The more markets change, the more the hedge fund investment philosophy at Evanston Capital Management seems to stay the same.
These central tenets tend to revolve around the fund of hedge fund firm’s hallmark portfolio concentration approach that seeks to provide access to pedigreed managers vetted by a seasoned team with ability to understand not only the trends driving performance, but the people behind the investment strategy.
Adam Blitz describes the investment philosophy at the firm being largely the same as it was more than 20 years ago when the firm was founded by David Wagner, who served as Northwestern University’s chief investment officer for a decade prior to founding Evanston Capital.
With offices not that far away from the Northwestern campus, the Evanston, Ill.-based team has grown assets to $4.3 billion spread across as few as 30 portfolio managers. The firm’s core expertise in multi-manager hedge fund strategies has expanded over time and includes strategy-specific hedge fund programs, hybrid strategies, blockchain-focused venture capital strategies, and international small-to mid-cap equity. Evanston also launched a closed-end registered investment company in 2014 that has a similar strategy to its flagship fund-of-hedge funds.
“The scarcest resource is great managers.”
Adam Blitz
Blitz, who is founding partner, CEO and CIO at Evanston Capital Management, has seen many promising managers over the years. Prior to joining Evanston at its founding in 2002, he worked at AQR Capital Management as well as at Goldman Sachs within both their prime brokerage area as well as the quantitative research group within their asset management division.
“Finding managers that can offer positive alpha net of fees” is essential to the firm’s focus. “That generally leads us to specialist managers. Also, the soft side is so important. Finding folks who enjoy what they are doing and are competitive about it,” Blitz added. “So much of our process is trying to understand the people, what motivates them and what drives them to have sustained success.”
Kristen VanGelder joined the firm in 2003, one year after its founding, and became a partner in 2012. Kristen is Evanston’s deputy chief investment officer and is responsible for position sizing and portfolio construction in addition to investment research.
She finds that smaller, more nimble hedge fund managers are often the ones with ‘fire in the belly’ and are more motivated by performance fees rather than management fees. Also, Evanston’s clients tend to find it more difficult to evaluate these early-stage managers on their own.
Evanston Capital’s concentrated approach results in a portfolio of fewer than 30 managers, but that too has its own challenges. “It is fantastic discipline for our team,” VanGelder said. “You bring a prospective manager back to the table and ask, ‘which manager would you fire to hire a new one’?”
Alpha picks?
VanGelder described credit as a strategy garnering more attention at investment committee meetings. Looking out on the horizon, the team expects a credit cycle with notable opportunities. Some managers are seeing yields in the mid-teens in their credit portfolios.
“It will obviously be tied to the macro cycle, if we see a recession or more of a hard landing,” she added. “Higher rates are likely to provide opportunities in leveraged loans. Rising interest expense may lead to elevated cash needs at the same time that lending is being reined in.” Credit managers in those cases may be able to provide a creative solution at a price, she observed.
“There is a real opportunity for alternative diversifying strategies like hedge funds to show their value-add to portfolios during more highly volatile investing environments,” said Blitz. “This is true across the full range of hedge fund strategies.”
According to VanGelder, while macro strategies in 2022 had a banner year, the first quarter of 2023 had long/short equity performing well and macro dipping. At Evanston, the aim is to maintain a long-term strategic asset allocation and to be tactical along the edges, she said.
“I like that we have managers with the flexibility to respond to all types of market environments,” VanGelder observed. “Over the last couple of quarters we have also become slightly more concentrated in managers that we feel are best equipped to capitalize on the current opportunity set.
The search for new talent
Recent years have seen some notable shifts in the hedge fund industry. In 2020, investors were generally pleased with hedge fund performance, according to Blitz, while 2021 was an okay year for the most part, and last year depended on strategy. “We are still seeing a few highly pedigreed managers from blue-chip firms that have been able to raise substantial amounts of capital,” Blitz added. While those managers with pedigrees are getting fewer, the team remains optimistic that good hedge fund launches are still happening.
VanGelder added that the growth of the multi-portfolio manager and multi-strategy model is hindering the overall number of launches as portfolio managers are getting attractive packages to go trade at those firms.
“The best of the best are still motivated to raise capital and new funds,” she said. “We make, on average, three to five new investments each year. That is one of our keys to success over time in that we don’t have to invest in every new manager.”
Tech-savvy approaches
The firm has expanded its use of technology over the next decade. The primary goal has been the centralization of all information and data firmwide.
“It is one version of the truth in a centralized database and then building on our own proprietary tools that report that data out,” VanGelder said. “The reports that operations see will be different from the investment team.” Evanston leans on tool developers in adding what calculations are important to staff.
A third-party vendor was recently engaged to automate the manager information-gathering process. As an email comes in, a bot goes on to route that information into the database. The time and resource that had been spent gathering and inputting the information can now be diverted to analyzing the data, which in turn improves decision making, she said.
While technology can create efficiencies, both agreed that qualitative judgements are essential to the portfolio management process. Blitz added that in the area of risk management, there is a need to be forward looking and contemplate scenarios that have not occurred in the past.
Embracing the blockchain
Evanston’s experience in the blockchain space began in 2016; in early 2022, the firm completed the final close of its dedicated blockchain venture capital fund of funds, raising $58 million. The offering, while not hedge fund-oriented, fits with the firm’s long-time approach of investing with conviction and concentration.
“We’ve always said we are open to new strategies, if there is potential to add a lot of alpha,” said Blitz. “We’ve looked at a lot of things over the years and we have a very bullish view on the role of blockchain. This is not a bet on Bitcoin or cryptocurrency, but it is a bet that blockchain technology will transform specific industries.” The sweet spot remains, he added, to invest in high-quality and passionate managers. The reason this works in a venture capital format is that by investing in the seed stage there is more optionality and potential for value creation. Blitz described it as part of the firm’s search for innovation which may include other technology- oriented areas, such as artificial intelligence.
VanGelder added that Evanston’s blockchain knowledge built organically within the firm after it assumed the management of a hybrid strategy dating back to 2015. Some of the managers in that strategy have a tech focus and invested in blockchain assets.
“At Evanston, we are very deliberate and try to focus on quality over quantity,” she said of the firm’s approach to growth.
New market risks?
Looking ahead, Blitz and VanGelder agreed that issues such as liquidity and manager selection remain paramount.
There was a general view among managers that inflation would be hard to get under control and that the Federal Reserve would need keep rates higher for longer. Then the banking issues in March changed that perception. Now, Blitz said, there is a great deal of uncertainty of the path going forward.
The challenge is always finding good managers, according to Blitz, since the dominant source of return will be alpha driven by the individual stock or credit picks of such managers. The decision to move out of a manager at the right time is equally complex, Blitz said. In his view, with the markets not being as liquid as they once were, there is a false sense of security should one need to liquidate a portfolio quickly.
VanGelder also questioned the rise of the multi-portfolio manager firms that use higher amounts of leverage which may be behind the moves in factor risks.
“With all this money following and using very similar risk models, if they all de-risk simultaneously, how does that affect their portfolios?” she said.
