The hedge fund industry is more transparent than ever; however, questions remain such as what data to collect or how to use that data effectively. Investors such as Investcorp-Tages have refined their process over the past 25 years to not only broaden their sources of data, but to also effectively leverage that data for unique insights.
It has been over two years since Investcorp and Tages Capital united their alternatives divisions in a 50/50 joint venture, Investcorp-Tages. The pairing has combined both firms’ expertise in seeding and in creating bespoke portfolios that deliver differentiated sources of returns across alternative assets.
The now $7.6 billion firm is co-led by Salvatore Cordaro, former CIO of Tages Capital, and Lionel Erdely, former Head and CIO of the Absolute Return line of business at Investcorp. The 17-strong investment team with 20 years of average experience has operations in London, New York and Milan.
“There has been a continued improvement in the way we use technology over the past 25 years,” according to Erdely, who is now co-CEO and CIO of the combined firm. “In addition to the qualitative work performed by the team, we are a prolific user of technology and data to streamline the process of sourcing and monitoring managers as well as to build and optimize portfolios”.
Erdely joined Investcorp in 2013 after working for over a decade at Lyxor Asset Management, where he held the dual position of chief investment officer (2004-2013) and chief executive officer of Lyxor Inc. (2009 -2013). Prior to Lyxor, Erdely was vice president in the equity corporate finance department at Société Générale.
The Investcorp-Tages team has been even more focused in recent months on volatility. “Starting from the end of Q3 last year, the team’s priority was to focus on less pro-cyclical strategies as well as ones which would react well to rising rates,” added Erdely. The increased exposure to the prepayment segment within the mortgage-backed securities market is an example. Erdely has also recently directed his team to focus on more idiosyncratic opportunities, like the Chinese real estate credit market, to take advantage of the significant ongoing dislocation. The Investcorp-Tages team was able to source an expert with boots on the ground.
“The first half of 2022 has been a very challenging market environment with the reemergence of a positive correlation between equities and bonds, which were both down significantly,” Erdely said. Liquid alternatives (hedge funds) have seen their relative opportunity set substantially increase. Strategies such as CTAs and global macro have provided robust returns and diversification year-to-date, capturing the trend in both energy and rates.
After two years of solid performance in the hedge fund industry, inflows are picking up. While Erdely expects the strong performance to continue, it is the quality of the performance that is of prime importance to investors.
Investcorp-Tages is unique within the multi-manager business in that it focuses almost exclusively on building bespoke portfolios for clients. The ability to build customized portfolios is paramount as each client has very specific needs. Investcorp-Tages has streamlined the process with a heady mix of data and technology and has become a true differentiator among other multi-manager specialists.
“Our objective is to deliver consistent and repeatable alpha and using the right tools at every step of the process is critical,” said Erdely. “We utilize a broad set of databases and have created custom models to efficiently screen them. One of the most precious resources for the investment professionals is their time, and actionable technology helps them focus on what really matters within our portfolios.”
In addition to collecting and screening large data sets, Erdely adds “We then take that data and run it through a robust in-house optimization process”. Erdely also commented on what happens subsequent analysis, “We also use a portfolio management software which streamlines our allocation process by taking an approved decision from all the way through to instructing a specific portfolio action”.
The data trail begins with the managers in which they invest. Investcorp-Tages has an expectation to receive single position transparency with managers. In the rare cases where single position transparency is unavailable, the investment team uses granular risk factor analysis based on historical returns in addition to risk aggregates received from the manager.
While some scoff at the idea of manager transparency being additive to the investment process, Erdely’s view is that the highly specific data can be instrumental in measuring and delivering alpha through granular analysis and portfolio construction.
The ability to benchmark performance on both prospective and invested funds is an essential piece of the investment process.
The Investcorp-Tages team has dedicated the resources to create its own customized indices that are helpful to clearly and consistently define the properties of each strategy. Indices can significantly vary depending on the different providers. The indices allow the team to more accurately compare specific investments and determine over/under performance. Accurate relative comparisons become critical in the analysis of peer groups and making good use of that data. While indices and databases are not the same or perfect, for Erdely it’s about finding the most robust and relevant index comparison.
Yet there is another question of prime importance – how alpha is measured and defined. With manager transparency, one could quantify all factor and sector exposures to perform a relative comparison on style allocation. Accurately comparing factor exposures provides further insights into whether a manager is providing value (i.e. alpha) through the dynamic management of their beta/factor exposures as well as through their security selection.
“That is why exploiting the data in a granular fashion is critical when trying to assess the performance of a manager and the alpha they deliver,” added Erdely. “The technological developments have enabled firms like us to carry out more robust analysis when well-integrated within the investment process.”
And so far, for Investcorp-Tages, it has been well worth it.
