Shortlist: Best new hedge fund

The GAM Star Emerging Market Rates Fund invests in local and hard currency denominated sovereign and quasi-sovereign bonds and related derivatives such as interest rate swaps, credit default swaps (CDS) and others as well as currencies and their related derivatives. Investment director Paul McNamara and investment managers Caroline Gorman and Denise Prime manage the strategy. The team works collaboratively.

Outside research comes from 10 to 12 international brokerage houses and banks that help with issue selection. The vast majority, approximately 75%, of the research is done by the emerging markets debt team. This comprises three investment managers and a dealer. This research is undertaken from primary sources.

There is no formal split of country responsibilities. The managers are each responsible for generating best ideas for the portfolio. McNamara, the lead investment manager, tends to focus his research more on Latin American countries, while Gorman concentrates more on Eastern Europe, the Middle East and South Africa. Prime contributes to all areas.

There are also 13 investment managers on the fixed income investment team. Each investment professional is a sector specialist providing a rich source of in-depth knowledge on different parts of the global fixed income and currency markets.

Key for the fund is to identify major global macroeconomic themes and trends. The emerging markets team use these as one input to their investment idea generation process.

However, specific investment ideas are mainly generated from applying their structured screening process that highlights countries with stable macroeconomic environments and positive real yield interest rates. They then position themselves on the yield curve, allocating positions to countries in accordance with their conviction on future curve movements.

The fund uses an absolute return approach to investing in emerging market bonds, local and hard currencies and related derivatives within a tightly controlled environment.

The fund aims to produce net absolute returns of approximately 10% a year over Libor through actively selecting countries, currencies, credit quality, and interest rate and duration positioning.

Hedging is done on a trade by trade basis at the discretion of the investment managers.

The managers seek to maintain good liquidity by focusing on countries which have the guaranteed liquidity provided by a primary dealer system, as well as tending to invest via liquid, exchange traded securities.

Under normal market circumstances liquidation of the majority of the portfolio could take place within in three days without suffering significant negative price impacts.

Typically the portfolio holds around 30 positions across three to four themes with the managers seeking to balance meaningful positions sizes with good diversification across countries and currencies and low correlation between positions.

The fund tends to have a net long bias overall, reflecting the view that long-term opportunities for growth exist in emerging markets. However, the fund can be, and on occasion has been, net short.

Fund facts
Full name of fund: GAM Star Emerging Market Rates
Name of portfolio managers: Paul McNamara, Caroline Gorman and Denise Prime
Name of investment/management company: GAM
Contact information: Lynn Mah, 12 St James’s Place, London SW1A 1NX (+44 (0) 20 7393 8848; lynn.mah@gam.com)
Launch date: April 13, 2010
Assets under management: $294.1 million (at March 31 2011)
Strategy: emerging market bonds, local and hard currencies and related derivatives
Share classes: Swiss franc, euro, sterling, yen, US dollar
Administrator: GAM Fund Management
Auditor: PricewaterhouseCoopers
Custodian: JP Morgan Bank (Ireland)
Domicile: Ireland
Listing: Irish Stock Exchange
Management fee: 1.5% (excludes administration and custodian fees)
Performance fee: 20% over three-month Libor on a high water mark basis.
Minimum investment: $10,000
Lock-in: none
Redemption/liquidity terms: subscription: daily; redemption: on any dealing day with five business days’ notice prior to the deal date