Fund manager eschews predictable herd mentality

As funds of hedge funds go, the Cogo Wolf Global Strategies Fund LP is not likely to be accused of following the crowd.
The $65 million fund, the flagship product of San Francisco-based Cogo Wolf Asset Management LLC, was established in March 2006 after the strategy had built up a 12-year track record as a separately managed account.
“This is a forward-looking animal that’s designed to look out over the next six to 18 months to try and assess what’s happening in the global economy and where the money is likely to be made,” said Giles Conway-Gordon, who co-manages the fund with Chris Wolf. The firm has assets under management of $100 million.The co-managers make no bones about their general distaste for the more predictable and often less successful strategies applied by so many of their competitors in the fund-of-funds area.
“The typical quantitative models that most funds of funds use are looking for specificity in huge amounts of detail, and they mark those details to their models but not to reality,” Mr. Wolf said.
This specific corner of the alternatives space developed a predictable herd mentality, the co-managers argue, mostly by virtue of the hedge fund industry’s evolutionary stretch from the early 1990s through 2000.
Strategy fails
“For a relatively long period, the straight-up and level markets led people to believe all they needed to do was diversify to do well, and if they wanted more performance, they just added more leverage,” said Mr. Conway-Gordon. “But right now, what’s happening is, the road has become curvy, and it’s moving up and down.”
To help maneuver through such curvy stretches, the Cogo Wolf strategy relies on diversification but no leverage at the fund-of-funds level.
The current portfolio is invested in 34 underlying hedge funds. Although most of them are managed in Western Europe and the United States, the fund also provides exposure to such markets as China, India, Russia, Latin America, Eastern Europe and Africa.
“One of the great things about the hedge fund industry revolution over the past several years is the development and growth of new funds that provide exposure to the areas we want to be in,” said Mr. Conway-Gordon.
“When we’re investing for exposure to places like India, it makes more sense for us to have two or three smaller allocations.”
The general strategy, which involves looking globally to build a diversified portfolio in relatively liquid positions, is currently exposed to long-short, real estate, specialty-bond and global-macro hedge funds.
Unlike quantitative models that the co-managers said “rely on history repeating itself,” the Cogo Wolf objective is to identify themes, based on the evaluation of “an entire range of real economic vehicles.”
The fundamental premise that has been driving the strategy for nearly five years is the tectonic shift of the global economy, according to Mr. Conway-Gordon.
“Right now, the entire global economy is moving toward the developing economies, and that growth is lifting large populations out of poverty,” he said. “This entire shift is, of course, being accelerated and helped along by things like the Internet and free trade, but you always have to be open to the possibilities of new factors.”
The continuing analysis helps the co-managers to adjust for factors such as inflation in India and “a dicey situation in Argentina,” Mr. Conway-Gordon explained.
“Most funds of funds are just looking for non-correlated hedge funds and relative-value strategies,” Mr. Wolf said. “Their quant strategy is highly complicated but flawed because they’re expecting a linear market.”
The portfolio at the end of July was most heavily exposed to emerging markets, at 34%. No other allocation was greater than 13% of the assets.
Equity-related hedge fund strategies made up 66% of the fund, while alternatives such as precious metals, commodities and real estate made up 32%. The remaining 2% was in cash.
Through the end of July, the fund had a net return of 18.7%, which compares with a 6.8% return for the MSCI World Index, and an 8.4% return for the HFRI Fund of Funds Composite Index.
The portfolio had a net return of 21.7% last year, compared with gains of 20.1% and 10.1%, respectively, for the MSCI and HFRI indexes. The fund’s five-year annualized return through the end of July was 21.7%. The MSCI and HFRI indexes, meanwhile, had annualized gains of 15.5% and 8.9%.
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E-mail Jeff Benjamin at jbenjamin @crain.com.