CPP Investments' Heather Tobin Gives an Overview of Absolute Return Strategies
This clip is orientated towards regular Canadians who never invested in a hedge fund or don't know what absolute return strategies are and she gives a nice overview in 4 minutes.
One thing I will recommend to CPP Investments is it post a transcript that accompanies these short clips (yeah, I'm lazy, I read faster than I watch and it would make my life easier).
Anyway, Heather does a great job giving a quick overview of what her team does at CPP Investments stating this:
The department runs a highly diversified global portfolio across two core strategies.
The first core strategy is our External Portfolio Management Program. This team invests in public market managers across a broad range of global asset classes and strategies.
The second team is our Systematic Strategies Group and this group develops and manages quantitative programs by investing in equities, fixed income, currencies and commodities.
Our position as a top allocator globally to external public manager programs allows us to bring a market aware perspective not only to how we assess the performance of own strategies but equally to how we think about portfolio construction and portfolio resiliency within Capital Markets and across the Fund.
So why does this matter? This approach allows CPP Investments to access a broad range of insights across global public markets, across asset classes and strategies through working with trusted partners that allow us to generate alpha and enhance diversification for the total fund.
The two skills I consistently see in top performing team members are to cut through complexity and communicate with clarity.
Now these skills have always been important but they are truly so important at this moment and time when things around us are changing so rapidly.
I'll let you watch the rest below but let me give you some quick thoughts.
First, CPP Investments is a top allocator to global private equity funds and hedge funds.
You can actually see a list of their top hedge fund partners here.
Surprisingly, no investments in Citadel, Millennium and other top funds that go way back to the years I was investing in external hedge funds at La Caisse (over 20 years ago) but I did recognize some global macro funds like Bridgewater and Rokos Capital Management.
I recognized a few others and to be fair, they mix long only funds with absolute return funds in their list of partners and I've been out of that game for a long time so I don't know any of the newer funds (loved meeting and grilling managers, hated the travel and bogus hedge fund conferences, drove me nuts).
The person in charge of CPP Investments' External Portfolio Management Program is Amy Flikerski. Back in November 2024, she discussed the evolving landscape of external portfolio management with the Top Traders Unplugged ‘Allocators’ podcast:
As Managing Director & Head of External Portfolio Management at CPP Investments, Amy Flikerski and her team of forty, spanning offices in London, Toronto, New York, and Hong Kong, are responsible for a $60 billion global portfolio. In the latest episode of the Top Traders Unplugged ‘Allocators’ podcast, Flikerski discusses the evolution of the hedge fund industry, strategies suited to external management, and CPP Investments’ emerging managers program. She was recently named to Financial News’s list of the 100 most influential women in European finance.
*The following has been edited for clarity and brevity.
How do you see the role of external portfolio management within CPP Investments’ overall ($600 billion) portfolio? Is it a kind of a volatility dampener?
Amy Flikerski: Our external portfolio management team (EPM) seeks a return profile that’s a little bit different compared to other strategies at CPP Investments. EPM is absolute return-focused and has more consistent volatility than some of the long strategies like infrastructure investing or direct private equity. It has those properties of, hopefully, convexity as well as being adjusted for volatility. And it’s coming from different sources than those more beta-oriented, market-oriented types of (typically) equity exposures.
Some allocators have said the changed macro environment in the last number of years—following COVID and amid more volatility in rates—has made this a more favourable environment for hedge funds.
Amy Flikerski: We definitely agree with that sentiment; higher rate environments ensure a healthy level of volatility, and prompt more dispersion across security types and asset classes.
Any observations on the evolution of the hedge fund landscape in the 12 years you’ve been at CPP Investments?
Amy Flikerski: I’ve been in the space for over 20 years and during that time I’ve seen a lot. The market has evolved; some of the large managers of the past have been acquired, merged or just shut as founders retire or as there’s difficulty determining succession plans. There’s no ability to coast along just because groups have a lot of assets under management, and I think we’re very attuned to that as fund investors. As of late we’ve seen a big rise of platforms in terms of scaling, growth and talent, and how the pass-through model is impacting the industry.
Within CPP Investments, which strategies lend themselves to being done internally versus sourcing managers externally?
Amy Flikerski: We’ve always run our investment efforts in parallel. We’ve historically thought of external allocations a kind of completion exposure: allocating into strategies that wouldn’t be able to be done internally, whether those are quantitative strategies that require a lot of specialized infrastructure, as well as talent, speed, modelling et cetera.
We do some degree of internal quant investing around risk premia. Externally, we would probably look at more event-driven, catalyst-driven types of fundamental managers, with shorter duration investment horizons, whereas our internal active equities colleagues are looking at the longer horizon, larger positions.
We run internal investing where we have the skill set as well as capabilities.
CPP Investments has had a well-established emerging manager program for nearly 10 years. What was the rationale for introducing your emerging manager program and how do you think about making allocations to emerging managers?
Amy Flikerski: We established the dedicated emerging manager program in 2016, but prior to that we had been investing in emerging managers outside of the dedicated program. I should define how we think about emerging managers. This is purely looking for best-in-class investors that are newly launched. We also think of this as capital acceleration, which could be a manager a few years after the initial launch, who’s looking to take in a large investor. A day-zero type investment would be more of a seed, where the anchor investor will take revenue share to mitigate the early-stage risks. Whereas with capital acceleration, we are looking more for the founder’s life terms.
Emerging manager investing, which allows us to invest early, secures future capacity rights and early-stage performance. Emerging manager investing is a complement to the core fund managers in which invest, and strong performing emerging managers can ‘graduate’ to the core program.
What is the typical profile of an emerging manager?
Amy Flikerski: Our framework is around people, process, performance. That’s pedigree, that’s the repeatability of the strategy they’re employing. We’ve invested in traders or investors who came out of banks, people who have a very high profile and came out of large hedge funds themselves. We’ve also invested sometimes in number two-type portfolio managers who feel ready to launch their own groups.
Performance information can always be a bit of a pastiche. We may have a track that’s vetted and sometimes we have very little or nothing.
How do you think about the portfolio construction and turnover within it?
Amy Flikerski: We’re definitely longer-hold investors. But we’re not just investing forever and that’s it. We’re on top of the day-to-day and we’re always evaluating. We do, for example, a quarterly review of the entire portfolio.
If something has shifted to the negative, we try to work through that. On occasion we’ve been very quick, but on balance we tend to give more time rather than less for managers to work out performance, team or strategy issues. It’s roughly a two- to three-year initial horizon, but we’ve had managers in the program who’ve been there for over a decade.
Listen to the full podcast.
From what Amy said, they launched their emerging manager program back in 2016 and it continues to be an important part of their activities.
For example, Bloomberg reporter Nishant Kumar recently posted this on LinkedIn: "Ex-Millennium senior portfolio manager Ed Cooper to manage money for CPP, Partners Capital and in talks with a multistrategy hedge fund for additional cash. He is expected to start with between 400-500 million this year."
But given CPP Investments' size and it really has limited choice but to ramp up that emerging manager program, securing future capacity, negotiating lower fees and co-investments, and having an equity stake in the management company where there's more upside if things go well (not sure if they negotiate this).
I'll put it to you this way, CPP Investments is already close to CAD$800 billion in assets under management, in order for that External Portfolio Management Program to add significant alpha, it needs to secure capacity with existing and new funds primarily in highly scalable and liquid absolute return strategies.
They don't have much of a choice, investing in arcane, illiquid strategies which aren't scalable will not move the needle in any meaningful way.
How do I know all this? Again, I used to invest in top directional hedge funds at La Caisse back in 2002 and was one of the first to invest in Bridgewater among institutional funds in Canada and other top macro, CTA and L/S Equity funds (I also had a few top short sellers and funds of funds).
I still track top funds' quarterly activity mostly for fun and because I love markets and trading.
I read the latest news on hedge funds but I am so far removed from that world and that's probably a good thing because I'd be grilling them even harder these days as I know a lot more about markets and their strategies.
Nowadays, external absolute return strategies are back in vogue, there is a high demand for top funds and securing great capacity because liquid alternatives are outperforming illiquid ones on an absolute and risk-adjusted basis.
That means top funds can charge hefty fees and pass through fees and if you don't like it, tough luck (another reason why I'm so glad to be out of that game, you have to put up with a lot more nonsense these days).
Alright, let me wrap it up there and maybe one day, I'll ask John Graham to give me access to Heather Tobin, Amy Flikerski and others across public and private markets so I can interview them properly and really dig a lot deeper into their operations and how they approach absolute return and other strategies.
That's what I love doing nowadays, that's where I add value.
Below, Heather Tobin, Senior Managing Director & Global Head of Capital Markets and Factor Investing, shares insights on the role of disciplined absolute return strategies in long-term oriented portfolios.
Also, Amy Flikerski, Head of External Portfolio Management at CPP Investments, joins Alan Dunne in this episode to discuss allocating capital to emerging and established hedge funds. They delve into the evolution of the hedge fund industry from the perspective of an allocator and particularly how the growth of the large multi-manager multi-strats has impacted hedge fund allocating.
Amy discusses the role of the External Manager Allocations in the context of CPP Investment’s overall portfolio and some of the key considerations from a top down and bottom up perspective when the portfolio is constructed. She also highlights how CPP Investments evaluates emerging managers, what makes a great hedge fund manager and also offers valuable advice for hedge fund managers when engaging with allocators.
Comments
Post a Comment