104 | Absolute Return Investing

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Tutor

  • Chris Childs, Senior Fund Manager, BMO Global Asset Management

Learning outcomes:

  1. How absolute return investing differs from real return, alternative or multi-asset investing
  2. The different techniques managers use to try and generate an absolute return
  3. How to go about researching absolute return funds

Kepler research on absolute return funds

Channel

Asset Management
Learning outcomes: 1. How absolute return investing differs from real return, alternative or multi-asset investing 2. The different techniques managers use to try and generate an absolute return 3. How to go about researching absolute return funds CHRIS CHILDS: Well, Mark, we live in a world of jargon and semantics, and there probably isn’t a single definition. Although of course you can go back and do a Google search and say well what is absolute return? Well in our world it’s simply the return from an asset or a strategy or a fund over a finite period of time – not much more than that. PRESENTER: So you really, if there isn’t any consensus you really need to make sure that what you mean by the terminology is what the produce provider means by it? CHRIS CHILDS: Yes, and as I say there’s a lot of jargon and there’s a lot of confusion in this whole space, and I guess our job today is to try and bring a little bit of clarity to that. PRESENTER: But when you hear a lot of talk as well about things like alternative assets, things like aircraft leasing, different forms of property, where do they fit with absolute return? CHRIS CHILDS: Well of course the knock-on thought from absolute return is it’s absolute but how does, where is that return coming from in the context of the economic markets or the financial markets? So most people then think OK absolute return, that means I’m going to make a positive return irrespective of what’s going on in other markets, for example in the equity market. So coming back to for example aircraft leasing, it’s not so much is that an absolute return strategy, it’s more a case of how does that particular strategy or that asset class behave when for example equities are struggling? PRESENTER: Now, we’re in a period of pretty low inflation at the moment, is an absolute return, does that on the whole imply you should be getting a return once inflation is taken into account, or is it a nominal return that could look? CHRIS CHILDS: Well I think most people look at returns in a nominal sense. But of course the real return is what’s important, certainly over the longer term. But most people, we’re going to talk about the funds in a little bit, but most people think about absolute returns in a nominal sense. PRESENTER: I suppose the other one is target return, is that just an aspiration, a sort of marketing? CHRIS CHILDS: Well it is a little bit of marketing isn’t it at the end of the day? Target returns, the question is where is the return coming from? And I think the investor should ask himself OK what’s the return mechanism or the generation behind this return? PRESENTER: And just for clarity, you’re running what you would describe as an absolute return fund, what’s the style and approach that you use? CHRIS CHILDS: Right, well, for full disclosure purposes I actually wear two hats. One is I reside in a multi-asset team, and the other thing is that I am the co-manager on a market neutral absolute return strategy, and the connection there is that we actually employ that strategy within our own multi-asset funds. Now the absolute return strategy is a market neutral strategy that employs global equities, so we are long and short but we’re market neutral. Another differentiator is that it’s entirely systematic. So there’s no discretionary fund management in there at all. But the key thing is very few people buy a fund in isolation. It’s a case of this fund is going into my portfolio, so if I put on my multi-asset fund manager hat I’m thinking how does this strategy fit into my multi-asset portfolio? PRESENTER: So absolute return for you is something that can go into a multi-asset fund. I ask because multi-asset is such a big asset class these days. There’s so much of it about. CHRIS CHILDS: Well multi-asset is about diversification, and if you can find strategies, let’s not call them necessarily absolute return strategies, but if you can find strategies that are uncorrelated with your principal risks, and in the context of multi-asset portfolios your principal risk is typically equity, then that’s a good thing, it brings diversification. PRESENTER: And you mentioned a little earlier when you’re looking at absolute return it’s an absolute return over a time period; any rules of thumb over which an absolute return strategy should be delivering? CHRIS CHILDS: Well again there’s no definition, but I think realistically you would want to look over say a three-year period, keeping an eye on the rolling 12 month return, and that’s very much in line with some of the definitions within the peer groups. PRESENTER: And where did absolute return come from originally? CHRIS CHILDS: Well I guess absolute return was where investment started in a way, because people approached the market and said I want to make a return. And absolute return’s cousin if you like is relative return, and relative return only comes because you start comparing an absolute return with a benchmark. And therefore you get this concept of relative return. I think if you go back to the grandfathers of investment they never thought in relative terms. They were thinking about growing your capital in an absolute sense. PRESENTER: So are the two actually indistinguishable? If say 50 years ago someone said well I’ve bought this company because it produces an income, and over time it’ll go up. CHRIS CHILDS: Well you might well argue that it’s about your own expectations, your own ambitions. But I think the industry these days makes some quite clear distinction between assets that are more cyclical in nature, i.e. equity, and those strategies that are attempting to get away from that cyclicality, and that’s what absolute return strategies should endeavour to do. PRESENTER: But now that extra level of complexity if you like has come in as investment analysis has taken off in the last few decades. What are some of the implications of that? CHRIS CHILDS: Well I think the investor has a lot more choice. There’s a lot more scope for confusion of course as well. And that means that ultimately at the end of the day they can build better portfolios. PRESENTER: But again looking back to the origins of absolute return, is this something that’s come originally from the hedge fund world? CHRIS CHILDS: I think in the context, if you move away from the strict definition, if you move away from the fact that in the past people were interested in making absolute returns irrespective of what they were investing in, then a lot of it does come from the hedge fund community. Maybe it’s the push into the more UCITS vehicle world. I think there’s also some other things that have happened along the way, so the UCITS structure is far friendlier now than it used to be to implementing absolute return strategies. PRESENTER: Well talk us through, because UCITS is a term that’s out there a lot, why has that been so important? CHRIS CHILDS: Well the UCIT of course is the principle vehicle for the private investor, and the majority of anyone buying a unitised type product. The UCITS label if you like ensures that it adheres to certain rules and regulations. The simplest one being that it’s sufficiently diversified for example. But increasingly over the last couple of evolutions of UCIT vehicles they’ve become far more sophisticated in the way that they look at risk for example. And the knock-on effect of that is how you can use derivatives in the context of a UCITS vehicle. So the UCITS vehicle has really gone from being a long-only traditional thing to something that can actually hold a genuine absolute return strategy. PRESENTER: But you’ve talked a couple of times about why people would want to generate an absolute return. But markets move around all over the place all the time, isn’t it really chasing after a false god, can you really do it? CHRIS CHILDS: Well I think that’s an excellent question. It’s can someone, an individual, consistently produce absolute and therefore really positive returns? It is challenging, and really you’re looking to fund groups to find their very best fund managers to run these strategies. Is it possible? Yes of course, it is possible, but I think it’s far more difficult than running say a passive portfolio which is incredibly simple. Is it more difficult than a traditional fund manager trying to outperform his benchmark? Not necessarily. You need to employ other techniques, so a key differentiator between an absolute return strategy and maybe a total return strategy would be that fund manager’s ability and willingness to short assets. And that’s, you really have to look at the strategy itself to see if it is genuinely absolute by looking to see what sort of activities the fund manager is prepared to do. PRESENTER: The reason I ask is that there always seem to be a big surge of interest in absolute return pretty much immediately after a market crash, so it’s people wanting something they wished they’d had 12 months ago. Is that the best way to think, is that a good way to think about what you want to buy for the next five or 10 years? CHRIS CHILDS: Well I mean that’s human nature isn’t it? Where that comes from is that we tend to chase returns, and hence the concept of momentum. I think fund managers and investors generally should focus on building good portfolios for the future, irrespective of what’s happened in the past, because the past is the past. Of course if absolute return strategies produce good returns, and at the same time traditional assets produce very poor returns, then you’re going to have a growth in that asset class. PRESENTER: To what extent do you think this is perhaps being driven by the fact that we’re 30 years into a bond bull market, there’s not a lot of upside left in bonds, and government bonds traditionally did produce a consistent nominal return to investors? CHRIS CHILDS: Well of course it wasn’t just that they produced a return, it’s they also formed a nice hedge against equities. That’s not always been the case but certainly in recent history they’ve formed a very nice hedge in the context of a multi-asset portfolio. Perfect, they’ve produced a strong positive return, and they’ve protected you at those times when equity has struggled. And people are concerned by two things. One the outlook for bond returns, and secondly what’s the correlation going to be between bonds and equity? And that forces people into other ways of achieving diversification within their portfolios, and one way of doing that is to buy alternatives or to buy absolute return strategies. PRESENTER: Now you mentioned earlier you yourselves are running a systematic strategy, how much has this growth come because of just the rise in computing power, and the fall in the costs of computing power? CHRIS CHILDS: Well I think there are different types of alternative strategies. Some are highly computing intensive, and others are actually more traditional in a discretionary sense. But I think generally the industry has benefited, grown, been dependent on the growth in computer power. If I compare what I sit in front of today with what I sat in front of 20 years ago in terms of IT and technology, it’s quite stark. PRESENTER: So, in terms of where we are today, again a bit of a rule of thumb, are there some fairly clearly defined types of absolute return strategy that investors can choose from? CHRIS CHILDS: Well this is interesting, because if you look in the general peer groups there’s not a lot of differentiation. They tend to get all thrown in together and you get the multi-asset portfolios thrown in with some absolute return strategies as well. So my thought there is actually to go away and lay your hands on some proper alternative and absolute research, and there is some good research out there, just to gain an understanding of the, if you like the sub-categorisation of these strategies, such as market neutral, long short, macro, etc. etc. And there is some good research out there. PRESENTER: Well you mentioned good research, any names that are worth just having a look at? CHRIS CHILDS: Well recently I’ve been looking a lot at the Kepler Partners’ work, and that’s very useful. If you’re new to the absolute return space, or new to the alternative space, and you wanted to spend half an hour reading something that gave you a really good leg up, then that’s an excellent starting point. PRESENTER: And when you’re talking about that peer group, are you talking the IA absolute return funds peer group as a bit of a catchall sector? CHRIS CHILDS: Well Kepler Partners have their own peer group, which is probably more useful to someone who’s going to focus on absolute return and alternative strategies. The IA peer group is interesting, because it defines the target returns as being over an absolute or a positive absolute return over three years. And that of course should move you away from having traditional, too much traditional asset exposure. But if you look in the peer group it’s a large peer group, it’s over £100bn of assets in there, but it’s dominated by a limited number of funds that most of us would look at as being multi-asset type vehicles. So I think again the investor has to be a little bit careful as to what he buys from that peer group. PRESENTER: And again as you look at that peer group, how long are some of the track records; have they been seriously stress tested in periods like 2008, 2009? CHRIS CHILDS: Well most of the funds are probably launched post 2008, although there’s a very interesting question for a research individual is to ask the fund manager what’s the genesis of the strategy, where does it come from? Very often the strongest strategies come from an internal effort that’s worked internally, and then has been externalised in the form of a fund. But I think where strategies come from and the evolution of those strategies is very important, and the individuals involved. PRESENTER: So turning to your own example, you’ve got a market neutral absolute return approach. But when you were putting that together how sure could you be that the data that you’d seen, the past track record was something that could be, you had a high level of confidence it could be repeated in the future? CHRIS CHILDS: Well my confidence was really driven by working with the individual who put it all together, which is Eric Rubin who’s the other, the manager on the fund. And there’s a tremendous amount of academic literature out there. So we tend to go back and look at academic literature, and see what has been highlighted by the academics. And then we will test that using real world data if you like. But it’s got to pass a sniff test, does it actually make sense, does the strategy make sense? So our strategy was very much born out of a desire to have an absolute return strategy that was uncorrelated with traditional assets in our own multi-asset portfolios. And we were fortunate we had a very good, still do have a very good head of systematic strategies who was able to take what we wanted to do and implement it extremely well. PRESENTER: But just sticking with systematic strategies, again the world is always changing, does a systematic strategy have to be tweaked over time, or once you’ve worked it out does it, is it just left there to be absolute? CHRIS CHILDS: Well I think it depends on the nature of the strategies. So in the case of our strategy we’ve very much picked factors that were identified a long time ago, and therefore we’re going to stick with those factors and believe in them over the long term. Other approaches may be evolving far quicker than our own. And in some cases, and again I don’t have great experience of this, they may be evolving extremely quickly. And that’s a good question to ask if you’re interviewing the fund manager is how, what evolutions, what steps have you taken, and what are you expecting to do in the future? Is there something that you’re working on now that might improve returns or the risk profile in the future? PRESENTER: Now you mentioned factors there, could you give us examples of a factor? CHRIS CHILDS: Factors these days are extremely well known and they’re the value, the size and the momentum from those classic academic papers of the early ‘90s. And of course they are the factors that many smart beta indices are using these days. We have a couple of additional factors, but they’re very well-known and well-recognised factors. Other houses will be slightly more opaque in terms of the factors they use, and they might be more dynamic in terms of the factors they use. And that is a differentiator, because absolute return is not just solely about rules based or systematic investing, far from it. We are just one subset of absolute return funds. We happen to be entirely systematic. PRESENTER: But now everybody’s catching on to factors, you hear a lot more about them. Are you worried that any advantage you might have had up to now just gets arbitraged away? There’s a wall of money heads for low volatility or income or whatever it happens to be. CHRIS CHILDS: Well I think for every factor that’s done very well and is very popular, and like you mentioned low volatility, that’s probably the most obvious one. There’s a factor that’s well-known that hasn’t performed particularly well, and value would be the classic counterpoint to that; hence you need to build a portfolio of factors. I think also there’s a lot of more excitement about these things, there’s a lot more talking about factors, risk premier, styles etc., than actual money flowing into this space. Of course we worry about crowding in certain factors, but we believe that it’s something that will come and go over time. PRESENTER: I suppose the other element around absolute return is the issue of fees. Again, talk us through, how are fee levels changing in this space? CHRIS CHILDS: Right, well you might argue that it’s a way for fund management groups to earn back some management fee, given how management fees have moved over the last few years. Looking at, if you look at the Kepler report, actually the fees are remarkably attractive for what funds are trying to achieve. The majority of funds are charging somewhere between ½ and 1%. A lot of funds in terms of numbers of funds are charging an outperformance fee, and that’s a little bit like Marmite for people: some people like the idea of outperformance fees, others don’t. But if you look at the assets, then it’s reasonably split between those charging an outperformance fee and those charging just a flat fee. But I was actually quietly surprised that the majority of fees by AUM is somewhere between about ½ and 1%, which I think is reasonably good value. The important point there is though for the investor, if he is paying say 1%, that’s 1% of what? And the ‘of what’ is the alpha or the excess return that is in that fund. So you have to look at the fee in the context of the volatility of the strategy, the efficiency of the strategy and therefore the expected return of the strategy. PRESENTER: And again any good rules of thumb on how you should think about whether a performance fee is value for money or not? CHRIS CHILDS: Well I think with performance fees people’s concern is that if there is a performance fee the manager is encouraged to take risk, excessive risk, which could work against the investor. And so part of, my thought is that part of the decision is can the manager actually just increase his risk dramatically? And if you take, thinking about our own strategy, we target an explicit level of volatility. So if we launched a share class or a fund that had a performance fee, we can’t up the risk because we are running at a given level of risk. Other strategies, where it’s perhaps more discretionary, you could have that scope for the fund manager to chance his arm, because there is an asymmetry there. But as I say outperformance fees are Marmite to people. PRESENTER: But isn’t volatility, we’ve talked a lot around the return side, but on the risk side isn’t volatility itself pretty volatile? Are there years where whatever level of volatility you’re targeting you think gosh this puts us down at the really low end of risk, and other years you think my goodness we’ve got a huge amount of discretionary we didn’t have last year? CHRIS CHILDS: Well you touched upon a couple of issues there. Within traditional assets such as equities and bonds of course volatility does vary quite a lot. Hence you get this notion of the volatility of volatility, and that’s ultimately what the VIX is all about. Less so when you are running a more market neutral strategy, because there you are long and short something. And we are certainly of the view that it’s easier to control risk than it is to actually find returns. Hence we are very explicit, we say look we are going to give you a level of risk, and the returns are, like it or lump it, what they are depending on the efficiency of the strategy. But you do touch upon another point which is if you are blindly driven by your risk numbers, and your risk numbers are getting low and of course these days you can apply a leverage to things, and you just up the leverage within the fund, i.e. take more risk just because your risk numbers are low, then that’s ultimately dangerous. And again coming back to our own strategy, we actually have a cap on the amount of risk we will take in the form of leverage that we will actually take within the structure. PRESENTER: With all of this analysis that can now take place, is there much scope for alpha, or is that ultimately, we ultimately discover that all alpha is really beta we haven’t worked out how to capture yet? CHRIS CHILDS: Well that’s again a good point, and of course if you read any smart beta literature you’ll see that classic graph where they decompose returns into beta, factors, and then alpha. And that makes the traditional fund manager’s job that much more difficult. I mean it’s been a challenging time for traditional active managers. Are factors an alternative to beta? Well of course they are in a mathematical sense, but the question is: are they correlated with your main risks, your main beta risk being equity? So it doesn’t really matter where your returns come from, it’s that they’ve got to be there and hopefully they should be uncorrelated. PRESENTER: And we talked a lot about the background on it, but if you’re looking at doing some due diligence on absolute return and getting involved with that, what would your advice be to somebody who’s coming new to this? How do you go about that process? CHRIS CHILDS: Well I think the starting point is to lay your hands on some high level research about the sector. What are the main funds out there, what are the classifications, how have funds generally performed, what level of risk are these funds running in terms of volatility? Are they a 10 vol, are they a 5 vol? What level of return have you had for that level of risk? Because that’s, the funds are quite different in nature, and you must always normalise the returns for the level of risk that is being taken. I think you then start looking at some of the literature that is produced by the fund groups. And some people are very good in terms of the literature they produce. If you go and speak to the fund managers directly, just ask them some sensible questions. If they can’t explain the strategy in the elevated pitch time, then is that a strategy you really want? I think the other thing is to just be aware of stories. Just try to be aware that we like to hear stories, and a fund manager sitting there telling you how he’s going to generate lots of alpha for you can be quite an enticing story, and you probably just want to stick to the facts. PRESENTER: Well you mentioned a little earlier with the absolute return sector there’s some very big funds in it. Again we hear a lot in the long only market about capacity and size constraints, how important is it to work out what the capacity of an absolute return strategy is? CHRIS CHILDS: Well I think it’s a very good question to ask the fund manager, how he goes about thinking about the capacity of his strategy? And to be honest we have seen some what I might call capacity creep, i.e. people have soft closed funds and then 12 months later the fund is significantly larger. Working out the capacity of a strategy is quite challenging, but it’s an important discipline to go through. Obviously the big risk is that if you’re a successful fund manager you produce the returns, the assets come to you, you yourself may not be greedy but the fund group will be greedy and will want to maximise the opportunity from a revenue perspective. And the danger is you take in too much asset and you start killing your own returns. That is the danger. Where that tipping point is is very strategy dependent. Some strategies are actually quite restricted. If you were just doing long/short European equities, then you may not actually have that much capacity. We’re global equities and we broadly know where our, or we think we know where our capacity is. But you’re right, there are some very large funds out there that are, they must be hitting capacity. PRESENTER: And when you look back over a track record, how important is it to look what the distribution of those returns is, and over what time period? CHRIS CHILDS: Well that’s very important because coming back to an earlier comment I made, very few people buy a strategy in isolation, it’s how that strategy sits within your own portfolio. And therefore it’s not just the volatility of the strategy that you’re buying that’s important, it’s how it fits in the portfolio, i.e. how highly correlated it is with the other things that you have in your portfolio. In addition to that it’s worth looking just at the distribution of some of these strategies, because they may well have very nice smooth returns, but every now and then have a horrible bump, i.e. it’s quite a skewed distribution. And you should be aware of that. So looking at the correlation, looking at the distribution of the returns is very important, and inspecting the performance at times when your other risks have really struggled. So look to see how a strategy performed when equity was struggling, and try to understand why the strategy did well or did badly in that environment. PRESENTER: Do you worry that there’s quite a lot of beta dressed up as alpha in the sector, is that just a sceptical concern any potential investor should have in any sector? CHRIS CHILDS: I think it’s always right to be sceptical. I’m not going to be drawn into the debate as to whether hedge funds to take a group are ultimately beta dressed up as something different; I think there’s plenty of research out there that will help people come to their own conclusions in that regard. Of course one, we haven’t really spoken about different approaches to absolute return. And I’ve talked about we are ourselves market neutral, hence we’re absolute return by structure. So we’re long and we’re short, that takes us into the absolute world. Other strategies are far more discretionary. A manager will say look - and macro would be the classic case here - I really like equities, I’m going to buy equities. So he’s long equities. The key test there is does he ever go short equities? PRESENTER: Yes, so he’s got an asset allocation discretion if you like; whereas you, that’s been taken away from you. CHRIS CHILDS: Yes, we’ve said OK look we’ve got a universe over here, and the way we’re going to approach the universe is we’re going to be as long as we are short from a risk perspective. Other strategies will be very much more traditional discretionary strategies, whereby the fund manager is trying to make market calls. That’s very much more your classic alpha-type strategy. PRESENTER: But within that, I mean even within a market neutral one presumably you could get it doubly wrong. You go, the long position is wrong and the short, and wouldn’t you then have just doubled a single bet in a way? CHRIS CHILDS: That’s always a risk that your longs go down and your shorts go up. That comes with the territory. And again it comes back to expectations. If someone is expecting an absolute return strategy to be positive every month, he’s probably likely to be disappointed. And it comes back to the question over what is a reasonable window to assess a strategy? Well three years you should be positive I would have thought. But you would want to keep an eye on the rolling 12-month performance. And I think you want to be on top of drawdowns. Any strategy will suffer, but what is it that’s particularly driven the drawdown? PRESENTER: And within this universe again are there particular environments that will favour certain absolute return strategies, but not others? In the same way a value manager can do very well at some point in the long only world, and there’s other periods where we say he’s a great manager, it’s just not working, it’s just not the right market for him. CHRIS CHILDS: Well I suppose in our world of, in our particular strategy we deliberately build the fund to be uncorrelated with the general macro risks. So we’re a bit of an explicit case. But if you’re a macro fund manager obviously you need markets moving around a bit. You need markets to move on a trend such that you can jump on it and play with it. If markets become very un-volatile and boring, then it becomes that much more difficult to make money. The other thing is you need assets to be uncorrelated in some way, because you need to be able to pick an asset that’s done well, and be able to short something that’s done badly. PRESENTER: You stressed there a couple of times the importance of being uncorrelated, not slightly correlated or negatively correlated, why is that important? CHRIS CHILDS: Well it just makes it a nice building block for a multi-asset portfolio. If you have two assets that have got broadly the same volatility but they’re uncorrelated, and you then say OK I’m going to put 50% in this asset, 50% in this asset, then the risk is significantly less than having 100% in any one asset. So it’s just a nice, mathematically it gives you a nice portfolio at the end of the day. PRESENTER: But wouldn’t you want negative correlation, because that’s implying if one goes up the other will go down, and that should balance things out? CHRIS CHILDS: Yes, and you’d think well if they both produce a positive risk premier, don’t forget they’ve both got to produce a positive return despite the fact that they’re uncorrelated, then that would be perfect because you’d have zero risk and great returns. But that situation doesn’t persist for very long in our markets. PRESENTER: OK, chasing a false god it would be, or potentially. CHRIS CHILDS: The situation just doesn’t arise that often. I mean funnily enough equities and bonds was an example, because they were negative, or have been negatively correlated with one another, but they’ve both had positive returns. And the simple balanced portfolio has been a very effective instrument. And I think you asked earlier on what was really the, where did the multi-asset portfolio come from? It came from that simple balanced portfolio, which has continued to be very effective. PRESENTER: And we’ve talked a lot around looking at the fund, and how to consider the fund, but how important is it to get a sense of what the produce provider, the group behind the fund is up to? CHRIS CHILDS: Well I think this has been quite interesting. I personally don’t have experience of sitting down with different fund groups, but I think how open hedge funds are about what they’re doing compared with a traditional fund group, you could get some quite different outcomes there. I think it’s important to, if you’re going to go in and talk to a manager. Particularly if it’s a discretionary strategy, you want to have a good feel for the culture in which he works. Is he there, is he going to stay there, has he been there a while or is he looking to jump ship and go to a hedge fund for example? The other thing is that I think with fund groups they will be far better at providing information about the strategies, and far more receptive to providing you with more information. PRESENTER: The jump across to hedge funds. There was a lot of that took place at the start of the 2000s, but it all went a bit quiet since. Where are we in the cycle of fund groups as a whole pretty good at returning manager talent these days? CHRIS CHILDS: So the question is are we seeing a transition of fund managers from traditional fund groups across to hedge funds? PRESENTER: Yes. CHRIS CHILDS: I can’t really comment on that, because from our own shop we don’t and have never seen a lot of that. I think the main feeding ground for hedge funds is probably trading desks, bank trading desks. And of course with the reduction in proprietary trading a lot of the traders then moved across to hedge funds. And hedge funds very stereotypically are more trading orientated than our sort of absolute return funds, which are more investment orientated. The problem for hedge funds I believe is if you’re not producing really good returns, then you can’t charge the fee structure you’re charging. And we talked very briefly about the typical fees we’re seeing in alternative UCIT vehicles. The hedge fund fee structure is far higher. They take a lot more of the alpha in the product. And I think with low level of interest rates, generally low returns, people are very aware of what they’re paying for alpha. PRESENTER: But within the fund group world are there, do you need to be a certain size as a fund group to be able to support the infrastructure and the risk capabilities and so forth that should underpin an absolute return fund? Is it something more for a big group or a big team? CHRIS CHILDS: Not necessarily, actually, I don’t believe so. Because actually risk systems are fairly accessible to people - they are expensive but they’re accessible - and IT these days is also relatively cheap. I think the biggest challenge is finding the talent to run the funds. PRESENTER: And at a time where we’ve got an FCA review about potentially some of the dangers of putting, taking a liquid fund structure and putting illiquids inside it, is that potentially an issue for absolute return funds? CHRIS CHILDS: Definitely, I think if you’re looking at absolute return funds, then you want to be very confident that you’ve got the right level of liquidity. So that doesn’t mean that every single absolute return strategy needs to have daily dealing, because you yourself may say well look I’m quite happy to have my money locked up for three months. On the other hand investors like myself, we’re running UCIT vehicles, we should have daily liquidity. PRESENTER: And UCITS means daily liquidity. CHRIS CHILDS: Not necessarily, but most UCIT vehicles would have daily dealing. And that really forces the underlying strategy to be broadly tradable on a daily basis. So I think it’s a very important aspect when you’re looking at absolute return strategies to assess liquidity. PRESENTER: We’re out of time. Chris Childs, thank you. CHRIS CHILDS: Absolute pleasure.