

There is a lot going on geopolitically, including the US-China trade war blustering. This adds to the degree of unease at a time when people are very invested. There is a lot more retail money in the market than there has ever been, and investors are overwhelmed with the number of product choices and different opportunities. They are crying out for guidance, for a sensible moderate approach to constructing portfolios.

Right now we are skeptical about markets. We are conscious of greater fragility in the market converging, and high-yield credit in particular is an area of concern for us.

Passive investing has been a significant growth area in recent years. Where do alternatives fit into the broader investment picture?

There has been a spotlight on active management in the past decade, with massive growth in passives and index investments.

Within alternatives, the more illiquid types of alternatives such as private equity and specialist infrastructure are on the one side, and hedge funds on the other.

We think it is important to reduce the number of moving parts in investor portfolios. Why would we try to compete with beta? It is a lot simpler for investors to have a passive allocation to fixed income and equity at lower fees, and then an active allocation to hedge funds and illiquid alternatives like private equity.

We focus on strategies and investment styles that are not available through traditional metrics. Investors need access to niche, value-adding strategies. You can’t get macro-oriented trading exposure through a mutual fund.

We believe we need to offer something different to conventional portfolios.

How did Aurum endure the global financial crisis, given its impact on the hedge fund industry?

We went through the crisis quite well. We had significant outflows as investors sought liquidity, but performance-wise, our funds were down less than 5% in 2008. Since then our assets have more than doubled to around $2.5 billion.

We have changed our processes substantially since then. The composition of our client base has also changed quite a lot.

More than 60% of the assets managed by Aurum are now in segregated accounts, with 70% of clients fitting into the institutional bucket. We don’t have a private client business model – we work with intermediaries and discretionary asset managers to build enduring relationships.

Our systems and processes provide sophisticated access to information, internal research and portfolio transparency.

Have your portfolios changed over the years?

Yes, but, the investment philosophy has stayed consistent. We remain flexible and adapt as the cycles change and of course the portfolios are reviewed on an ongoing basis. Changes may be made for a variety of reasons; underperformance, style drift, a structural issue or simply the fact that a better fund has been identified.

But, for Aurum, it’s about having a sensible top-down view and outstanding bottom-up processes. That dovetailing has served us well over the years. Aurum’s investment thesis has been formulated to include this convergence.

How much should investors put into a hedged product?

I often use the example that my 82-year-old mother has 100% of her assets in Aurum funds. The exact numbers can be somewhat arbitrary, but the math suggests there should be a significant allocation to alternatives.

There is no particular number as to how much you should allocate to a hedge fund product. But, you would have been very well served to have a larger portion of your assets in a product like ours during the periods of market stress that we have witnessed since it launched. For example, in 2008 the Aurum Isis Dollar Fund had one of its most successful periods of relative performance over peers and various indices. Investors need to sleep well at night during those sorts of moments.

How many managers do you allocate to?

The Isis fund invests in about 20 underlying managers at present. We are comfortable with that level. The happy medium is 23-24 managers, but the portfolio can go to 15-18.

You need to get the strategy and manager mix right. You don’t want 40 funds in the portfolio – then you’re giving exposure to a hedge fund index. We allocate to our best ideas in the context of a low beta fund. The Aurum Isis Dollar Fund has a low correlation to equities and bonds, with moderate volatility below 5%.

What is your view on hedge fund fees?

I believe certain hedge fund managers charge too much. I am very sympathetic to the fee argument. But, as investors we always evaluate price versus value. Value reveals itself over a longer period. You need to preserve capital at inflection points in the markets.

We measure success on the real return after fees. The Aurum Isis Dollar Fund has compounded at just under 6% net of fees in dollars over its lifespan. If investors can achieve that with a low correlation, then the fees that we and our clients pay become academic.

If you have invested in a multi-strategy fund and it has done Y, which is bigger than X return from a long-only fund, then the price value reveals itself.

Why does the fund of hedge funds model still offer value?

Investor portfolios should have good quality passive positioning plus a few other things on the side. Some components of portfolios are commoditised and some are more premium. You need both. And Aurum’s role as a multi-strategy absolute return manager is to ensure that the premium component offers value.

We strongly believe that the fund of hedge fund (FOHF) model is the most sustainable model when it comes to allocating assets to hedge funds.

Investors ought to have access to a portfolio that can protect and grow capital, while still providing consistent and diversified returns.

With a FOHF, you are putting your money into a business run by a team of hedge fund experts. You are not putting your money into a single fund.

Aurum’s principals have a significant amount of our assets in Aurum funds. We are as aligned as we can be. We see greater benefits by being invested in an owner-managed business.

We believe a client working through us will get substantially better value and a low barrier to entry by coming via a fund of funds.

What Aurum is good at is choosing outstanding managers. When they come off the boil, we swap good managers for better. You can’t go on collecting managers. That flexibility is important, and you need quality control. And then sometimes the cycle changes.

What does the Aurum Isis Dollar Fund invest in?

It is a diversified multi-strategy portfolio with low beta to equities and bonds and a bias towards liquid, trading-oriented strategies. We look to identify alpha in an unstable market environment.

We employ sector or strategy specialists, investing in diversified managers that trade the most liquid markets and are typically market neutral in nature, with exceptionally tight risk controls.

Right now, event-driven strategies are very interesting for us. Macro is still interesting. How can one replicate those strategies internally? We believe it is far more sustainable to invest in the best managers.

Does environmental, social and governance (ESG) feature in your investment process and business culture?

As a group, we are committed to addressing environmental, social and governance issues, both in the way we run our business and in our approach to social responsibility. We understand that a business that is not in harmony with the ecosystem within which it functions is doomed to fail

In 2014, Aurum became a signatory to the United Nations Principles for Responsible Investment, which works to understand the investment implications of ESG factors and to support its signatories in incorporating these.

While Aurum does not have an official exclusion policy with its underlying managers to the extent such a policy avoids investment in certain companies, Aurum does monitor the largest investments in each fund’s book.

ESG issues are incorporated into the investment decision-making process when Aurum considers prospective investments and when performing monitoring of existing investments. The core focus of this assessment is on corporate governance. Our close relationships with managers facilitate a constructive dialogue around the topic of ESG.

ESG underpins our business philosophy, which is built on five pillars that are essential to continued stability.  Performance –  a proven investment philosophy of achieving alpha-driven, uncorrelated, consistent returns over multiple market cycles. High impact social programmes – we support a range of social and environmental projects and also encourage charitable engagement amongst all our employees. Culture and stability – we believe continuity of people, process and philosophy ensures preservation of culture and cohesion. Governance –  we believe that maintaining high ethical standards and integrity safeguards sound and reliable corporate governance. And last, we have one of the most important elements, which is a strong culture of risk management – we use proprietary systems to help facilitate thorough initial and ongoing due diligence, enabling us to manage portfolios whilst mitigating business risk.

Aurum supports many charitable endeavours – including Synchronicity Earth, a UK-registered conservation charity, with advisory fees from one of the embedded impact solutions going towards supporting its operating expenses, which creates stability for the charity and the initiatives they support.  Aurum also provides ongoing support to a Sabah-based NGO to help them restore highly degraded and fragmented forest patches in Malaysian Borneo.

Aurum has a long history of philanthropy, and over the years have made significant allocations to South Africa. Most recently, in January this year, we supported a One to One Children’s Fund project in the Eastern Cape that invests in a programme preventing mother to child transmission of HIV. Such projects can have a real impact on the fabric of society, which is important to us.

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