Tremont looks abroad to expand its hedge-fund business

Date: Friday, December 29, 2006
Author: Bob Thompson, Financial Post

Canada part Of International Growth Strategy

A couple of weeks ago, I made the long flight from Vancouver to New York City to meet with the CEO and president of one of the larger hedge fund firms around, Tremont Capital Management. Tremont has morphed over the years, and the current strategy is to focus almost exclusively on managing fund-of-fund portfolios, and making exceptionally performing single-strategy managers available to investors who may otherwise not qualify to purchase the product. One of the managers in their slate requires a US$25-million minimum investment, but through Tremont's Rye Investment Management, there may be other ways to purchase the product in the future. I took the 45-minute train excursion from my hotel near Times Square in Manhattan, up through Harlem, to near the Connecticut border, in Rye, N.Y., where Tremont makes its home. By the way, this area, Westchester County, and nearby Greenwich, Conn., is where some of the biggest, boldest hedge funds in the world make their home, but that's another story. Below is an excerpt of my two-hour conversation with Robert Schulman, CEO; Rupert Allan, president; and Brian Kremer of Tremont's Canadian operations.

Thompson: Tell us a bit about Tremont. Allan: Tremont started as an advisory firm and in 1995 started to manage client assets. Through the years we have sold off our non-core assets so we could focus almost exclusively on managing hedge fund-of-fund portfolios. On the fund-of-funds side, we manage about US$6-billion, and US$8-billion, if you include Rye Investment Management.

Thompson: Why did you expand to Canada and other countries? Allan: Five years ago, our mix was all U.S.; now we are about 60% international. This is due in large part to manager activity and investor demand. Kremer: We opened our office in Canada in 1999, to service and market to our Canadian clients, as well as to be on top of Canadian tax laws and currency hedging, which may impact us.

Thompson: Have you used any Canadian hedge fund managers in your fund of fund over the years? Schulman: We had a manager at one point in our portfolio from your part of Canada [Vancouver] but none at this time, although we have made several manager visits.

Thompson: What is the value of a fund-of-fund manager, and is managing large sums of money, like you do, an advantage or disadvantage? Allan: The key is the operational and investment due diligence, and to know the right questions to ask. The real work, you can say, begins after we have hired an underlying hedge fund manager, to monitor them and make sure they stick to their discipline. For example, in some cases, managers add styles or disciplines to their platform, and we don't have a problem with that if they can make it work with system or staff enhancements.

Our size allows us to have the necessary infrastructure to implement and perform the functions appropriately, so we think being bigger is a definite advantage for us. Also, with 22 years in the business, we have evolved with the industry and have developed many personal contacts. Even though the hedge fund industry has grown tremendously, a lot is still based on personal contacts.

Thompson: How does your investment process work? Schulman: The process can start in several ways. First, managers come to us from a variety of sources, including industry contacts, tracking managers leaving a firm, e-mail, or capital introduction meetings. From there, we go through exhaustive back-office due diligence and background checks on the principals to make sure they didn't climb out from under a rock.

Our analyst will then write up a report and introduce to our investment committee, and the manager will be included in our fund, if they pass all the screening tests.

We then look at our "top-down'' outlook to allocate or change the allocation in our fund to various strategies.

We don't have an enormous confidence in relying upon past results of the manager, but look more at the level of risk when they "got it wrong in the past.''

Thompson: Do you target a level of return to generate or target a level of risk? Schulman: It is almost impossible to forecast a rate of return in the future, but what we are very good at is forecasting and building a portfolio for a target level of volatility. In our case, in our multi-strategy products, we target a volatility that is half that of the S&P 500.

Thompson: What has been your best call over the years, and your worst mistake? Schulman: One of our best calls was getting in early and believing in the emerging market story. This has helped enormously.

Something we could have done better would have been reducing our exposure to the trend following types of long/short equity managers that were heavily exposed to technology stocks in 2000. Thompson: What is your current macro outlook? Schulman: We are essentially positive on the market, so we have a relatively large exposure to long/short equity managers, which generally has a long bias to it. We are in the right year for the Presidential Cycle, and valuations aren't crazy, while there has been an enormous pickup in earnings over the last few years. On the fixed-income side, we have managers who have shown they can perform well in a negative yield curve environment.

- Bob Thompson is an Alternative Investment Strategist and Investment Advisor with Canaccord Capital Corp. This is not an official publication of Canaccord's, and the author is not a Canaccord analyst. This report is solely the work of the author. bob_thompson@canaccord.com.