Winner: Best performing diversified fund of hedge funds over one year and Hedge Funds Review fund of hedge funds of the year

2010
Highly commended: Best performing diversified fund of hedge funds over 10 years and Hedge Funds Review fund of hedge funds of the decade

Aberdeen Asset Management began life 1983 through a management buyout of the investment management contract for a small investment trust. Over the years the company has expanded through a combination of acquisitions and organic growth. Throughout its expansion, asset management has remained its sole business.

Assets under management (AUM) have grown to around £170 billion. While the majority of this is in traditional assets – around 35% in equities, 34% in fixed income and 13% in property – 18% is in alternative investments. The company has been managing fund of hedge funds (FoHF) portfolios for over 11 years.

One of the most successful of those products is the Aberdeen Orbita Capital Return fund, a diversified portfolio running since 1998. So far it has attracted $1.6 billion from investors. Available in dollar, euro and sterling classes, the fund has delivered remarkably consistent returns: annualised 6.31% with volatility of 5.29%.

The asset manager says these returns derive from its three core management principles. First, selecting the best managers in a chosen field is essential. Aberdeen Asset Management analyses factors including investment style, performance, volatility and infrastructure. It forms close working relationships with managers and continually monitors them.

“We look for managers that have an edge that helps them to generate and sustain superior returns in differing market environments,” says fund manager Russell Barlow.

“Often the key factor that gives us comfort is the manager's ability to stick to its mandate in extreme conditions be they strongly positive or painfully negative. This helps to reaffirm the assumptions that we used in blending the managers within a strategy to generate the best possible risk-adjusted returns potential,” he adds.

Optimising allocation is also essential to deliver superior risk adjusted returns. It is necessary to identify those strategies offering the greatest future opportunities and to understand fully their associated risks before allocations can be determined, according to Barlow.

The fund managers review their opinions continually and over time adjust allocations as a result.

Finally, the third tenet of successful returns is controlling risk. The fund does this using a proprietary combination of both quantitative and qualitative techniques. Manager diversification also has an important role to play both in minimising risk and maximising stability from multiple sources of return.

The fund invests in a range of different investment strategies including fixed income arbitrage, equity long/short, convertible bond arbitrage and event arbitrage. In general the fund does not take positions on broad market directions. The allocations to strategies and funds may vary over time.

The asset manager has developed a number of tools and processes to help manage investment risk emanating from such sources as such as distribution. These include value at risk (VaR) and fat-tail risk, for example. The fund also monitors diversification and clustering as well as leverage at the manager, strategy or portfolio levels. It constantly seeks warning signals that an allocated fund is falling short of expectations and has developed a proprietary method for “watch listing” managers.

However, Aberdeen Asset Management does not let automated processes replace hands-on monitoring. Nearly all managers receive quarterly visits where a structured approach is used to review the investment process and the management company. In the rare event of a quarterly visit not being possible, conference calls are held to conduct the due diligence. All managers are visited on site on at least once a year. 

Warning signs that could prompt a change in allocation or even closing a position include “breaches of performance tolerances, managers deviating from their mandates or stubbornly extending trades that they think will come good, continuous personnel changes involving key persons,” says Barlow.

Size also matters. “When a manager's AUM becomes so large that they may not be as nimble in the market, it may constrain their returns potential and lead us to consider disinvestment,” he explains.

The fund’s minimum investment is $250,000, with a management fee of 1.25% plus a 10% performance fee. It offers quarterly liquidity with 90 calendar days’ notice.

Antonia O’Connor, Aberdeen Asset Management

Fund facts

Full name of fund: Aberdeen Orbita Capital Return Strategy
Name of investment/management company: Aberdeen Asset Managers
Contact: Patrick Walker, head of UK business development, Bow Bells House, 1 Bread Street, London EC4M 9HH (+44 (0)20 7463 5959
Portfolio manager: Russell Barlow.
Launch date: July 1, 1998
Assets under management: $1.65 billion (at September 30, 2010)
Net cumulative performance since inception: 111.71% (at September 30, 2010)
Annualised return: 6.31% (since inception at September 30, 2010)
Annualised volatility: 5.29% (since inception at September 30, 2010)
Sharpe ratio: 0.6 (since inception at September 30, 2010)
Strategy: multi-strategy
Share classes: institutional, discretionary and advisory
Administrator: ABN AMRO Fund Services (Cayman)
Auditor: KPMG
Custodian: ABN AMRO Fund Services Bank (Cayman)
Domicile: Cayman Islands
Management fee: 1.25%
Performance fee: 10% (subject to hurdle, high water mark)
Minimum investment: $250,000
Lock-in/up: none
Redemption period/liquidity terms: quarterly with 90 calendar days’ notice