Investment Adviser & Investment Process

Investment Adviser




K2 Advisors LLC acts as the Company’s Investment Adviser and is responsible for the ongoing day to day management of the Company’s investment portfolio.

K2 Advisors was founded in 1994 and as at the end of July 2008 had 78 employees and approximately US$7.4 billion in assets under management in fund of hedge funds. K2 Advisors is a dedicated fund of hedge funds manager and is privately owned, the substantial majority of the equity being held by the founders, David Saunders and William Douglass. K2 Advisors is headquartered in Stamford, Connecticut with offices in New York, London, Tokyo and Sydney. K2 Advisors is registered with the US Securities and Exchange Commission as an investment adviser.

K2 Advisors’ first fund of hedge funds, K2 Investment Partners LP, was launched in October 1994 and has delivered, since inception to 31 July 2008, an average annualised US$ return of approximately 12.8%. The Company’s assets are managed according to a mandate consistent with that of K2 Investment Partners LP.

Philosophy


The Investment Adviser seeks to generate superior investment returns while preserving capital by selecting a diversified group of hedge funds managed by portfolio managers who have demonstrated superior investment performance or who the Investment Adviser reasonably believes have the ability to achieve such performance.
This investment philosophy and approach has been consistently applied by the Investment Adviser since October 1994. Critical success factors which drive the investment process are:

  • a senior management team with practical hedge fund experience;
  • early identification of, and investment with, new portfolio managers to secure future capacity and holdings-based reporting;
  • the ability to identify increased risk to existing portfolio managers and/or hedge fund strategies; and
  • ensuring adequate diversification across investment strategies, industry sectors and markets.

Manager Selection


The Investment Adviser is responsible for the allocation of the Dexion Equity Alternative Limited’s (the Company) assets in accordance with the Company’s investment objective and investment policy. In selecting hedge funds, the Investment Adviser applies stringent and continuous qualitative and quantitative due diligence procedures to evaluate portfolio managers and analyse their investment strategies.

Specifically, the Investment Adviser seeks portfolio managers who satisfy the following key criteria.

  • Portfolio managers that have demonstrated an ability to achieve superior investment performance over a period of time. The Investment Adviser will attempt to assess a portfolio manager’s investment philosophies, skills and strategies to determine whether such strategies are likely to be successful in the future.
  • Generally, portfolio managers that have a portion of their personal assets and net worth invested in their own hedge funds.
  • Portfolio managers that have sufficient liquidity in their investment strategy. The Investment Adviser pays close attention to the total assets under management of each of the hedge funds in which the Company is invested. Once a hedge fund becomes too large, liquidity can be a detrimental to its ability to invest in certain attractive opportunities as a result of fewer investment choices and the hedge fund, by its own size, moving the markets of the securities in which it is trading, thereby causing further deterioration in its investment returns.
  • The portfolio manager’s success is the result of a diversified portfolio and the fund is not heavily dependant on any one particular portfolio position.
  • Portfolio managers that have proper professionals and advisers to assist in the management of their fund. The Investment Adviser conducts regular on-site visits to evaluate a portfolio manager’s support infrastructure and assesses the portfolio manager’s custodian, accountant, lawyers and prime brokers. The Investment Adviser conducts regular on-site visits to evaluate a portfolio manager’s support infrastructure and assesses the portfolio manager’s custodian, accountant, lawyers and prime brokers.

Portfolio Construction


The Investment Adviser combines a top-down process to determine strategy weightings with a bottom-up manager selection component. Portfolio construction is also influenced by the Investment Adviser’s risk assessment of both the investment strategy and the portfolio manager.

Generally 60 – 70% of the Company’s assets will be invested in equity long/short strategies intended to generate a higher return but with a higher volatility with 30 – 40% invested in low volatility strategies such as relative value arbitrage, distressed securities and merger arbitrage intended to generate lower but less volatile and more consistent returns. The Investment Adviser will generally seek to procure that (i) not more than 10% of the Company’s total assets are invested in any one fund, (ii) the Company will not have a net exposure (in particular netting off long and short positions) to any single industry sector exceeding 25% of its total assets and (iii) with the exception of equity long/short, not more than 20% of the Company’s total assets are invested in any single hedge fund strategy, although it may deviate from such guidelines from time to time.

The exact number of funds and strategies used may vary over time but the Directors expect that, consistent with the investment strategy of K2 Investment Partners, the Company will be invested at all times in a minimum of 20 underlying funds implementing at least 3 different strategies.

Risk Management


K2 Advisors implement an advanced approach to risk management. Over 87% of underlying portfolio managers (including prospective managers) provide monthly security position or sector level transparency, directly or indirectly, to independent third party risk analytics providers who in turn provide the Investment Adviser with a range of analyses including an independent mark-to-market of securities and detailed exposure reports at the portfolio manager and aggregate portfolio level. Independent pricing of individual security positions and the ability to identify portfolio concentrations and correlations at both the portfolio manager and aggregate portfolio level enables the Investment Adviser to assess two key sources of risk in hedge fund investing.