Henry Kneis, CEO and chief investment officer of Toronto-based Abria Asset Management Inc., views the world of hedge funds in much the same way as a traditional equity mutual fund manager would view financial securities.
Instead of stock markets, his investment universe consists of 8,000 hedge funds from around the world. His goal is to cherry-pick a diverse group of the best global hedge fund managers to create a pool of complementary funds with low-risk, steady returns and the ability to preserve wealth when traditional markets are in a tailspin. Typically, single fund managers within the fund of funds represent 3% to 5% of assets, and never more than 10%. "The hedge funds of the world are the 'securities,' we pick from," says Kneis. "We filter them based on the strategies we're interested in and the quality of the managers. In the last few years there's been an explosion of hedge funds, but only about 10% are worth serious consideration."
Abria Diversified Arbitrage Trust, managed by Kneis, last month took home the award for "Best Fund of Hedge Funds" at the 2004 Canadian Investment Awards. The $164.7-million fund has a 4.9% average annual return for the three years ended Dec. 31, far ahead of the median return of 1.8% for the Alternative Strategies category.
The fund is sold by offering memorandum and is available only to accredited investors who can meet provincial standards, such as the $25,000 minimum initial investment required in Ontario.
Since its launch in February 2000, Abria Diversified Arbitrage Trust has experienced positive returns on a monthly basis 80% of the time. Kneis employs "market neutral" strategies, which means returns are not tied to the direction of underlying financial markets.
He also aims for tax efficiency within the trust structure, emphasizing capital gains rather than income. He employs derivatives to keep the fund fully RSP eligible as Canadian content, even though its returns are based primarily on international exposure.
Kneis's diversified team of independent fund managers employs various arbitrage strategies, including convertible, merger, volatility, fixed income, and equity long/short. Currently, there are 29 global managers contributing to Abria Diversified Arbitrage Trust, although the number ranges from 25 to 35. There is about a 20% turnover of fund managers annually, as strategies move in and out of favour or fund managers stumble.
"If there was a major problem in any one fund within the trust, it would be an unhappy event but not a business limiting event, due to diversification in the portfolio," Kneis says. "I wouldn't choose to invest with a single hedge fund manager any more than an equity manager would put an entire fund into one stock."
Kneis has more than 17 years of experience in market neutral arbitrage and equity derivatives trading and development. He graduated from the University of Toronto with a bachelor of applied science in engineering in 1985 and went on to earn his MBA from York University in 1987.
He was then hired by First Marathon Securities Ltd. as a "market neutral" proprietary account trader. He began using index arbitrage strategies, and when the stock market crashed in October 1987 he sailed through with positive returns.
"I was 22, barely out of school, and green when the 1987 crash happened," he says. "It was a career-defining moment. I realized that analysts couldn't predict the overall direction of the market in any meaningful way. I also realized market risk could be hedged away with arbitrage strategies, and that seemed a lot safer and more sensible."
Kneis branched out into other types of arbitrage strategies using warrants, options, and instalment receipts, and expanded geographically. He became a senior partner at First Marathon Financial Products by 1989, and then headed the Canadian and U.S. arbitrage desks. In 1997, he started an alternative strategy fund-of-funds to invest the firm's money, and in 1999 introduced a market neutral arbitrage fund for high-net-worth investors.
Desiring more control of his own destiny, he left that year to start Abria and launched its fund-of-funds portfolio in 2000, just as the technology boom was going bust.
Kneis's strategies are constantly evolving, as inefficiencies in the market attract arbitrageurs. For example, securities such as credit default swaps have only become highly liquid in the past few years.
On the other hand, opportunities for merger arbitrage have withered. That's because the technology stock meltdown sapped the value of company shares that were being used as currency in many mergers and acquisitions.
"We are constantly on the lookout for interesting niche ideas, and must be prepared to be nimble and go where others have not yet ventured," Kneis says.
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