Cube Capital, the alternative investment fund management house, has made some significant changes to its asset allocation through its fund of hedge funds business. The business is a substantial one: it has 50 staff working in London, Hong Kong, Moscow, Shanghai and Beijing. Among its regulatory arrangements is registration by the Securities and Exchange Commission in the US. The firm says this environment is also one in which Cube believes fundamental stock-picking should generate superior returns. This leads them to equity managers in areas such as event-driven strategies. Cube’s managers are raising allocations to equity-orientated managers in US small/midcap financials.

This publication recently questioned Scott Gibb, partner and portfolio manager at Cube Capital about its business and strategy.

How large is Cube's FoF's business in terms of total assets under management?

The Cube Global Multi-Strategy Fund of hedge funds has $748 million of assets under management; its fund-of-funds has $830 million.

Where is it based?

Cube has primary offices in London and Hong Kong. The CGMS portfolio management team is based in London.

How many funds, on average, does the FoF basket hold on a regular basis? Does this fluctuate?

We target 25-35 managers in the portfolio, with a maximum position size of 10 per cent. The number of managers is driven by the opportunity set and market environment. Often we will be at the high end of the range when there are many good opportunities available, or if we are in a period of transition with overlapping redemptions and subscriptions.

Can you give me some indication of recent returns and volatility?

CGMS’ annualised historical volatility is 5.51 per cent and Sharpe ratio is 1.15 over 12m LIBOR average.  CGMS has outperformed the index almost three fold on an annualised basis.

What sort of clients does Cube aim at (family offices, private banks, pension funds, other)? 

Pension funds; endowments; family offices, private banks, sovereign wealth and ultra high-net worth individuals.

Please give me a short history of Cube and who its main people are.

The firm was created in 2003: Cube Capital established by founding partners Francois Buclez, Oleg Pavlov and Alan Sipols. Cube Global Multi-Strategy Fund (CGMS) was launched in that year. In 2006,  Cube opened an office in Hong Kong. In the same year, Scott Gibb joined and became portfolio manager of Cube Global Multi-Strategy Fund. In 2009, the Cube Global Opportunities event driven hedge fund was launched. In 2009, Thomas Holland, head of Asia, appointed partner. In 2011, Janene Waudby (general counsel) and Scott Gibb (portfolio manager, CGMS) appointed partners of Cube Capital.

Strategy, the statement says that Cube is raising allocations to areas such as CTA and global macro, and yet it also says that the environment is getting better for stock picking. Would not the latter point be more of a case for areas such as relative value and arbitrage strategies rather than macro?

In the current environment correlations are declining across asset classes as well as intra-asset class. Growth divergence and policy divergence mean that the opportunity set for macro managers is large – there are directional and relative value opportunities between the yield curves of different countries, strong fundamentally driven foreign exchange opportunities as well as the ability to trade different global equity markets given the “global de-synchronisation”. This is why we are excited about the opportunities in macro where the risk-on/off environment led to little ability to generate robust and diversified returns.

Likewise, with intra-asset class correlations decreasing, we continue to like the opportunities available from strategies that exploit the dispersion between winners and losers. In this regard low net exposure long short equity, sector specialists and event driven strategies stand out. Where managers can get paid for being fundamentally correct about the beneficiaries of the improvements in regional growth, strategy or financing in an environment with a normalizing US yield curve relative to those that are struggling to get financing, are servicing markets which are in structural decline, or in fact simply have a failing business model. The environment for this is ripe as investors become more discerning in their search for yield, the comprehensive access to high yield bond markets is diminishing and some companies will not be able to issue with terms that make survival viable.

What sort of risk constraints and tests do you apply to when to enter and get out of a strategy, and why?

The risk constraints we consider - the tests or criteria we apply - are dependent on the strategy or underlying manager being considered. CGMS’ strategy selection process is driven by top-down themes where the fundamental aspects of valuation and the technical aspects such as price action and importantly flows across asset classes are crucial. Generally, we are looking for capital misallocations. These elements drive the idea generation and discovery process. Quantitative inputs are likewise relevant to portfolio construction and testing of the size of new strategies or managers. We use an internal “expected beta” framework that estimates the reactions of the current (or prospective) portfolio to our expectation of the future economic environment. This framework allows us to identify a risk level most suited to benefit from the market.

We size up every investment in comparison to the amount of capital flowing in or out of the opportunity - this holds true for both the setting of the investment environment by the investment committee as well as the portfolio construction and manager selection / termination decisions. The investment committee will generally formalise these opportunities into themes and sub-themes.  The investment team then uses these themes and sub-themes as the basis to go out and identify managers, strategies and asset classes through which we may access the opportunities.

You talk about three themes - de-leveraging, demographics and distressed, and give a small idea of why you like them. Can you elaborate?

We’re currently transitioning our themes to bring them into alignment with our top‐down view. We’ve been cautiously optimistic since the market rally began, using the overlay as a hedge, reconsidering the effects of the changing economic environment ‐ the potential unwinding of extraordinary policy across the developed world. Our work suggests that the attractive opportunities with regard to size and capital allocation have shifted.

We are transitioning away from the deleveraging theme to reflect a normalizing of interest rates. We are transitioning some of our long-term CTA, FX and Macro managers to the Yield Curve and Rates Normaliation theme, given their shift in posture and our expectation that they will be driven by the shape of the US yield curve, perceptions about future interest rate decisions, and divergent policy trends. With respect to new managers for this new theme, we will add global macro and will consider returning to mortgage derivative strategies in order to capture the negative convexity as rates back up.

An important aspect in our portfolio positioning going forward is our belief the world markets are becoming less synchronised. The liquidity driven markets before the crisis, and the policy interventions during and since the crisis have been significant drivers of markets and kept correlations relatively high. Globally synchronised risk‐on/off is something that we believe is diminishing as regional and asset class volatility becomes driven more by the differing respective underlying fundamentals of each region than by generic policy pronouncements.

We have developed a theme we refer to as Regional De‐Synchronisation and Stock Dispersion, where we will reclassify several of the “all‐weather managers”. They will be represented in this theme as their ability to generate alpha from fundamental positioning is enhanced although their inherent ability to generate returns with low net exposure and high quality risk management. We will also transfer some funds from the Regulatory Change theme where the dominant return driver has shifted from the immediate aftermath of policy related decisions to the lower correlation of risk assets. Manager additions will be based on their ability to select winners and losers due to the diverging fundamentals across regions and asset classes. This theme will primarily consist of exposures in sector specialists and event driven strategies with low net exposure.

We expect to continue to grow our Africa exposure, should the dynamics and liquidity continue to improve. We believe that several of the African markets remain cheap relative to comparable risk assets globally. Our emphasis on Africa is based on our fundamental research. We’ve spent time on the ground in Latin America and Asia, and continue to monitor BRIC type exposures, but there are few opportunities that offer as compelling a risk/reward scenario.

We are transitioning out of our distressed theme based on the fewer opportunities presenting themselves. Although, it has been a top performing strategy (as US economic growth has started on a more sustainable track), there have been fewer distressed opportunities developing over the recent period. This consists of only the proportion of one of our managers that we classify as distressed situations. This theme is being phased out in our new thematic allocations.