The hedge fund industry has been through a tough time but there are firms able to achieve respectable risk-adjusted returns in all weathers - which is often precisely what clients aim to pay for. FWR interviews a firm saying it is delivering.

Making money via hedge funds has become a tough task these days because of strategy crowding and headwinds caused by low, or even negative, interest rates. The glory days of stellar returns that got managers’ faces on magazine front pages have faded.

Managers at the Duet Brasidas Asia Event Fund are in confident mood, however. They reckon this fund’s strategy of targeting corporate events such as takeovers and management changes, seeking to find mis-pricings and profit from them, can earn steady if not spectacular returns to cheer investors. In Japan, for example, reforms to how companies are owned creates rich M&A opportunities in that country, while there remain plenty of opportunities in China and other parts of the Asia region, managers told Family Wealth Report in a recent interview. 

At the end of last year Duet Group appointed Jon Withaar and Steve Deitch in New York to oversee that fund. The managers had worked together starting in 2010 at Millennium, and left to found Brasidas Capital Advisors in June 2014. The team then partnered with Deimos Asset Management, a multi-strategy fund, in 2015. Duet, founded in 2002, is led by Henry Gabay. It has about $5 billion of assets under management and serves clients including family offices and private banks, as well as endowments and foundations. 

FWR spoke to Ken Smythe, president, investor relations and business development, and Withaar.

“Every strategy we have done has an idiosyncratic way of extracting value,” Smythe said at his firm’s offices in Madison Avenue, NYC.  

The kind of fund as represented by the Duet Brasidas Asia Event Fund exists to generate real Alpha, which is just what investors, jaded by having to pay high fees for market Beta, are looking for in the current climate, he said. “People are always willing to pay for returns – it is fixed costs and low returns that are the problem,” Smythe continued. 

Withaar said his fund adopts an opportunistic approach, looking to buy where it sees real benefits; it is not a quant-driven fund of the type that might have to sell securities because its models tell them to. “In fact, in down markets we are often very strong,” he said. “In fact, my best personal year was in the 2008 financial crisis,” he continued, describing a period when he was working as the head of principal trading at Citigroup Australia.

The fund is built around a strong risk management approach, with strict liquidity limits in terms of the kind of investments that are made. It benefits from Duet's institutional-scale operational business model, Withaar said. The fund does use leverage, but that it capped at a 2.5 times ratio and typically stays around 1.3 to 1.5 times, he said. The fund has a base portfolio target return, after fees, of 10-15 per cent.

“An M&A deal closing in three years’ time where the return is 3 per cent is not enough [for the fund]; a deal closing in three months with a 12 per cent return at no or low risk is ok,” he said, illustrating his methodology. About 30 per cent of the portfolio comprises stakes in announced M&A deals, he continued. “We look at each situation independently and take a systematic approach to hedging exposure,” he said.

Large, macro themes do form part of the analysis that goes on, he said, giving examples of Japanese changes to corporate governance and the subsequent perceived boost to M&A and restructuring, or changes in valuations to the Chinese renminbi.

Being an event-driven fund, clearly one major focus will be on those M&A deals in Asia, and given the strategy, it is as important to spot signs early of when a deal might be going sour as when they may go ahead. Withaar cited the case of West China Cement, where its slated acquisition by Anhui Conch Cement collapsed after a tumble in the former’s share price. There were some warning signs that the deal had got stuck, he said, and that is the sort of intelligence that the fund aims to have, he said.

Boots on the ground
Smythe said the strategy of the fund meant managers had to be out on the ground regularly. 

“You have to really understand a company’s assets to do the hedge…it is a deep-diver strategy,” he said. Given a variety of risks and issues, such as family ownership structures and legal tangles, there are no clever shortcuts, Smyth said. “Machines can’t deal with this,” he said.

Duet Group manages hedge funds, long only funds, private equity and real estate, employing 77 people in London, where it is headquartered, New York, and Dubai.