Highly commended: Most innovative fund of hedge funds

When Altima Asset Management launched the Tera Capital Fund in April 2005, it decided to create something different – a fund of hedge funds (FoHF) focused on Russian investments, spread across both debt and equity.

So far all the signs are that they made a good choice: the fund has returned an impressive 16.05% a year on an annualised basis with a volatility of 11.46%. Its fee structure is unusual too, with no management charges, just a 20% performance fee.

Investors are mostly from Western Europe and US and are generally small asset management companies, investment advisors and high net worth individuals.

The average investment is $150,000.

According to chairman Timothy Enneking, who manages the fund along with Alexander Polykovskiy, it is a tough environment, making it challenging for the Moscow-based FoHF to boost assets under management above its current $5 million level.

“The biggest challenge by far has been attracting new investors,” he explains. “Everyone is far more skeptical, cautious and, frankly, scared than we've ever seen them. Once an investor is in the fund, they generally stay for an extended period, but attracting new investors even after the recent economic crisis is very difficult.”

Nonetheless, he believes Altima has a lot to offer, with a unique products that he says is the fund of funds in the world focused on Russia. However, that produces its own complexities. Russia has a unique and historically explosive economy.

Enneking looks for special qualities in his managers. “Longevity is the key,” he says. “If one of the principals of the management company hasn't survived at least two major crises (the 1998 currency crisis and the 2008-09 economic crisis), the odds are very low that we will be seriously interested. It's a Darwinian world out there. Those who survive have proven themselves.”

Altima monitors some 900 on- and off-shore funds to select the five- to eight most appropriate based on diversification, focus, strategy, volatility, risk, leverage and a variety of other quantitative and qualitative criteria. The portfolio is then constructed based on these criteria, with each fund taking between 5% and 30% of AUM, excluding a 2% to 5% margin.

While potential firms are selected on performance, they also have to be attractive from a due diligence perspective. The biggest single red flag that would prohibit investment is the right professional structure, in Enneking’s opinion.

“If the service providers are not serious, legitimate players, then something in wrong,” he states. “We've never found an exception to this rule. Calls to service providers will tell you everything you need to know about a fund.”

Once a fund is in the portfolio, it has to keep up with the pack to stay there. A lagging performance is the trigger to realising that the fund is no longer what Altima is looking for.

“The difficulty is knowing when to pull the plug,” muses Enneking. “We generally give an underlying fund six months. We have one fund in our portfolio on the cusp now. We are tracking it even more closely than otherwise and discuss what to do on a monthly basis,” he concludes.

Fund facts

Full name of fund: Tera Capital Fund
Name of investment/management company: Altima Asset Management
Contact: Timothy Enneking (+7 910 439 1486, te@altim.ru)
Launch date: May 2005
Assets under management: $5 million (September 2010)
Net cumulative performance since inception: 94.5% (through September 2010)
Annualised return: 16.05% (through September 2010)
Annualised volatility: 11.46% (standard deviation through September 2010)
Sharpe ratio: 1.39
Strategy: multi-strategy
Administrator: Maples Fund Services
Auditor: Altschuler, Melvoin & Glasser
Custodian: Maples Fund Services assumes these duties
Domicile: Cayman Islands
Management fee: none
Performance fee: 20%
Minimum investment: $10,000
Lock-in/up: six months (5% penatly, waivable)
Redemption period/liquidity terms: 30 days from end of month