Winner: Best new fund of hedge funds (launched after July 2, 2009)

It has been just over a year since Merrant Fonder opened its Merrant Select Market Neutral Fund back in August 2009. Since then the fund has put in an impressive performance: a positive return in every single calendar month and 87% of each trading week. Fund manager and CEO Ulf Sedig is relieved.

“The biggest challenge has been protecting capital and being able to generate significant alpha in a year of difficult and volatile market conditions,” he explains. “This has proven that our fund is truly uncorrelated with the main equity markets and has the ability to extract alpha even during highly volatile and changing market conditions.”

Managing to operate with a high-risk adjusted return – a Sharpe ratio of 4.3 and standard deviation of just 1.8% – was what was always intended, according to Sedig. However, it has not been easy to achieve.
 
“Many hedge fund strategies have suffered due to the rapid shifts in markets trends, volatility and risk willingness,” notes co fund manager Rolf Hagekrans. “The uncertain global recovery, structural imbalances in leading west economy, huge fiscal and monetary stimulus packages and global trade surplus/deficit imbalances have given a seedbed for continued volatile and difficult market conditions in equities, commodities, currencies and fixed income.”

To counteract this environment Sedig structured the portfolio to be able to generate significant alpha independent of market conditions and direction and to have a long volatility bias and a long fat tail bias. 

Even within a specialist fund of hedge funds  (FoHF) the right kind of diversification is key, believes Sedig. “Generalist FoHF managers who aggregate their portfolio based on ‘best of breed managers’ within the most common hedge funds strategies end up with a portfolio that has too much downside correlation and linearity or beta with main equity and bond markets,” Hagekrans cautions.

Merrant Select clearly defines which specific asset classes, strategies and geographical areas it invests in, making it easier from an investor perspective to evaluate and understand the risks inherent in the portfolios.

Merrant invests in highly liquid strategies that can generate substantial alpha and explore market inefficiencies regardless of directional movements of the global equity and bond markets.

All underlying strategies are uncorrelated with global equity markets and are selected only if Sedig believes they are repeatable and valid strategies that have proven track record in volatile and changing markets conditions.

The fund also applies rigid investment prerequisites for underlying funds. These include monthly redemption, no redemption fee, no gating, no lock-up, weekly performance updates, high transparency, experienced fund managers and solid infrastructure.

The fund currently has a strong focus on multi-strategy/volatility trading, relative  value, equity long/short and pair-trading single manager funds. These account for around 55% of the portfolio. The portfolio also is geographically diverse with allocations to Asia, North America, Europe, Australia and South Africa.

When choosing the right hedge fund managers, Sedig has some key qualities he looks for. These include the presence of a strong team rather than just a star individual manager. He also wants to see a successful track record achieved as a team managing their strategy in volatile and changing market conditions as well as a solid operational infrastructure.

“Success is a team effort and not dependent on a single individual’s personal view and sole decisions,” states Sedig.

He also believes it is vital to find the right managers and at the same time avoid the wrong ones. This, he says, is where a real mix of quantitative and qualitative assessment comes into play

“Thorough due diligence for us is not about just ‘ticking the boxes’ but actually taking the effort do in-depth analysis of how the hedge fund is managed and structured,” he explains.

“I rate the most severe red flags as the following; insufficient operational infrastructure and staffing, inadequate risk control function, inadequate compliance function, small and un-known custodian/administrator/auditor, net asset value (NAV) calculations and/or position valuation based on in-house operations,” concludes Sedig.

The fund uses the HFRI Fund of Funds Composite Index as its benchmark. The fund's investors are Swedish and UK-based institutional investors. A typical investment size is around $1 million.

Rolf Hagekrans (left) and Ulf Sedig, Merrant Fonder

Fund facts

Full name of fund: Merrant Alpha Select Fund (former name Merrant Select)
Name of investment/management company: Merrant Fonder
Contact: Ulf Sedig, Rolf Hagekrans, 35 Grev Turegatan, Stockholm 1143, Sweden (+46 8 7795 070)
Fund managers: Ulf Sedig and Rolf Hagekrans
Launch date: August 2009
Net cumulative performance since inception: 10.70% (at November 5, 2010)
Annualised return: 8.01% (at November 5, 2010)
Annualised volatility: 1.81% (at November 5, 2010)
Sharpe ratio: 4.29 (with risk free rate = 0.25%, based on US 12-months Treasury bonds)
Strategy: market neutral
Share classes: US dollars
Administrator: A-Sec
Auditor: Neveling Revision
Custodian: SEB Merchant Banking
Prime Broker: SEB Merchant Banking
Domicile: Sweden
Management fee: 1%
Performance fee: 20% over 3% annual hurdle rate  
Minimum investment: $100,000
Lock-in/up: None
Redemption period/liquidity terms: monthly redemption with 35 days’ notification