Elkstone Private is Ireland’s largest private investment office and CIO Karl Rogers recently completed 15 months. AlphaWeek’s Greg Winterton spoke with his Rogers to learn more about his take on the hedge fund space and how Elkstone sees its applicability to clients.
GW: Karl, when you first joined Elkstone, the world seemed to be coming out of the Covid-19 pandemic and the world was getting back on its feet. But it’s a very different world now. Tell us more about the questions your Elkstone clients are asking you, their concerns, and what you tell them.
KR: Yes, it’s certainly been a volatile few years with a lot of headline news. Concerns quickly reverted to a more “normal” investing picture, mostly related to his ESG issues, before 2022 hit, due to concerns over the coronavirus. Now the question has shifted to the macro-environmental outlook from falling inflation, equities and bonds, and consequently to the question of when to get involved.
Going into 2022, we are already underweight equities and have little exposure to bonds. Recently there have been questions about when to start weighting in both areas. Our investment committee is looking at tactical allocations given that the stock market is down his 25% and interest rates are trending up again.
Investors are currently at a difficult psychological crossroads, with some saying they won’t buy because the valuation is too high at the end of 2021 and others saying they won’t buy because the price is too high at the end of 2022. I’m here. drop”. No one can perfectly time the market, but from a medium- to long-term perspective for HNWI, we are starting to see some buying now as it is discounted. Long-term equity weighted because we don’t think we’ve bottomed out yet. The market should see both valuation compression and earnings compression. I wouldn’t be surprised if more pain hits the stock market.
GW: Your views on the hedge fund space are very strong. As an allocator, what strategies do not pass Elkstone’s tests and why?
KR: I think the best way to answer that question is to provide some insight into how we look at hedge funds and hedge fund philosophies. In no particular order, 1) Hedge funds see it as a role within the overall portfolio rather than as an absolute holding or an isolated entity within the investment portfolio. 2) Hedge funds are structures, not strategies – Hedge fund structures have access to strategies, markets, and managers that the rest of the portfolio cannot reach. That’s what this portfolio’s allocations are focused on. 3) The goal of each hedge fund holding is to provide diversification and thus alpha to the core portfolio, which tends to be equities and liabilities or loans.
With that fixed perspective in mind, it’s easy to overlook key hedge fund strategies such as long/short equities and global macros. This is because we believe there is a mismatch between these strategies and the philosophy of this part of the portfolio. If you look at hedge funds within the overall portfolio, they already have significant equity and traditional market exposure, and are cheaper, and we believe hedge fund allocations should provide diversification. Diversification from is very difficult to achieve when you are running significant AUM within the market you are trying to de-correlate. Since we are trying to be uncorrelated with our core portfolio, we are trying to use hedge fund structures to access markets and strategies that are considered fundamentally unrelated to our core portfolio. I tend to read it across investment media.
GW: What about those who do? What strategies and exposures do you prefer and why?
KR: We seek to concentrate hedge fund portfolios on managers operating in inefficient, non-traditional markets, or strategies that isolate returns from structural market inefficiencies. . As a respective example, an inefficient non-traditional market that fits the bill is electricity. This is a market that I personally used to trade in and it’s very hard to talk about the inefficiencies that exist and the fact that stocks and interest rates don’t affect the profit or loss of a trade if you’re trading power. It’s comfortable. An example of structural inefficiency is copper arbitrage. The physical nature of the metals market can create price discrepancies at the geographic level available to traders. Crucial to our hedge fund philosophy is that traders are able to isolate returns solely on structural inefficiencies rather than general copper prices. This is important for manager trade settings. Because you’re isolating the return of inefficiency rather than capturing general market exposure, which can be done much cheaper.
GW: You are a special advisor to the ESG Foundation. In investment terms, what do you think about the intersection of hedge funds and ESG? Do you think the industry can and should do better? Do you sympathize with those who say you are too contradictory?
KR: We’re already seeing regulators effectively invalidate claims that the “data quality isn’t good enough.” I think it’s a mismatch when it comes to hedge funds and ESG. In my personal opinion, across the liquid investment universe, ETF and UCITS structures are essentially executing his ESG sector investments and are aimed at those who have that mandate. I’m doing it. I don’t think active Liquid his manager will continue to collect assets with the goal of beating benchmarks based purely on his ESG trends.
I said earlier that hedge funds are structures. All else being equal, we are committed to using private credit, private equity and ventures to provide access to technologies and companies that have real impact and meet ESG and sustainability requirements. I like
As such, our hedge fund allocations are free of ESG obligations.
GW: Finally, Carl, Elkstone also has venture capital and real estate initiatives. What is your overall approach to allocating client portfolios to “alternative investments”? Do you use some of the same screens you use in the hedge fund space or are they different? Why is that? is it?
KR: We believe that alternative investments are very important within a portfolio, and we have no problem giving them a high weight. When it comes to the interesting question of using the same screenings that venture and real estate hedge funds use, it’s important to bring out an even more important screening nuance. That is, analyzing direct investments and allocations to external managers.
Let’s take our venture activities as an example. We are a very active early stage venture investor with a direct portfolio of over 46 companies, providing sourcing, due diligence, execution and ongoing strategic support to companies. It also concludes direct early-stage Irish exposure from its portfolio with an investment in an external venture fund. Analyzing a portfolio company is very different from analyzing the team of people who analyze and execute the portfolio company. The same is true on the real estate side as we source, analyze, finance and execute projects in-house. This is a different proposition than investing in an outside real estate manager that requires a different skill set. Another nuance is to analyze closed-ended funds with quarterly, semi-annual or annual data points and open-ended funds with daily monthly data points.
Venture, real estate, and hedge fund analysis are all quite different as they require different skill sets, but what runs across the portfolio is the investment philosophy for what you’re looking for in that component of the portfolio. So that each investment is part of the overall portfolio and not on its own island, you have to look at the name of the structure to determine where it fits, whether it’s hedge fund allocations, real estate , venture or public equity markets, commodities, etc.
Carl Rogers Chief Investment Officer of Elkstone Private