Putting a friendly face on hedge funds

Date: Friday, September 11, 2009
Author: Mark Noble, Advisor.ca

If you ask Salida Capital's relatively new president and CEO, Courtenay Wolfe, what the hedge fund industry needs more of, it may very well be a softer touch with clients.

This message is coming from a firm that currently has one of the top-performing fund mandates in the country on a year-to-date basis. This performance comes after veering dangerously close to the brink last year. The firm saw its assets drop from $1.2 billion in assets in early 2008 to about $200 million — the result of a combination of redemptions and a 66.5% loss in 2008.

"We had a tough year along with everybody else last year. Our fund experienced draw-downs along with a lot of other funds. We also had an enormous recovery," she says. "Of note, we've come through this absolutely thriving. Our worst-performing fund is up 116% year to date — which is the Salida Multi-Strategy fund."

That fund is currently the company's sole offering for Canadian investors.

"The Multi-Strategy fund is now only slightly down from the high of June 2008, and the energy fund we offer was down 48% and is now up 150%,and has broken through that early high," she says.

But she points out that performance is not a marketing strategy. If you market a fund on performance alone in today's market, you leave yourself open to devastating redemptions. Wolfe believes that by creating an operation not too dissimilar to many large mutual fund companies — where marketing and education are powerful, value-added relationship tools — her company can provide clients with a greater understanding of her firm's macro-investment thesis and the importance of patience.

Salida's funds have a long-bias toward resource equities, which are sometimes more illiquid small cap stocks. The firm's investment managers use fundamental analysis to select securities, which also conforms to their top-down view that commodities and inflation will continue to rise over the long term as the developing world continues its massive industrialization.

"All our funds are long-bias. I think that one of the things that differentiates Salida is that we have one of the broadest and deepest resource teams, and the deepest energy team in Canada," she says. "Today, our macro theme is that we are heading into an era of inflation, and commodities are the where you're going to want to be. We believe this is driven by the growth of the emerging market. We are going to continue to see consolidation in the natural resources space.

She adds, "For example, we've seen a trend that's been gaining momentum with acquisitions by China in gaining hard assets. They are diversifying away from U.S. treasuries, and they are buying things in the ground. They are buying enough resources for the next 250 to 300 years."

The investment style is active and aggressive, and will use tactical shorting strategies when necessary. This style will greatly differentiate its mandates from typical prospectus-based mutual funds, which tend to be long-only and constrained in their trading activities. The idea is that the hedge funds are different enough so that they provide a unique set of correlations that diversify a client's overall portfolio.

This is nothing new for hedge funds, but in the past, there have been criticisms that hedge funds have not done enough to explain to clients what they are doing, so when the sector tanked in 2008, investors were naturally outraged.

"Many Canadian hedge funds aren't what people would consider hedge funds in the traditional sense. They are essentially stock-picking funds that tend to have a long-resources and short-financials bias, and so they have tended to correlate quite highly with one another," says Al Kellett, a senior fund analyst, who closely monitors the hedge fund industry for Morningstar Canada. "We saw a lot of these funds lose 60% or 70% last year. They'll almost need to triple their assets before getting back to their high-water marks. That's an important level for these funds, the point where they can start earning performance fees. Until they get back to that point, they are working for the management fee, which is a fairly different business model."

Salida is fully on track to meet its performance benchmarks, but even before the downturn it was interested in bringing on someone to enhance the firm's brand awareness. Wolfe, who had formerly worked to build Dell Computers' online presence in Canada and as the head of sales for another hedge fund firm for Tricycle Asset Management, joined Salida in April 2009 to raise the company's profile with investors.

"Obviously, with last year's market crisis, which ended up being more of a crisis of management strategy, my initial challenge was how do we get this brand mainstream? How do we get to the next level of the marketing? I'm a big believer that technology is leverage. You don't really have the ability to hire 200 people and have them running around on cellphones. You need a consistent distribution of information.”

She says, "With the click of a button you want to be able to offer distribution in a very unified way. You want to make sure that it's a tailored experience for every investor. Tricycle was a $100-million firm initially, and putting the [marketing] infrastructure around it helped it grow to $1.3 billion in two years."

Wolfe says she has a similar sort of goal for Salida.

"When I started, there was sort of a skeleton password-protected website that wasn't much more than a glossy brochure," she says. "There were no marketing materials; there was a one-pager with some bulletin points. There was really no client database. We have an unbelievable track record from a performance perspective and incredible strong operations and infrastructure. There is a big opportunity to [grow through] marketing."

Wolfe says she's worked to improve the firm's education, transparency and communication.

"Every month now we do very detailed fund reports that give you an incredible amount of detail on fund performance, our long position holdings, our short holdings, and concentration by holding, and our top number of holdings," she says. "Salida wants to be seen as a leader in transparency. I'm of the belief that you disclose everything you can that does not take away your competitive advantage. We're working hard to remove this whole black-box mentality that exists in the industry. We want investors to understand what we're investing in."

An educated client is more likely to stick with the firm, Wolfe points out. Her firm now also has a reader list of more than 12,000 people for its market update reports.

"Our macro views are a huge opportunity for educational material. If we deliver on our three goals of education, transparency and communication, whether the market goes up or down, clients are willing to understand a little bit more about how and why our performance is behaving the way it's behaving."

Wolfe believes that building this relationship with the broker/advisor network in particular will make it easier to roll out new products in the future and establish the firm as a go-to source for alternative investments. Next month, the firm will be bringing its strategic growth fund and energy fund to the Canadian marketplace.

"We had inflows last month of just under $25 million. We're now over $400 million in assets under management," she says. "We could easily grow to $2-plus billion as a firm, without worrying about capacity.

Kellett says size will be key for many hedge fund firms going forward in order to deal with the increased cost of operation. In doing so, some hedge fund firms will start to mirror the relationship practices of mutual fund firms.

"Hedge funds when they first started were products for high-net worth individuals. They tended to be smaller secretive firms with a client base of high-net worth individuals. Now that they have migrated to a broader institutional client base, transparency has gotten a lot higher. They are starting to resemble more traditional vehicles like mutual funds," he says. "[Investors] just won't put up with this answer: this is a black box and you have to trust me."