Cube
Capital,
the alternative investment fund management house, has made some
significant changes to its asset allocation through its fund of hedge
funds
business. The business is a substantial one: it has 50 staff working in
London,
Hong Kong, Moscow, Shanghai and Beijing. Among its regulatory
arrangements is registration by the Securities and Exchange Commission
in the US. The firm says this environment is also one in
which Cube believes fundamental stock-picking
should generate superior returns. This leads them to equity managers in
areas such as event-driven strategies. Cube’s managers are raising
allocations
to equity-orientated managers in US
small/midcap financials.

This
publication recently questioned Scott Gibb, partner and portfolio manager at
Cube Capital about its business and strategy.

How large is Cube's FoF's business in terms of total assets under
management?

The Cube Global Multi-Strategy
Fund of hedge funds has $748 million of assets under management; its
fund-of-funds has $830 million.

Where is it based?

Cube
has primary offices in London and Hong Kong. The CGMS portfolio management team is based in
London.

How many funds, on average, does the FoF basket hold on a regular
basis? Does this fluctuate?

We target 25-35 managers in
the portfolio, with a maximum position size of 10 per cent. The number of
managers is driven by the opportunity set and market environment. Often we will
be at the high end of the range when there are many good opportunities
available, or if we are in a period of transition with overlapping redemptions
and subscriptions.

Can you give me some indication of recent returns and volatility?

CGMS’
annualised historical volatility is 5.51 per cent and Sharpe ratio is 1.15 over
12m LIBOR average.  CGMS has outperformed
the index almost three fold on an annualised basis.

What sort of clients does Cube aim at (family offices, private banks,
pension funds, other)? 

Pension
funds; endowments; family offices, private banks, sovereign wealth and ultra
high-net worth individuals.

Please give me a short history of Cube and who its main people are.

The firm was created in 2003: Cube Capital established by founding partners Francois
Buclez, Oleg Pavlov and Alan Sipols. Cube Global Multi-Strategy Fund (CGMS) was
launched in that year. In 2006,  Cube
opened an office in Hong Kong. In the same
year, Scott Gibb joined and became portfolio manager of Cube Global
Multi-Strategy Fund. In 2009, the Cube Global Opportunities event driven hedge
fund was launched. In 2009, Thomas Holland, head of Asia,
appointed partner. In 2011, Janene Waudby (general counsel) and Scott Gibb (portfolio
manager, CGMS) appointed partners of Cube Capital.

Strategy, the statement says that Cube is
raising allocations to areas such as CTA and global macro, and yet it also says
that the environment is getting better for stock picking. Would not the latter
point be more of a case for areas such as relative value and arbitrage
strategies rather than macro?

In the current environment correlations are declining
across asset classes as well as intra-asset class. Growth divergence and policy
divergence mean that the opportunity set for macro managers is large – there
are directional and relative value opportunities between the yield curves of
different countries, strong fundamentally driven foreign exchange opportunities
as well as the ability to trade different global equity markets given the
“global de-synchronisation”. This is why we are excited about the opportunities
in macro where the risk-on/off environment led to little ability to generate
robust and diversified returns.

Likewise, with intra-asset class correlations decreasing,
we continue to like the opportunities available from strategies that exploit
the dispersion between winners and losers. In this regard low net exposure long
short equity, sector specialists and event driven strategies stand out. Where
managers can get paid for being fundamentally correct about the beneficiaries
of the improvements in regional growth, strategy or financing in an environment
with a normalizing US yield curve relative to those that are struggling to get
financing, are servicing markets which are in structural decline, or in fact
simply have a failing business model. The environment for this is ripe as
investors become more discerning in their search for yield, the comprehensive
access to high yield bond markets is diminishing and some companies will not be able to
issue with terms that make survival viable.

What sort of risk constraints and tests do you apply to when to enter
and get out of a strategy, and why?

The risk constraints we consider - the tests or criteria we
apply - are dependent on the strategy or underlying manager being considered.
CGMS’ strategy selection process is driven by top-down themes where the
fundamental aspects of valuation and the technical aspects such as price action
and importantly flows across asset classes are crucial. Generally, we are looking
for capital misallocations. These elements drive the idea generation and
discovery process. Quantitative inputs are likewise relevant to portfolio
construction and testing of the size of new strategies or managers. We use an
internal “expected beta” framework that estimates the reactions of the current
(or prospective) portfolio to our expectation of the future
economic environment. This framework allows us to identify a risk level most
suited to benefit from the market.

We size up every investment in comparison to the amount of
capital flowing in or out of the opportunity - this holds true for both the
setting of the investment environment by the investment committee as well as
the portfolio construction and manager selection / termination decisions. The investment committee will generally formalise these opportunities into themes
and sub-themes.  The investment team then uses these themes and sub-themes
as the basis to go out and identify managers, strategies and asset classes
through which we may access the opportunities.

You talk about three themes - de-leveraging, demographics and
distressed, and give a small idea of why you like them. Can you elaborate?

We’re currently transitioning our themes to bring them into
alignment with our top‐down view. We’ve been cautiously optimistic since the
market rally began, using the overlay as a hedge, reconsidering the effects of
the changing economic environment ‐ the potential unwinding of extraordinary
policy across the developed world. Our work suggests that the attractive
opportunities with regard to size and capital allocation have shifted.

We are transitioning away from the deleveraging theme to
reflect a normalizing of interest rates. We are transitioning some of our
long-term CTA, FX and Macro managers to the Yield Curve and Rates Normaliation
theme, given their shift in posture and our expectation that they will be
driven by the shape of the US
yield curve, perceptions about future interest rate decisions, and divergent
policy trends. With respect to new managers for this new theme, we will add
global macro and will consider returning to mortgage derivative strategies in
order to capture the negative convexity as rates back up.

An important aspect in our
portfolio positioning going forward is our belief the world markets are
becoming less synchronised. The liquidity driven markets before the crisis, and
the policy interventions during and since the crisis have been significant
drivers of markets and kept correlations relatively high. Globally synchronised
risk‐on/off is something that we believe is diminishing as regional and asset
class volatility becomes driven more by the differing respective underlying
fundamentals of each region than by generic policy pronouncements.

We have developed a theme we
refer to as Regional De‐Synchronisation and Stock Dispersion, where we will
reclassify several of the “all‐weather managers”. They will be represented in
this theme as their ability to generate alpha from fundamental positioning is
enhanced although their inherent ability to generate returns with low net
exposure and high quality risk management. We will also transfer some funds
from the Regulatory Change theme where the dominant return driver has shifted
from the immediate aftermath of policy related decisions to the lower
correlation of risk assets. Manager additions will be based on their ability to
select winners and losers due to the diverging fundamentals across regions and
asset classes. This theme will primarily consist of exposures in sector specialists
and event driven strategies with low net exposure.

We expect to continue to grow our Africa
exposure, should the dynamics and liquidity continue to improve. We
believe
that several of the African markets remain cheap relative to comparable
risk assets
globally. Our emphasis on Africa is based on
our fundamental research. We’ve spent time on the ground in Latin
America and Asia, and continue to monitor BRIC type exposures, but
there are few opportunities that offer as compelling a risk/reward
scenario.

We are transitioning out of our distressed theme based on
the fewer opportunities presenting themselves. Although, it has been a top
performing strategy (as US
economic growth has started on a more sustainable track), there have been fewer
distressed opportunities developing over the recent period. This consists of
only the proportion of one of our managers that we classify as distressed
situations. This theme is being phased out in our new thematic allocations.