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Monday December 17 2018
 
Australia Gets Third Multi-Manager Hedge Fund

From Investor Weekly September 20-26, 1999

by Ben Seeder

 

      BOUTIQUE hedge fund Coastal Capital will market itself as a multimanager hedge fund following the signing of a deal with US-based Magnum Group, which will put it in direct competition in this country with Wilshire Global Advisors and Deutsche Bank's Strategic Investment Group.

      Coastal Capital, a boutique multistrategy hedge fund run by former Credit Suisse First Boston trader Peter Frohlich, has also attracted former Austral Capital director Nick Ryder.

 

      The agreement with Magnum will see the two Coastal directors marketing a suite of 19 Magnum hedge funds as a product. This manager line-up will include the Coastal fund, which uses a combination of arbitrage and event-driven trading strategies.

 

      The other 18 funds which will be available through Coastal Capital's multimanager product were "well-established managers with track records based in many parts of the world", according to director Peter Frohlich.

 

      Some of the funds to be offered by Magnum through Frohlich's Coastal Capital included the Galleon Omni Fund, the Alexandra Global Convertible Fund and the AIG West Broadway Fund.

 

      According to Frohlich, the fund has designed a mechanism which will allow any investor to pay tax on a normal post-realisation basis which avoids FIF problems where relevant.

 

      Frohlich said he had decided to enter into the arrangement with Magnum because there was no realistic chance of winning a mandate from a superannuation fund at this point.

 

      He said the agreement with Magnum brought to Coastal Capital both a track record and a much more conservative Investment vehicle through which clients could invest.

 

      "We don't think there are good enough reasons for institutions such as super funds to give us money. We recognise that we won't get any money from these conservative investors until we have a long standing track record. I have that, but it is locked up inside CSFB, " he said.

 

      "But with our fund being offered by the Magnum group, we think there are now reasons. With the addition of the Magnum product, then our fund is much more credible. They have such a track record in the US spanning years, and super funds may also be comfortable investing through a multi-manager strategy."

 

      He said the other opportunities from the Magnum agreement stemmed from Coastal being included on the Magnum manager line-up for overseas-based investors wanting global hedge fund strategy exposure.

 

      "We think we have a better chance of having our fund being marketed to overseas institutional investors who are more comfortable with these strategies through the fund-of-fund vehicle."

 

      The trading strategy employed by Frohlich and Ryder at Coastal Capital is a mix of event-driven and arbitrage strategies.

 

      The trading process was more opportunistic compared with other hedge funds and managed futures funds.

 

      Strangely, the two components which comprise the Coastal strategy - event-driven and arbitrage - were implemented separately on an opportunistic basis. Ryder, who recently moved to Coastal from event driven specialist fund Austral, handled the event-driven side of the strategy. Frohlich specialised in the security and indexed arbitrage side.

 

      Ryder said the event-driven strategy includes buying into takeovers, mergers, capital raisings, corporate recon structions and late stage private equity (ie - pre-floating).

 

      The other side, generally implemented by Frohlich, are the arbitrage strategies which include fixed interest arbitrage, warrant and option arbitrage and index arbitrage.

 

      "The trick here is to buy particular securities when their underlying stock is trading at a discount, or short sell the stock if it's trading at a premium.

 

      "You can have the [share price index] at a massive discount to the All Ordinaries because the market is so bearish. That leaves opportunities, so we would buy the SPI and sell short the physical securities," Frohlich said.

 

      According to Ryder, the event-driven strategies offered good returns to investors.

 

      "For the average takeover, the first announcement is, on average not the first offer or bid. If you then buy those securities after the first public announcement, there is a better-than-average chance the first offer will not be the highest," Ryder said.

 

      A similar approach was taken for floats, mergers and corporate reconstructions.

 

      Both Frohlich and Ryder admit that, as with any other strategy, the event-driven/arbitrage strategies are not risk-free.

 

      Frohlich said: "Our strategy is not riskless - It is simply swapping one set of risks for another".

 

      He said there were a number of risks for both arbitrage and event-driven strategies.

 

      "There is tracking risk- the risk that you can't fully replicate the index. There is liquidity risk - the risk that you cannot exit the market when you want. There is hedging risk - the risk that the hedging medium is imperfect, or the strategy used not accurate.

 

      Even with arbitraging cheap securities there is the risk that they will always get cheaper.

 

      "For the event-driven strategies, there are also a number of risks. If you buy into a merger, there is a risk that the deal will, somehow, not go ahead. You go and buy the stock with the expectation of a takeover, and the risk is that the takeover doesn't go ahead.

 

      When buying into floats, there is the risk they will enter the market at a discount."


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