Bailey McCann, Opalesque New York:
Neal Berger, President of New York-based Eagle's View Capital Partners L.P. has a unique view of alternatives investing. Rather than focusing on macro trends and typical asset classes, Eagle's View seeks out emerging investment opportunities such as electricity trading to drive returns. So far, it's a strategy that seems to be working - the fund of funds is up +5% YTD and is beating all alternative indices for both hedge funds and fund of funds.
Eagle's View is also planning to launch a new offshore fund of funds on February 1. I spoke with Mr. Berger about Eagle's View, the industry, and what is driving returns.
Eagle's View's investment philosophy is defined by uncorrelated niche-oriented strategies that leverage positive expectancy bets to drive returns. Rather than focusing on macro market trends Eagle's View looks for structural inefficiencies that can be effectively exploited.
Berger explains, "I don't think there is any allocator that looks at the world the way we do. We aren't in global macro, equities, event-driven strategies. We look for inefficiencies and positive expectancy investments. We operate on what I call the 'casino principle,' just like a casino whatever bet they take against a player, they have a positive expectancy against each bet. They play the edge they have against the player based on the game and how good the player is. This is largely what we do - we are internally uncorrelated as well as externally uncorrelated."
Berger extends this unconventional view to choosing managers as well. "When I speak to a manager, I want to know what is your edge, what are you exploiting, who is providing that edge, when can we expect that edge to erode or disappear and is the manager capable enough of leveraging that effectively before it changes or goes away."
He notes that managers too often fall back on their academic careers, or past performance rather than focusing on how they can succeed in today's market environment. "The standard answer is to tell me how their intelligence beats the market. But, there are very few managers that can overcome all market forces just by their wits alone. People lean on their track record, but a 3-5 or even 10-year track record is not a statistically significant sample size to predict behavior, nor does it take into account performance under current and changing market conditions."
Berger explains that in his view, when allocators look at a manager, they need to use more qualitative evaluations to understand what an individuals actual experience is. "It's not coincidental that we seem to see a black swan event every year. That's not a black swan event - that's part of the normal distribution of markets. A 3-10 year track record doesn't accurately predict how someone would perform under that distribution. You have to look at where the actual experience lies - what are the different asset classes, roles, did they manage a P&L and so on."
According to Berger, the unique investment philosophy driving Eagle's View allows them to invest in opportunities and managers that are higher risk but don't carry as much beta as strategies used by more traditional investors because they aren't capacity constrained. "If you're an institutional investor or those are your clients, you've got a certain minimum opportunity cost involved with looking at niche oriented, smaller, under the radar managers. The reality is, they aren't going to go through with that cost if they can only deploy $25 million into a manager or strategy so the alternatives landscape for those investors is much more narrow than what we can look at because we lack that constraint."
Instead, Eagle's View works with high net worth individuals and families to seek out new opportunities. "Because we are more nimble we can look at strategies that are generally uninvestable because they don't fit into specific buckets or they don't meet the investment requirements of an institutional investor."
Berger explains, "I don't look at global macro when I look at the landscape. I look at how the world is changing, for example, I look at the proliferation of ETFs and what is there to exploit there. It has nothing to do with my outlook on the world, it's just a fact that people are trading more ETFs and so I look at how that is going to play out. The same thing would be true for high frequency trading, that's developed over the last 2-4 years, that's essentially legalized front-running because of a speed edge, but you can look at the opportunities for inefficiency there."
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