Hedge fund chief David Lam says he advocates the same strategy in good times and bad to ensure steady returns
Nick Westra 9 February 2009
David Lam has seen all the doomsday forecasts and dismal headlines haunting the markets. But using a time-tested strategy of spreading his bets, he has managed to keep the faith in steady returns while fellow hedge funds fall by the wayside.
Most investors have clung to the sidelines over the past year after watching financial markets buckle under the weight of mounting strains on the global financial system.
But Mr. Lam, managing director of clients in Asia-Pacific at GAM, has criss-crossed the region, counselling clients and private banking distributors about investing for the long term and not putting all their eggs in one basket.
He believes that this storm will pass like others before it and that investors can start positioning themselves for a rebound by learning from the market crash and decreasing the potential for volatility within their portfolios.
“What we try to stress is diversification, diversification, and diversification. That’s what the key is,” Mr. Lam said. “We want to get through to our clients that they should have balance within their portfolio as to what asset class they should obtain, what certain kinds of goals to [set], and what certain kinds of risks [to take].”
GAM aims to develop alternative trading strategies which have little volatility or correlation to general market movements so that investors can rely on them to provide steady returns and complement their overall portfolios. The asset manager has carved a niche for itself in the hedge fund arena by utilising a multi-management concept where its products are constructed through the input of numerous in-house and external fund managers.
About 70 fund managers were working under GAM’s flagship product as of November, for example. “Not only in the asset classes, but even in our managers, we use [so many] that it diversifies the risk as well,” Mr. Lam said.
“Investors need to know that market timing is probably not the best solution, [compared with] ensuring that they find the right partner and professional to help them invest.”
Mr. Lam began his career in Hong Kong in 1982 after receiving a first degree in economics and a master of business administration from the University of Southern California.
Beginning as a trainee at Manufacturers Hanover Trust, which later became part of JP Morgan Chase after a series of mergers years later, he worked his way up the ladder to management positions in the private banking business. His work experience has spanned the financial industry, covering corporate finance, foreign exchange, and private banking management.
“The industry has evolved quite a bit since the day I joined,” he said. “I was lucky to have the opportunity to move from one specific area of the finance field to another.”
His current domain has come under increasing scrutiny, however, as investors spurned hedge funds once they failed to deliver satisfactory returns after credit markets froze up and market sentiment soured. Prominent firms like Highland Capital Management were actually forced to liquidate some of their funds last year to stop the bleeding.
But Mr. Lam said he was not surprised by downsizing in the hedge fund industry, considering how it mushroomed with speculative capital and untested fund managers over the past decade.
And he believes that GAM will emerge as a stronger player in the field by stepping up efforts to educate investors and continuing to provide them with consistent returns.
“Helping clients attain a risk-adjusted return is still a key objective for GAM,” he said.
“Different environments and different economic cycles may drive the client to invest in different regions or segmentations, but ultimately what we try to do is help them achieve returns. That hasn’t changed.”
GAM’s trading strategies last year achieved a 5.8 per cent gain in terms of US currency, according to data from GAM.
You have been a part of the financial industry for over 25 years. When did you decide to work in this field and what sparked your interest?
From my days as a teenager and when I was attending school, I’ve always been fascinated by how the economy works and what fiscal policy and monetary policy are and how they affect the entire economy. That has always been an interest for me, so when I came back [to Hong Kong], I decided to join the financial field.
Are attractive investment opportunities starting to open up after the market collapse? And what would you tell your clients about re-entering the market?
With the entire world modifying fiscal and monetary policy, trying to implement strategies to save the world economy in ways we have not seen before, this has actually created some opportunities.
[And] you just can’t keep your money in cash, getting a zero per cent return. So is it a good entry level? Probably yes. Then it is our job to educate the clients.
Investors seem to have lowered their expectations for returns after the market collapsed last year. Do you think they are just content with preserving capital at this point?
Human nature is always like that. What they want is a steady return with a low volatility and hopefully no correlation to the equity or fixed income markets. That is something which we have achieved for the past 10 years.
We go to clients and say we have a low volatility instrument or financial vehicle which can get you 7 to 9 per cent return, [but] sometimes the clients will forget the year or the couple of years before when they had a negative 45 per cent return and they just focus on [possibly getting] a 40 per cent return in the equity bull market.
This is the kind of education we have to keep going back with and reminding clients.
But with the clients that we deal with, which is the high net worth segmentation and private banking segmentation, I think it is easier than with the mom and pop retailer with HK$5,000 to invest.
How would you characterise your personal investment strategy? What does your portfolio look like?
I have investments in certain managers within GAM because I believe in their contrarian view and I believe in the long term that they may be able to help me build my own net worth.
And frankly, for people like me who are constantly on the road and not looking at the market all the time, we need these professionals to help us over a long period of time to grow that portion of our net worth.
How do you cope with the pressures at work and in the market? And what are some of your interests outside of the office?
I spend a lot of time with my family whenever possible. And I also have another goal of keeping myself very healthy through a change of diets, which helps a lot. But the Blackberry doesn’t help anyone at all!
But it’s a mental thing and you have to be disciplined and take yourself out from work ... it is good to look at the ferries [in Victoria Harbour] rather than look at the monitors.
In December, GAM announced in Britain that it changed its redemption period to once a quarter from once a month. Why did the firm make this decision?
In the last year, there were so many changes and movements against hedge fund managers to modify the terms of redemptions [in order] to protect the shareholders who invested in them.
The whole market environment has changed and in order for us to cope with [it] and to protect our shareholders, eventually we [became] one of the last to modify the redemption terms to cope with the change in the industry itself.
What type of feedback did you receive from your clients following the decision?
Most of the feedback was quite positive as they were expecting this [might] happen because the landscape itself in the fund of hedge funds and hedge funds arena has changed.
And frankly, if we didn’t change, we would be under a lot of selling pressure because if people needed money and couldn’t get out of the other funds they invested in, they could have easily accessed liquidity through our funds, which would create selling pressure on our funds not because of liquidity issues within the fund. It’s like when you can’t get money from your left side, you get it from your right side.
Investors have grown wary of leveraged instruments and high management fees, sparking speculation about cutbacks in the hedge fund industry. How do you think the industry will emerge from the market downturn?
In one of the commentaries that we made globally, we did say once upon a time that we expect over 900 hedge fund managers to disappear globally. Whether we revise up or not from this stage, I don’t know.
But it’s like Darwinism - survival of the fittest. And I think the asset management and hedge fund managers, the more able managers, should be able to adapt to this new environment. So what it will mean is the survival of the fittest of a smaller pool of talented fund managers.
How is GAM weathering the storm, and what factors will ensure that the firm makes it into the smaller pool?
Because of the multi-manager process and because of the selection process that GAM has, we are very much well positioned to be one of the so-called survivors in the industry.
And with fewer players in the market, we will see trades a little bit less crowded.
And it actually brings out who are really the best, so we see this on a positive note because the industry has actually grown too fast in the last five to seven years.
1 comment:
Fund manager spreads bets in survival of fittest
Hedge fund chief David Lam says he advocates the same strategy in good times and bad to ensure steady returns
Nick Westra
9 February 2009
David Lam has seen all the doomsday forecasts and dismal headlines haunting the markets. But using a time-tested strategy of spreading his bets, he has managed to keep the faith in steady returns while fellow hedge funds fall by the wayside.
Most investors have clung to the sidelines over the past year after watching financial markets buckle under the weight of mounting strains on the global financial system.
But Mr. Lam, managing director of clients in Asia-Pacific at GAM, has criss-crossed the region, counselling clients and private banking distributors about investing for the long term and not putting all their eggs in one basket.
He believes that this storm will pass like others before it and that investors can start positioning themselves for a rebound by learning from the market crash and decreasing the potential for volatility within their portfolios.
“What we try to stress is diversification, diversification, and diversification. That’s what the key is,” Mr. Lam said. “We want to get through to our clients that they should have balance within their portfolio as to what asset class they should obtain, what certain kinds of goals to [set], and what certain kinds of risks [to take].”
GAM aims to develop alternative trading strategies which have little volatility or correlation to general market movements so that investors can rely on them to provide steady returns and complement their overall portfolios. The asset manager has carved a niche for itself in the hedge fund arena by utilising a multi-management concept where its products are constructed through the input of numerous in-house and external fund managers.
About 70 fund managers were working under GAM’s flagship product as of November, for example. “Not only in the asset classes, but even in our managers, we use [so many] that it diversifies the risk as well,” Mr. Lam said.
“Investors need to know that market timing is probably not the best solution, [compared with] ensuring that they find the right partner and professional to help them invest.”
Mr. Lam began his career in Hong Kong in 1982 after receiving a first degree in economics and a master of business administration from the University of Southern California.
Beginning as a trainee at Manufacturers Hanover Trust, which later became part of JP Morgan Chase after a series of mergers years later, he worked his way up the ladder to management positions in the private banking business. His work experience has spanned the financial industry, covering corporate finance, foreign exchange, and private banking management.
“The industry has evolved quite a bit since the day I joined,” he said. “I was lucky to have the opportunity to move from one specific area of the finance field to another.”
His current domain has come under increasing scrutiny, however, as investors spurned hedge funds once they failed to deliver satisfactory returns after credit markets froze up and market sentiment soured. Prominent firms like Highland Capital Management were actually forced to liquidate some of their funds last year to stop the bleeding.
But Mr. Lam said he was not surprised by downsizing in the hedge fund industry, considering how it mushroomed with speculative capital and untested fund managers over the past decade.
And he believes that GAM will emerge as a stronger player in the field by stepping up efforts to educate investors and continuing to provide them with consistent returns.
“Helping clients attain a risk-adjusted return is still a key objective for GAM,” he said.
“Different environments and different economic cycles may drive the client to invest in different regions or segmentations, but ultimately what we try to do is help them achieve returns. That hasn’t changed.”
GAM’s trading strategies last year achieved a 5.8 per cent gain in terms of US currency, according to data from GAM.
You have been a part of the financial industry for over 25 years. When did you decide to work in this field and what sparked your interest?
From my days as a teenager and when I was attending school, I’ve always been fascinated by how the economy works and what fiscal policy and monetary policy are and how they affect the entire economy. That has always been an interest for me, so when I came back [to Hong Kong], I decided to join the financial field.
Are attractive investment opportunities starting to open up after the market collapse? And what would you tell your clients about re-entering the market?
With the entire world modifying fiscal and monetary policy, trying to implement strategies to save the world economy in ways we have not seen before, this has actually created some opportunities.
[And] you just can’t keep your money in cash, getting a zero per cent return. So is it a good entry level? Probably yes. Then it is our job to educate the clients.
Investors seem to have lowered their expectations for returns after the market collapsed last year. Do you think they are just content with preserving capital at this point?
Human nature is always like that. What they want is a steady return with a low volatility and hopefully no correlation to the equity or fixed income markets. That is something which we have achieved for the past 10 years.
We go to clients and say we have a low volatility instrument or financial vehicle which can get you 7 to 9 per cent return, [but] sometimes the clients will forget the year or the couple of years before when they had a negative 45 per cent return and they just focus on [possibly getting] a 40 per cent return in the equity bull market.
This is the kind of education we have to keep going back with and reminding clients.
But with the clients that we deal with, which is the high net worth segmentation and private banking segmentation, I think it is easier than with the mom and pop retailer with HK$5,000 to invest.
How would you characterise your personal investment strategy? What does your portfolio look like?
I have investments in certain managers within GAM because I believe in their contrarian view and I believe in the long term that they may be able to help me build my own net worth.
And frankly, for people like me who are constantly on the road and not looking at the market all the time, we need these professionals to help us over a long period of time to grow that portion of our net worth.
How do you cope with the pressures at work and in the market? And what are some of your interests outside of the office?
I spend a lot of time with my family whenever possible. And I also have another goal of keeping myself very healthy through a change of diets, which helps a lot. But the Blackberry doesn’t help anyone at all!
But it’s a mental thing and you have to be disciplined and take yourself out from work ... it is good to look at the ferries [in Victoria Harbour] rather than look at the monitors.
In December, GAM announced in Britain that it changed its redemption period to once a quarter from once a month. Why did the firm make this decision?
In the last year, there were so many changes and movements against hedge fund managers to modify the terms of redemptions [in order] to protect the shareholders who invested in them.
The whole market environment has changed and in order for us to cope with [it] and to protect our shareholders, eventually we [became] one of the last to modify the redemption terms to cope with the change in the industry itself.
What type of feedback did you receive from your clients following the decision?
Most of the feedback was quite positive as they were expecting this [might] happen because the landscape itself in the fund of hedge funds and hedge funds arena has changed.
And frankly, if we didn’t change, we would be under a lot of selling pressure because if people needed money and couldn’t get out of the other funds they invested in, they could have easily accessed liquidity through our funds, which would create selling pressure on our funds not because of liquidity issues within the fund. It’s like when you can’t get money from your left side, you get it from your right side.
Investors have grown wary of leveraged instruments and high management fees, sparking speculation about cutbacks in the hedge fund industry. How do you think the industry will emerge from the market downturn?
In one of the commentaries that we made globally, we did say once upon a time that we expect over 900 hedge fund managers to disappear globally. Whether we revise up or not from this stage, I don’t know.
But it’s like Darwinism - survival of the fittest. And I think the asset management and hedge fund managers, the more able managers, should be able to adapt to this new environment. So what it will mean is the survival of the fittest of a smaller pool of talented fund managers.
How is GAM weathering the storm, and what factors will ensure that the firm makes it into the smaller pool?
Because of the multi-manager process and because of the selection process that GAM has, we are very much well positioned to be one of the so-called survivors in the industry.
And with fewer players in the market, we will see trades a little bit less crowded.
And it actually brings out who are really the best, so we see this on a positive note because the industry has actually grown too fast in the last five to seven years.
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