Highly commended: Best performing diversified fund of hedge funds over 10 years

2009

Highly commended: Best performing diversified fund of hedge funds over 10 years

Since launching Stenham Universal in 1992, the fund of hedge funds (FoHF) has attracted over $542 million from investors. Chief investment officer (CIO) Kevin Arenson says much of the interest is attributable to investor confidence in Stenham Asset Management.

“It’s not just one single thing we do that helps us stand out,” says Arenson. “It’s partly about stability. Members of our team have been here for years working together. You need to have a stable team that works well together and believes in what it is doing to create excellence.”

Ongoing monitoring of managers is fundamental to FoHF investments made by Stenham. As much emphasis is placed on that function as on conducting the initial due diligence. The decision to stay with an existing manager is an active one for the company. In addition to the continued monitoring, each manager goes through the entire due diligence process annually and has to be re-approved by the group's investment committee.

“A key issue is avoiding mistakes. Our extreme focus on downside risk has helped us to avoid blow-ups,” Arenson notes. “Our investment process focuses on protecting the downside which forms an important part of the culture of the firm,” he says.

“Our roots are in managing wealth of private families. We started off as a family office and grew into managing assets for pension funds. High net worth individuals (HNWIs) are much more concerned about security and wealth preservation than just making money. We take care of the downside and the upside takes care of itself,” adds Arenson.

Stenham's average manager turnover is 10%-15% annually although there can be an increase to the rate during periods of heightened market volatility or strategic shifts.

Analysts identify issues by monitoring manager reports and performance which is tracked on a daily or weekly basis. This intense scrutiny helps flag up issues quickly. Managers can then be questioned immediately rather than after month-end reports.

The importance of strong due diligence, according to Stenham, is not to be underestimated and is a fundamental part of both the company’s manager selection and monitoring process.

“We have a separate operational due diligence team. That’s become the standard since 2008 but it’s something we have had in place for many years,” Arenson explains. “We were early in putting in place this separate function.”

Arenson explains the due diligence team has always had a complete veto on any investment. “If they weren’t happy with the counterparties such as auditors or even lawyers or if they couldn’t see independent valuations being produced, they can exercise that veto. When it came to someone like Madoff – well, it didn’t really make sense how someone employing such a simple strategy could beat the market year after year. If we don’t understand the process, it’s not for us,” he concludes.

Stenham Universal was the first FoHF launched by Stenham and has been managed since inception by Arenson. In the past 10 years the fund has achieved an annualised rate of return of 6.05% with an average annualised volatility of 3.60%.

An extensive mandate allows the fund to invest across a range of assets and allocate to arbitrage, equity hedged and global macro managers. Global macro and equity hedged strategies currently form around 75% of the portfolio's activity with relative value and event driven strategies accounting for the rest.

The British Virgin Islands-domiciled fund charges a management fee of 1.5% but no performance fee is levied. There is a minimum investment of $25,000 and redemptions are monthly with 95 days’ notice.

Fund facts

Full name of fund: Stenham Universal USD Class
Name of portfolio manager: Kevin Arenson
Name of investment/management company: Stenham Asset Management
Contact: Sudha Bharadia (+44 (0) 20 7079 6711; sudha.bharadia@stenham.com)
Launch date: July 1992
Assets under management: $542.1 million
Annualised return (over 10 years):  6.05%
Annualised volatility (over 10 years): 3.60%
Strategy: multi-strategy
Share classes: euro, sterling, US dollar
Administrator: Fortis Prime Fund Solutions (Isle of Man)
Auditor: Ernst & Young
Custodian: Mees Pierson (Channel Islands)
Domicile: British Virgin Islands
Management fee: 1.5%
Performance fee: none
Minimum investment: $25,000
Lock-in/up: none
Redemption period: monthly with 95 days’ notice