Signet Group, a $1.7 billion fund of hedge funds based in London and Lausanne, Switzerland, is in talks with US and European institutional investors about designing a portfolio to invest in Asia-based managers involved in private lending.
Robert Marquardt, founder, executive chairman and co-CIO, says hedge funds are earning attractive credit and liquidity premiums for lending to smaller or lower-credit companies that cannot obtain bank financing.
Prior to the global credit crunch, this arena had far more players, including investment banks, some of which were too loose with their covenants or their pricing. Marquardt attributes this to the prevalence of club deals, in which individual bankers cut deals and moved on, rather than took responsibility or relied on their relationship with local families or companies.
Many deals either fell apart or became extremely illiquid in 2008-09, but pricing is now returning to the market.
The number of experienced and active players is far fewer, however. And hedge funds (as well as private-equity firms playing secondary or distressed trades) are more hungry to raise capital.
“There is structural alpha built into the lending market,” Marquardt says. Signet is already invested in a handful of managers in Asia with their own networks among borrowers, and have the know-how when it comes to protecting their capital, ensuring cash can get offshore, and accessing collateral if necessary.
Signet invests in them through its global fixed-income absolute-return fund or its emerging-market multi-strategy product.
Marquardt is in discussions with Signet’s clients about creating a new portfolio dedicated to private lending in Asia. The firm’s clientele is mainly pension funds and other institutions in Europe and the US.
These clients are still licking their wounds from the 2008 panic and are looking for transparency and liquidity, conditions that hedge-fund private lending clearly does not meet.
But Marquardt says this is the time to get into an alpha-creating enterprise that can deliver a net IRR of 20% or more. Moreover, the underlying managers, eager for capital, are more prepared to open their books to clients, he says.
Private lending is just one area of activity for Signet, which in 2008 set up a Hong Kong research office under François Hora. In the 1990s, Signet’s Asia exposure was mainly equity long/short. Since 2003, as local bond markets have developed, it has moved into rates, currencies, sovereign bonds, corporate bonds and sovereign CDS.
Marquardt says Asian macro strategies can now deliver solid, 8-15% returns based on trading among all of these instruments. The quality of managers has improved, with the bad ones blown up in 2008 and the survivors now more experienced. The arrival of big US and European hedge funds to the region is also adding depth to the talent pool.
“It’s a great time to invest in Asian teams running $100-700 million,” Marquardt says. “They’re humble and transparent, they know how to hedge tail risks and trade dynamically, and they understand optionality.”
At its peak, Signet managed over $3 billion, but suffered big redemptions in 2008 (Lehman Brothers had been a client). Its performance took a knock as well, with its annualised return since inception falling from over 12% to under 9%. But Marquardt argues the fortunes of fund-of-hedge-fund survivors have turned a corner.