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

It has been a good decade for the Gems Low Volatility Portfolio. The diversified fund of hedge funds opened by Gems Advisors at the start of 1995 has $1 billion of assets under management (AUM). The fund has generated returns of 7.5% a year with annualised volatility of just 4.56%.

The fund is highly diversified. More than three-quarters of the assets are invested in macro, distressed, equity long/short, multi-asset and event driven strategies. It also has allocations to strategies such as managed futures, credit and convertible arbitrage. It is geographically diversified, with 59.29% of underlying funds operating in North America, 15.8% in the Asia Pacific region and 20.54% in Western Europe.

The Gems Low Volatility Portfolio seeks to achieve superior risk adjusted performance over the long term. This has been achieved by a conservative management approach, with the portfolio investing in a wide and carefully constructed range of investment strategies and managers.

Gems Low Volatility is designed to be flexible and liquid, taking advantage of the many relative value opportunities that arise in the global capital markets. The portfolio is highly diversified, with a core group of premier hedge funds.

The portfolio uses a variety of fund vehicles and instruments for the expression of Gems' investment views as well as overlays, if necessary, to protect the portfolio. Illiquid asset classes, managers and instruments as well as highly leveraged strategies, are avoided.

The fine balancing act is taking on enough risk to generate good returns for investors without running the risk of surging volatility, explains chief executive Miguel Abadi. “Normally, we operate with a fraction of the markets’ volatility. While, for example, the absolute number represented by the late 2008 performance, during the worst financial crisis in 70 years, was beyond our expectations, it was significantly below that of the market drawdown,” he says.

An experienced team that has worked together for many years is an essential element. Gems’ emphasis is on research rather than marketing with 29 of its 56 staff involved in investment work. The core team has worked together for over 15 years with no senior departures.

While every effort is made to manage portfolios with low beta, in a low interest rate environment “it is necessary to tolerate a little more volatility in order to achieve satisfactory rates of return for our clients,” explains Abadi.

With 23 years of managing investments behind it, Abadi says Gems has experience and discipline to make those calls.

The Low Volatility Portfolio targets a return of Libor plus 400 basis points and aims to spread investments around eight to 12 strategies at any time with 30 to 50 managers.

It is available in dollar, euro, sterling, Swiss franc and Norwegian krona classes as well as gold. A minimum investment of $100,000 is required and the fund offers monthly liquidity plus 45 calendar days.

The Luxembourg-listed FoHF, which benchmarks against HFRI Fund of Fund Conservative Index, owes much of its strong performance to a rigorous manager selection process. It takes Gems between three to 12 months to complete analysis on a new manager, with three specialist teams of investment professionals – the investment research, operational research and risk analysis teams – all playing their part.

The research teams confer at various stages. Only after they have completed the multi-stage process will a recommendation to accept or reject new managers be made to the investment advisory committee.

“The key qualities that we look for include organisational strength and integrity, analytical ability, portfolio and risk management skills plus how the manager behaves in difficult times,” says Abadi.

“One can never do enough due diligence. Gems will take into account organisational strength and stability, divisions of responsibility, independence of functions, checks and balances and the use of third parties for certain functions when assessing potential managers,” he concludes.

Fund facts

Full name of fund: Gems Low Volatility Portfolio
Name of investment/manager company: Gems Advisors is the investment advisor and Gems Management is the investment manager.
Contact: Stuart MacDonald, director of investor relations (+44 (0)20 7493 1617; stuart.macdonald@gemsadvisors.com)
Launch date: January 1995
Assets under management: $1 billion (at September 30 2010)
Net cumulative performance since inception: 212.35% net (at September 30, 2010)
Annualised return: 7.5% net (at September 30, 2010)
Annualised volatility: 4.56% (at September 30, 2010)
Sharpe ratio: 0.89 (at September 30, 2010)
Strategy: multi-strategy
Share classes: US dollar, euro, sterling, gold, Norwegian krona
Administrator: Citco Fund Services (Luxembourg)
Auditor: PricewaterhouseCoopers (Luxembourg)
Banker/custodian: Brown Brothers Harriman
Domicile: Luxembourg
Listing: Luxembourg Stock Exchange
Management fee: 2% a year
Performance fee: 10% of net returns (if above 5% annualised)
Minimum investment: $100,000 or currency equivalent
Lock-in/up: none
Redemption period/liquidity terms: monthly liquidity plus 45 calendar days