The following interview is with SkyBridge Capital, a firm operating in sectors such as the fund of hedge funds sector. This publication interviewed Max von Bismarck, partner and chief executive for Europe at SkyBridge Capital.

The following interview is with SkyBridge Capital, a firm operating in areas such as the fund of hedge funds sector. This publication interviewed Max von Bismarck, partner and chief executive for Europe at SkyBridge Capital. By way of background, before he joined SkyBridge, Mr von Bismarck was the head of investors at the World Economic Forum, where he built and led an international team based in New York and Geneva responsible for all global activities and relationships of the WEF related to hedge funds, private equity, institutional investors, family offices and sovereign funds. (All told, this is a group overseeing over $4 trillion of assets). He is a law student and holds numerous other qualifications and titles, including an Executive Masters in Global Leadership from the World Economic Forum (Programme in collaboration with Wharton School of Business, Columbia University, INSEAD and London Business School).

Mr von Bismarck also is a senior advisor on global business at the Asia Pacific Research Center of Stanford University, a senior advisor for Europe at the Nicolas Berggruen Institute and continues to serve as a senior advisor to the WEF.

Can you set out a bit of background about SkyBridge Capital's fund of hedge funds business, as in when did it get set up, who runs it, who owns it, what is its focus and unique selling point?

SkyBridge Capital (SkyBridge) is an alternative investment firm with approximately $7.4 billion in total assets under management and advisory as of 28 February 2013. Today, the firm provides the full spectrum of hedge fund investing solutions including fund of hedge funds, custom portfolios and hedge fund advisory services. SkyBridge was founded in 2005 by Anthony Scaramucci as a hedge fund incubation in the firm. Mr Scaramucci previously co-founded Oscar Capital Management, an investment partnership and managed accounts business which was sold to Neuberger Berman in 2001.

In June 2010, SkyBridge acquired the hedge fund business of Citigroup Alternative Investments, merging SkyBridge’s entrepreneurial culture with Citi’s talent and depth on the investment side. The Citi team was led by Raymond Nolte, currently co-managing partner and CIO at SkyBridge and formerly the CEO of Citi’s hedge fund management Group.  Nolte has held positions of leadership in banking and hedge fund investing, including at Deutsche Bank and Bankers Trust Company, since 1983.

I joined SkyBridge in 2011 to focus on further internationalising the firm and broadening our international investor base.

SkyBridge's multi-manager products focus on a high-conviction approach to alpha generation. Our research-focused investment team actively shifts investment exposures to opportunity sets with what it perceives as the greatest risk/reward proposition and the most attractive correlation characteristics. We believe that fund of funds can create value in today’s market through a thoughtful, thematic investment approach and timely manager selection, appropriate levels of theme and manager concentration and a dynamic evolution of the portfolio. 

What has performance been like over the past, say, five years and 12 months?

Due to private placement rules, we cannot publicly disclose our performance.

What have been performance drivers? What might have hit performance, and why?

The main performance drivers for SkyBridge in 2012 and so far in 2013 have been hedge funds focused on cash flow generative strategies.

In our view, these funds offer the most attractive return streams per unit of risk, beta, and liquidity in the current market environment. Thus, we continue to position for potential exposure to strong, consistent cash flow generative strategies that we believe should not be dependent on an improvement in the global economy or financial markets in order to generate returns. If the eurozone and the US economy hold together and security prices do not appreciate in value to any material extent, we believe that the cash flow generative nature of our top-three themes (prepayment sensitive mortgage-backed securities, credit sensitive MBS, and high yield/stressed US corporate credit) should generate at least modest returns.

Furthermore, on a relative basis, we believe these strategies should be typically less affected by the debilitating risk-on/risk-off price action that gripped the capital markets in 2011 and 2012, since the cash flow acts as cushion to extreme market moves.

In addition, we expect to maintain smaller exposures to strategies such as lower beta Basel III implementation-related relative value credit, and residual event-driven equity. We believe that what these strategies do not have in cash flows, they should partially make up for in hard catalysts, such as the continuing trend of US bank balance sheet consolidation and select merger and acquisition activity. We continue to seek to avoid strategies that are dependent on monetising, nearly impossible to time, mark to market gains or losses such as long/short equity or macro.

How in general does the firm go about selecting investments. How do you describe your investment and risk philosophy?

SkyBridge’s investment process starts with fundamental research of the global capital markets to establish a top-down view of the macroeconomic environment. Based on our view of the markets, we will seek to identify low volatility, non-correlated, thematic exposures to hedge fund opportunity sets with the greatest potential risk/reward proposition. Portfolio management actively shifts investment themes (strategies) and exposures as the environment changes.

Prior to making an allocation, we consider historical and anticipated performance of each underlying fund manager and perform extensive operational due diligence – while giving consideration to the current macroeconomic outlook and the particular manager’s strategy. We also practice active portfolio management with the goal of creating diversified, hedged portfolios.

All our investments are supported by risk management, operational due diligence and an ongoing monitoring process – with a view to positioning toward capital market opportunities and risks.

In terms of risk management - SkyBridge views risk holistically, as exposure to any financial, reputational, regulatory, legal, operational, or other such factors that may negatively impact the firm and/or its performance. Risk management considerations are integrated into the firm’s investment decision making and allocation process. The head of risk management sits on the manager selection committee and the portfolio allocation committee.  It is important to note, however, that no risk management system is failsafe.

What is the fee structure? Some FoHFs levy a separate fee. How are fees disclosed?

The industry’s exclusive focus on fees is clearly misplaced. What matters, at the end of an investment process, is the risk-adjusted return net of fees. How one gets to that return is immaterial. If an investor is happy with the return, then a fund of fund has provided value.

How you deal with "style drift" and ensure that the overall risk profile of the client's allocations is protected through time?

SkyBridge monitors its portfolio investment, including through risk aggregation software, to assess if the exposures are consistent with the investment style and risk profile stated by the managers.  In addition, we seek to understand the major themes and ideas in the managers’ portfolios through regular communication with the managers by our investment team.

Where do clients come from? Family offices, private banks, wealth advisors, others?

SkyBridge has a diversified client base comprised of high net worth individuals, family offices and wealth advisors, as well as institutions from all over the world.

Do you have plans to launch new products, hire new people, set up offices, etc? If so, can you give details?

As any entrepreneurial business, we are always on the lookout for growth opportunities, ways to expand our product range and talented individuals to help us facilitate this.

Can you give some brief comments on the overall state of the hedge fund industry, which has been through a lot in recent years?

The industry is back above peak assets, evidencing a resurgence for the industry.  We have also seen a shift toward more institutional participants - institutions have had fairly solid flows out of pension plans and endowment funds into hedge funds, because they continue to believe in the risk return parameters.  Additionally, given where interest rates are on the fixed income side, more market participants have begun utilising the asset class as an alternative to fixed income products.

Specific to fund of funds, we are seeing a bifurcation of the industry between providers of hedge fund beta and fund of funds that have become more alpha-centric. Generalist fund of funds are having a hard time justifying fees because the performance is just not there. However, fund of funds that are more tactical in their position taking tend to show more clear evidence of adding value and investors are therefore willing to pay an extra layer of fees.

What do you see the biggest trend in the industry now?

The very large funds continue to garner the majority of the assets and the institutional allocations continue to outnumber the individuals. The industry is also trending more toward niche strategies including special situation funds and direct lending funds, rather than macro and long-short equity strategies.  The correlation properties of these new strategies are proving complementary to stock and bond portfolios.

How are you set up to deal with the European Union's AIFMD regulatory changes?

We are closely watching the regulatory developments related to AIFMD to ensure that we act appropriately.