Investment Adviser & Investment Process
Investment Adviser
Aurora Investment Management L.L.C. (Formerly Harris Alternatives LLC) acts as Dexion Absolute Limited’s (the Company) Investment Adviser and is responsible for the ongoing day to day management of the Company’s investment portfolio.
Aurora Investment Management was established in 1988 with 66 dedicated employees and US$14 billion under management in fund of hedge funds and segregated accounts as at end June 2008. Aurora Investment Management is based in Chicago, Illinois, USA and is registered with the SEC as an Investment Adviser. On 31 December 2003 Aurora Investment Management became a wholly owned subsidiary of Natixis Global Asset Management L.P., which is itself a wholly owned subsidiary of Natixis Global Asset Management, a French institutional money management company. Aurora Investment Management remains autonomous retaining full control of all its investment decisions.
Aurora Investment Management’s principal fund of hedge funds is Aurora Limited Partnership which was launched on 1 January 1988. Aurora’s investment objective is to generate consistent long-term capital appreciation with low volatility and little correlation with the general equity and bond markets through a portfolio having a diversified risk profile. The Company’s assets are managed according to a mandate consistent with that of Aurora Limited Partnership.
Philosophy
The Investment Adviser selects hedge funds managed by independent portfolio managers and actively allocates capital amongst these funds in pursuit of consistent rates of return, with low correlation to equity or bond markets.
Critical success factors that guide the investment process are:
- identifying managers who are the best and brightest within their universe with a proven track record, a sustainable edge and a significant proportion of their own capital invested in the same hedge fund or strategy
- performing extensive, ongoing due diligence on each manager
- ensuring adequate portfolio diversification across asset classes, markets and investment philosophies
In selecting investment strategies, the Investment Adviser considers the return expected from a given strategy, the risk or probability of a significant decrease in value of the investment, the marketability of the securities involved, the extent to which the performance of the strategy correlates with other strategies, the type of investment or economic environment that will affect the particular strategy and the cost of implementing the strategy, including transaction costs and fees.
Manager Selection
The Investment Adviser is responsible for the allocation of Dexion Absolute Limited’s (the Company) assets in accordance with the Company’s investment objectives and investment policy. After identifying a particular investment strategy, the Investment Adviser:
- identifies the principal managers using the selected strategy
- makes a preliminary evaluation of those managers by comparing their performance, size and structure
- interviews those who appear to offer the most attractive investment opportunities
- assesses the personal characteristics of each manager, including their integrity, talent, expertise, flexibility and dedication; and
- evaluates each manager in terms of risk/reward analysis and estimated cost of management
The Investment Adviser attempts to select funds and managers that have specialised expertise, are talented, flexible and opportunistic and whose funds have achieved a high rate of return relative to the apparent risk. In addition, the Investment Adviser seeks to ensure that there is sufficient organisational depth to ensure continuity or, alternatively, to provide liquidity if the manager is unable to execute its strategy effectively.
The Investment Adviser maintains an extensive database containing details on more than 2500 hedge funds and interviews over 300 managers each year. The investment pool currently consists of 73 approved managers.
Although quantitative analysis is important in evaluating a portfolio manager, the decision-making process is subjective to a significant degree as qualitative analysis is an important component of this process.
Portfolio Construction
Portfolio allocation decisions are both top-down and bottom-up. The top-down allocation process reflects the Investment Adviser’s medium term view of the opportunities in each major hedge fund sector. From a bottom-up perspective, the Investment Adviser is seeking to invest with the most talented managers available – to the extent that they identify such managers they endeavour to include them in the portfolio.
The Company’s aim is to be fully invested in a diversified portfolio of hedge funds (or by way of managed accounts) allocated between 5 and 8 different hedge fund strategies. The exact number of funds and strategies used may vary over time but will comprise a minimum of 20 funds implementing at least 5 different strategies.
Risk Management
Risk is assessed at both the portfolio and manager level both quantitatively and qualitatively. Quantitative measures used include standard deviation, downside deviation and returns and correlations in different market environments. Qualitative factors include an informed analysis of the manager’s knowledge and experience.
Each month analyses are run that look at the portfolio by strategy and manager to evaluate risk. The factors considered include leverage, liquidity of the instruments traded, largest risk positions, redemption provisions of the underlying managers, long/short concentration, and geographic distribution. In this way, the Investment Adviser seeks to monitor inadvertent concentrations and makes adjustments if appropriate. Capital allocated to a manager may be withdrawn or reduced for a number of reasons including:
- a reallocation of assets among the Company’s investment
strategies - a change in the manager’s strategy or discipline
- a significant change of circumstances with respect to a manager including changes in assets under management or the departure of key personnel
- a conflict or potential conflict of interest
- performance that is low relative to the performance of other prospective managers using the same or similar investment
strategy; and - identification of new prospective managers whose performance records are superior to current managers using the same
investment strategy