Why is a vehicle like your hedge fund (CQS Diversified) needed for investors?

The CQS Diversified Fund has a single-manager, multi-fund structure which allocates across a spectrum of investments that we manage. We are able to dynamically rebalance the portfolio towards opportunities and strategies as value appears in them. A feature of this approach is that the fund has historically delivered attractive returns and low correlation to traditional equity and credit markets.   

What are the total Funds Under Management (FUM)? 

CQS’ total FUM is US$12.1 billion, predominantly from institutional investors. The diversified strategy has FUM approaching US$1 billion. 

What are the benefits over more retail/institutional funds etc? 

The underlying strategies are able to take both long and short positions, enabling the fund to potentially benefit both from declining and rising markets. The fund provides investors access to a range of CQS-managed funds that span a number of underlying strategies where we have significant expertise and a proven track record. The fund is designed to offer attractive returns with controlled volatility.

How important is bottom-up research in stock selection? 

For us, fundamental, bottom-up research is the foundation of our investment process. We strongly believe that you have to analyse and understand the entire balance sheet and capital structure – equity and debt. We think this gives us a competitive advantage.

How do you evaluate the ‘risk’ in your risk-adjusted returns?

We triangulate on risk using a variety of methods including, but not limited to, simple volatility of returns, more complex value at risk models, free cash and excess margin. What we seek to do is build a holistic picture of the risk the fund is taking across its underlying strategies on an aggregate basis.

What asset classes do you see as particularly attractive and why?

Presently, we see particular value on a risk-adjusted basis both on the short and long sides in structured credit, convertibles, asset-backed securities and equities, as well as loans on the long side. There is significant valuation dispersion, both by geography and within asset classes, which is driven by differing regulatory and funding environments. This presents further opportunities. 

Do you see hedge funds (like CQS) as being more able to gain exposure outside more traditional investment vehicles?  

Yes. As a firm, we operate over a number of investment products across multiple time zones. In comparison, traditional managers tend to focus on, or have silos between, single asset classes. We make sure that market intelligence and insight from our own analyses is shared on a global and cross-product basis, both during the trading day and formally at our daily trading meeting, where each product group is represented and shares its knowledge. 

What type of investors do you target?

We look for stable and diversified pools of investors. In Australia and New Zealand we seek wholesale or sophisticated investors only – this can mean superannuation funds, family offices, insurers, high net worth individuals or sovereign wealth funds.

With institutional investors, do you liaise with them directly or work more closely with large asset consultants?

We work closely with all these types of institutional investors. We liaise with them on multiple levels, from their in-house investment teams and trustees through to their external asset consultants.

Do you have any retail investors? 

Our funds are generally targeted at sophisticated or wholesale investors so we don’t target the retail market. There is indirect retail access to some extent via third party platform providers such as the UCITS funds in the UK but the firm sees only wholesale counterparties. Further, in Australia, we are only licensed to market to wholesale investors.

What is the capacity of the investments? At what point would you look to close the fund(s) to new money?

We think the strategy is scalable and has significant capacity. This is subject to close monitoring of the underlying strategies. We regularly review this on the basis of current market conditions together with market depth, opportunity, liquidity and team size. All are iimportant factors in determining capacity. 

With potential tapering of QE (in the United States, as identified by the Fed), do you see changes to the investment environment?

While we have been constructive on markets for a while, now there may be reasons to be more balanced. The risk-on, risk-off market we have had could be subject to even greater volatility, due in part to the effect of regulation which is removing liquidity in many areas of the market. We have witnessed massively accommodative monetary policies globally since the onset of the GFC in 2008. Overall, we think central bank actions should continue to be supportive of credit and equity markets. Nevertheless, one thing we have focused on recently is a sense that each round of global monetary stimulus appears to be having a diminishing impact, both on economic activity and markets. If that is the case, then one should probably be a little bit cautious.