Top of the league

Following the success and popularity of its annual European Hedge Funds Awards, Hedge Funds Review decided to fete the successes of a largely unsung part of the hedge fund industry ' the fund of funds groups. Funds of funds have returned an average of between 4% and 6% a year during the past two years of difficult markets, making them appealing to long-only equity investors of all types. We thought it would be interesting to look at the data and find out how well some funds of funds have performed over various time frames.

The first Hedge Funds Review European Fund of Funds Awards dinner was held at the Carlton Towers Hotel, London, on 3 December 2002. The process of analysing and judging the European funds of funds was similar to that used for the Hedge Funds awards.

judging process

We worked closely with Allenbridge's Hedgeinfo subsidiary, gathering performance data on hedge fund of funds based in Europe but investing globally. The awards categories were designed to find not just the best and most consistent performers over five and three years, but also those who produced returns with the lowest amount of volatility. Performance was judged from 1999-2002 and 1997-2002, while the 'best newcomer' had a start date in 2001.

The 'best process' awards were judged on a mostly qualitative basis by the judging panel. An application and questionnaire was sent to the 400 hedge funds listed on Hedgeinfo's proprietary database.

We had a significant response to this questionnaire. Questions included funds under management; whether the fund was open or closed; a description of the investment team and process; the risk management systems and portfolio construction.

The judges ' Jacob Schmidt of Hedgeinfo, Marie-Christine Riachi of Hoegh Family Office and John Haam of Abbey National ' were impressed with the amount of work that went into the completion of the questionnaires and we would like to express our thanks to those who took time to do this.

The next stage was for Hedgeinfo to produce a large database of entries, showing their returns and the methods by which they had arrived at them.

We then visited a proprietary database company and checked our findings with that. Interestingly, the results we were finding tallied with the data-driven results of this firm. After this exercise, we arrived at the short lists.

There was one interesting anomaly that we took out of the short-listed data: the Man IP 220 fund of funds is a guaranteed fund and so we felt it could not be included (initially because we felt it would be handicapped by the guarantee). Despite the added fees a guarantee implies, this fund, based on AHL and Man Glenwood performance, would have been the top performer in every category based on returns and had achieved 18% a year for the past five years.

Our process of arriving at a short list means that, as with the Hedge Funds awards, the short-listed firms are all high achievers and the decision as to who is to be the winner in each category is a difficult one requiring a fair amount of debate among the judges. It is the high quality of the judges that makes these awards important and our thanks go to them for their time and hard work. The judges were driven by a dedication to avoiding awarding funds that showed inconsistency in returns or too great a dependence and concentration on one sector.

The winner in the 'best performing hedge fund of funds over five years on a return basis' was La Fayette Europe Fund, which has achieved an annual geometric average over the five-year period of 23.39%. This return put it ahead of the rest of the field and the judges, having looked at the rolling monthly returns achieved by this fund, found that even during the periods of significant market unrest, the fund had held its own with no significantly bad monthly figures. Such was the strength of this fund that when it came to the three-year period, the judges felt that La Fayette Europe still dominated the rankings.

Over three years, La Fayette achieved an annual geometric average of 33.38%, only outperformed by a mere 0.5% by GEMS Russia. The judges felt that although the GEMS Russia fund had achieved excellent performance over the three years, it was a specialist fund and not as broad based as La Fayette.

Turning to funds awarded for their control of risk, we used the Sharpe ratio to find those that achieved returns with the least volatility. Here, GAM Trading US$ Fund achieved success with a Sharpe ratio of 2.21 over five years. This fund won our 'fund of funds award' in the European Hedge Funds awards in the summer and has consistently impressed the judges with its smooth approach to money management.

Over three years, our 'risk-adjusted award' went to SGL Quadrant, which achieved a Sharpe ratio of 3.73 ahead of Greenway Arbitrage, the next best ranked fund with a Sharpe of 2.60.

new kid on the block

The 'best newcomer award with an inception in 2001' was presented to Appleton Condor European. The judges were impressed with the depth of the investment process employed by this fund of fund manager and the consistency of returns achieved on a month by month basis by the portfolio.

The awards for 'best investment process for fund of funds groups' was split into two categories: one for those with more than $250m and one for those with less.

These awards called for a personal knowledge of the groups short-listed. These are the most qualitative of the awards presented.

The winner in the over $250m under management category is Crédit Agricole Alternative Investment. This was a tough decision to make in a strong field of contenders, but the judges felt Crédit Agricole has consistently managed to use its research and analytical resources to avoid the pitfalls many firms have fallen into.

The winner of the award for the 'best investment process of hedge fund of funds groups with under $250m' ' the funds of funds to watch for in the future ' was Gottex Asset Management.

The judges were impressed by the commitment of this new firm to research and analysis of hedge funds. It was short-listed for a number of performance awards and is building an impressive range of funds of funds.