Austrian roundtable celebrates extended relationship with alternatives
By Beverly Chandler, Opalesque London, Monday, July 25, 2011
The Opalesque Austria Roundtable, sponsored by Salus Alpha Group and the Opalesque Roundtable Series Sponsor Custom House Group, and held in Vienna at the end of June, opened with a discussion on how lengthy is the country’s history in alternatives.
The panel consisted of Mark Cachia, Head of Alternative Investments, Erste Group; Martin Greil, Co-founder and Secretary General of the Alternative Investment Association VAI; Günther Herndlhofer, Investment Manager, VBV Pension Fund; Oliver Prock, CEO and CIO, Salus Alpha Capital; Marie Milford, Managing Partner & CEO, Asset Allocation Alpha and Günther Kastner, Managing Partner, Absolute Portfolio Management.
Prock opened the discussion pointing out that Austria has a considerable history in alternatives and is often seen from abroad to have a strong leaning towards CTAs and quantitative strategies. However, he said: "Over the more recent years, the industry here has grown and matured, and many different strategies are run out of Austria as of today. Of course, back then the barriers of entry in managed futures were not as high as we find them nowadays. In the early days it was possible in Austria to establish different onshore structures for alternatives. That was quite favorable for the development of a small niche industry here."
Growth in alternatives in Austria also came from institutional investors. "It is also important to notice that the Austrian institutional investors also favored the development of alternatives, which was due to their innovative asset allocation and a focus on performance and diversification. We do a lot of business in Germany, and just as a comparison, their institutions only recently started to include a 5% alternatives basket. The Austrian investors were a little bit ahead of that because they believed in it. People like Maria, at her previous work at PSK, or myself at Erste Bank at that time all had an alternatives allocation. However, the bad thing was that even though all of this favored the development of a local industry, foreign funds definitely got a bigger chunk of the money than the local funds."
Milford agrees, looking back to the mid 1980s to see the roots of the Austrian alternatives industry. "In order to understand where we are today, let me go even a bit further back in time to the mid 1980s when the whole banking industry went through profound changes" she said. "At that time the - let's call them - "old boys" were retiring, and a new breed of CEOs and Boards of Directors emerged, who were instrumental in using and even creating some of the instruments which were new then and are today standard tools and investments. I remember for instance, when I started in the Economics Department, one day I saw my boss drawing squares and arrows, and I asked him: "Walter, what are you doing here?" and he said, "Maria, look, that is very interesting. It is called Swap! You have here a bucket of money and there a bucket, and then you just exchange the interest payments!" And soon after that, he actually traded one of the first swaps in Austria."
Milford remembers stepping into what she calls frontier territory with investing part of the bank’s book into futures. "There were no screens or direct access, we had to send faxes of our orders to JP Morgan in the U.S., and the next day we received the confirmation from them. Maybe this is a feature of Austrian corporate culture. If we had good ideas, we could actually realize them."
Milford was asked by the Board of Directors of her bank to set up a portfolio with each and every risk except fixed income. "They actually expected me to start an equity portfolio. I said that it was not wise to start an equity portfolio at that time. I suggested a move into hedge funds instead, and the two people in charge on the Board thought for some time and came back to me and approved it. You have to be aware that this happened at a time when CalPERS for example didn't even consider investing into hedge funds."
Being ahead of the game, at least in continental Europe, meant that Milford always liked the hedge fund industry for its role as a boutique and niche industry. "Things changed when in 2002/2003 the whole alternatives industry moved out of niche into mainstream, which in the end has become less and less entrepreneurial, in my view. After 2008, things got even worse, and to a certain extent some investors may even be reluctant to invest what should be their alternatives diversification into another mainstream world or mass market" she said.
She believes that the hedge fund industry is split up into two parts. "On one side you have the large mega hedge funds that are preferred by the institutional investor market. I think they are very useful, they are a good thing to invest into, but because they are so large they operate by certain rule: you have to look at yearend figures, and your terms regarding liquidity and transparency have to correspond to what your institutional investor base expects."
"And on the other side there is still a very small market out there that are very interesting, you find still some of the let's call it "old style", or the "old hedge fund boys" who really arbitrage this mainstream market. Because they are free, they do not have to look at year-end and so on, they can be much more niche and opportunistic" Milford says.
"Don't get me wrong, the institutionalized market is a good development and we need investments there. But at the same time, they are not the same as what we have seen 15 years ago or more; these firms are different."
