Highly commended: Best performing diversified fund of hedge funds over one year

The Royal Bank of Canada ARC Fund looks to generate absolute returns, generally independent of market direction, through global investment in a diversified portfolio of 20 to 60 hedge funds employing a variety of strategies.

Launched in 2000, the fund advised by Saguenay Capital, has notched up assets under management (AUM) of over $100 million, around a fifth of the company's total assets.

Fund managers David Dobell and Brian Walsh have not managed the fund of hedge fund (FoHF) for the full 10 years.

Dobell explains: "In the summer of 2007 we took over the sub-advisory of the ARC fund and we immediately attempted to modify the portfolio to bring it more in line with the way we manage our co-mingled vehicles. Investing is an art and a science. Our track history suggests that we have married the two successfully."

This translated into a heavy focus on risk management. Saguenay Capital uses proprietary risk tools and tracks risk metrics such as market exposures, correlation analysis relative to other managers, value at risk (VaR), CVaR (conditional value at risk, the expected loss conditional on the losses being greater than or equal to VaR) and peer group analysis.

Risk management is central to the team's philosophy, Dobell insists. "Our background in capital markets and risk management means that we focus on protecting on the downside. Our clients aren't trying to get rich quickly. They want consistent returns that allow them to sleep at night. We use our experience, well over 125 years between the four of us, to focus on building portfolios that we believe will not be hurt by volatility but will benefit from it," he notes.

Investors consist primarily of high net worth individuals (HNWIs) primarily located in the UK, Europe, North America, Latin America, the Caribbean, Hong Kong and Singapore.

Rick management should not be treated separately from liquidity management, Saguenay believes. This is why its risk management incorporates monitoring liquidity of the underlying funds and liquidity analysis of the overall portfolio.

Over 2008 the portfolio remained highly liquid with 70% of the fund available for liquidation within a three-month timeframe.

Dobell believes the company's manager selection process has helped the fund to achieve steady returns with annualised returns of 4.45% and volatility of 5.70%. While traditional methods of sourcing managers are used, the majority of time is spent finding the best managers within a given strategy.

The high conviction portfolio of less than 30 names allows the investment team to know the managers in great detail. Regular site visits are undertaken on an annual or more frequently if required. There is constant oversight of the underlying managers with most of the managers contacted on a weekly or monthly basis. Turnover can range from 15% to 20% in any given year.

"When choosing a manager we first will have a sector bias at any given time, given our macro views, and that will direct us away from and towards different sectors," Dobell explains.

"A common element among our managers is not just that they can demonstrate attractive performance and risk metrics on a historical basis that would benefit our portfolio, but also that they have a convincing strategy going forward. We shun managers with hubris and prefer those with humility," concludes Dobell.

Fund facts

Full name of fund: Royal Bank of Canada ARC Fund
Name of investment/management company: Royal Bank of Canada Investment
Management (Guernsey)
Contact: Don Lefresne, Canada Court, Upland Road, PO Box #246, St Peter Port, Guernsey GY1 3QE, Channel Islands (+44 (0)1481 744 141
Launch date: April 1, 2000
Assets under management: $103.3 million (September 30, 2010)
Annualised return: 4.45%
Annualised volatility: 5.70%
Strategy: diversified
Share classes: B and C shares
Administrator: RBC Offshore Fund Managers
Auditor: Deloitte & Touché
Custodian: Royal Bank of Canada (Channel Islands)
Domicile: Guernsey, Channel Islands
Listing: none
Management fee: 1%-2%
Performance fee: 10% over a 6% hurdle
Minimum investment: $50,000 (B); $10,000,000 (C)
Lock-in/up: none
Redemption period: calendar quarter end with 45 days' notice