InvestHedge

VOLUME 10 ISSUE 1 OCTOBER 2010

HedgeFund
Intelligence

THE ONLY PUBLICATION THAT FOCUSES ON INVESTORS IN HEDGE FUNDS

Moving beyond fear

to opportunity
Delegates cautiously optimistic
INVESTHEDGE FORUM 24

AP1 analyses
over 100 RFPs
Swedish fund to hire three advisers
INSTITUTIONAL PROFILE 14

Albourne paints
a conflict-free
picture
Clients invest $200bn
CONSULTANT PROFILE 18

Permal embraces change

Assets grow but retain fingerprint FUND PROFILE 34
InvestHedge HedgeFund
Intelligence

fund profile

Permal
develops its
customisation
theme

Specialised services are a top

priority for Permal in its bid to
be innovative and stay ahead

G
Isaac Souede

iant fund of funds manager Permal the JP Morgan Permal AIS Fund, a daily liquidity
Group has barely paused for breath this product where Permal allocates among 25 synthetic
year. So far, the $20 billion company has trading indices developed by JP Morgan. The aim is
launched five new funds, developed a to capture the return generation of hedge fund strat-
state-of-the-art risk system, and made egies such as momentum and carry. Far from seeing
several high profile hires. such products as a threat, Permal embraces them as
A common theme runs through these new ways to use its skills, according to Omar Kodm-
developments. It is the need to offer in- ani, senior executive officer at Permal, who sits on
creasingly specialised services to clients. the risk committee.
“The fund of funds industry is no longer Meanwhile, Permal’s new risk system, CubeRisk, is
monolithic. It is very much custom-tai- designed to ‘explain’ performance more accurately
lored,” says Isaac Souede, Permal’s New than most risk tools, and so can not only isolate
York-based chairman and chief execu- manager skill more precisely, but allows the team to
tive, who has been a driving force behind the com- construct portfolios (such as the AIS Fund) within
pany for 23 years. very tight parameters.
By Claire Four of the five new Permal funds have innovative And Permal’s high profile hires are also part of the
Makin structures or strategies. The most radical concept is trend towards increasing specialisation. One exam-

Disclaimer: This publication is for information purposes only. It is not investment advice and any mention of a fund is in no way an offer to sell or a solicitation to buy the fund. Any information in this
publication should not be the basis for an investment decision. InvestHedge does not guarantee and takes no responsibility for the accuracy of the information or the statistics contained in this document.

October 2010 © InvestHedge


ple is Andrew Rozanov, who joined from State
Street in July to head up Permal’s Sovereign
Advisory Business. It was Rozanov that coined
the term Sovereign Wealth Fund in a 2005 pa-
per.
Souede says that it is critical for Permal to
keep pace with what clients want, and to de-
liver it by delving into the company’s toolkit.
“We are using our skill set in a greater variety
of situations,” he says.
One reason for the pace of new develop-
ment at Permal is its growing US institutional
client base – long a coveted market for the
company. This has nothing to do with the
purchase of a majority stake in Permal by New
York-based asset manager Legg Mason in
2005, according to Kodmani. The institutional
push has been entirely Permal’s own initia-
tive, he says. Legg Mason has a history of leav-
ing its subsidiaries to get on with their busi-
nesses although Kodmani acknowledges that
having a prestigious parent has helped raise
Permal’s profile in the US market.
While many of Permal’s competitors reacted
to the financial crisis by behaving like rabbits
caught in the headlights, Permal seems to
have been energised by it. “I truly believe
there’s never a good crisis unless you take ad-
vantage of it,” Souede says.
Souede divides Permal’s approach into pre-
and post-crisis. Before 2008, he says that the
company delivered value-added to its clients
via long/short, ‘all-weather’ macro, or direc-
tional strategies.
Post-crisis, investors’ willingness to listen to
new asset management ideas created a major
opportunity for Permal, Souede points out.
Since 2008, the company has ‘deconstructed’
its approach with increasingly specialised and
customised offerings.
To some extent, this has involved a new an-
gle on manager relationship as Permal ‘cherry
picks’ what its managers offer, and creates
new structures to suit clients’ needs. The com-
pany has also hired more specialists, particu-
larly in operational due diligence, in risk, and
in legal and compliance to deal with the new
regulatory environment.
Overall, Permal has nearly doubled employ-
ee numbers since 2005 to 192. It has also
opened its doors in Hong Kong, Tokyo and Du-
bai – adding to existing offices in New York,
Boston, London, Paris, Nassau and Singapore.
Souede believes that one of the firm’s key
strengths is its flexibility. Despite an increas-
ingly institutional focus, Permal has its roots
in the European high-net-worth market, and
first invested with US-based hedge fund man-
agers in the early 1970s.
This explains Permal’s New York headquar-
ters and longstanding ties with US managers.
Most of the company’s employees are based in
mid-town Manhattan, including the 41-strong
investment team led by Jim Hodge who joined
Permal in 1987 and became CIO in 1997. Risk
© InvestHedge
management is run from London, Permal’s
other main centre, by Julian Shaw, who
joined in 2004 from BarCap, where he was
head of market risk.
There are now 15 funds of funds in the Per-
mal family. The two biggest, Permal Fixed In-
come Holdings and Permal Macro Holdings
(formerly Permal FX, Financials & Futures),
have returned 8.5% and 8.1% a year over 10
years, and both have more than $5 billion in
assets. The third largest is $2.1 billion Permal
Investment Holdings, a 78-manager global
multi-strategy fund with a directional bias. It
has returned 3.4% annualised over 10 years,
Post-crisis, investors’
willingness to listen to new
asset management ideas
created a major opportunity
for Permal. Since 2008, the
company has ‘deconstructed’
its approach with increasingly
specialised and customised
offerings
while the MSCI World was down 1.5%. In
2009, the average performance of Permal
funds was 16% plus, compared with a return
of 9.2% for the InvestHedge Composite.
So far this year, markets have severely tested
the funds’ ability to meet their objectives,
with a May/June slump followed by a July ral-
ly and a rough August. “That kind of rapid
one-two test tells you pretty quickly whether
your funds are behaving as they should,”
Souede notes. Permal Fixed Income is up 4.1%
net of fees through August.
A drop in assets from peak levels of $36 bil-
lion in 2008 to $20 billion (where they were
in 2005) had more to do with banks withdraw-
ing leverage from the market than clients
Permal Group: at a glance
Headquarters: New York
Other offices in: Boston, London, Paris,
Nassau, Singapore, Hong Kong, Tokyo and
Dubai
AUM: $20 billion
Number of funds of funds: 15
Number of underlying managers: 193
Managers on managed account plat-
form: 68 ($4.6 billion)
Employees: 192
Number in investment team: 41
InvestHedge
fund profile
pulling their money out, according to Souede.
So far this year, Permal says it has seen net
inflows, particularly into its absolute return
funds.
As the company evolves, it is determined to
retain what Souede calls ‘the genetic finger-
print’ of a Permal fund. All the company’s
products follow the same philosophy, apply
the same beliefs, and are backed by the same
disciplined risk management process, he says.
The Permal ‘fingerprint’ includes investing
in deep and liquid markets, a relatively high
reliance on high-conviction managers and ex-
pression of top-down macro views in portfoli-
os. Permal avoids strategies that are hard to
understand, especially those that are illiquid.
“In spite of the talk about illiquidity bringing
higher returns, in general it has not, particu-
larly over the last decade,” Souede says.
Manager skill is critical to Permal’s invest-
ment philosophy. In its biggest funds, the top
five managers run one third of the money.
They are typically well-known names (for
compliance purposes Permal prefers not to
name any). “No matter how clever you are on
the operational side, the key is still utilising
talented managers,” Souede says.
Most of Permal’s portfolios include a long
‘tail’ of positions in newer, smaller managers
that Permal hopes will become the stars of the
future, but who are also subject to relatively
high turnover.
The search for skill has been enhanced by
Permal’s new risk systems. These can be used
to isolate manager skill from luck, or from the
various forms of beta that can easily be con-
fused with skill, according to Pierre-Antoine
Duvallon, senior quantitative analyst.
Another Permal ‘fingerprint’ is the compa-
ny’s expression of top-down views in all its
portfolios. This capability has been hugely en-
hanced by Permal’s growing managed ac-
count platform, which includes engineered
accounts as well as pari passu accounts that
replicate hedge funds.
There are now some 68 managers on the
platform, nearly one third of Permal’s 193 un-
derlying managers. What makes the Permal
platform particularly interesting is that, like a
few funds of funds like Lighthouse Partners, it
is pure buy-side, compared with the sell-side
managed account platforms set up by the
banks.
As well as running managed accounts that
mirror hedge funds, Permal increasingly engi-
neers ‘pure play’ mandates that cherry-pick
from a manager’s skill set. For instance, one
credit manager was invited to create a special-
ised leveraged loan portfolio for Permal’s plat-
form. “As we customise our services to clients
we are also getting managers to customise
their services to Permal,” Kodmani says.
Long/short managers have been asked for
more concentrated portfolios and systematic
traders may be asked not to use certain mod-
October 2010
InvestHedge HedgeFund
Intelligence

fund profile

ules that Permal believes are inferior to its own.

Managers have displayed mixed reactions to
From a macro perspective, set to fall further over the next 6 to 12 months
in the expectation that spreads will compress,
these requests. “The initial conversations Souede sees two possible even in high yield and emerging markets.
were at times a little stressed,” Souede admits,
adding that managers cheered up when Per-
scenarios for the global “We believe that we will get to the point that
it really is return-free risk,” Souede says.
mal offered improved fee terms. economy. First, developed From a macro perspective, Souede sees two
Some managers go away and do their own
analyses of Permal’s suggested modifications.“In countries will all fail and possible scenarios unfolding for the global
economy. First, developed countries will all
quite a few instances managers come back and become like Japan. Second, fail and become like Japan. Second, and most
say ‘We like what you’ve done, can I offer it to
my clients?’” Souede says. and most probable, they will probable, they will do everything to avoid de-
flation and the outcome will ultimately be
“The interesting thing about this approach do everything to avoid inflationary.

deflation and the outcome will

is that it is a pathway to differentiated re- The implications for fixed income asset al-
turns,” Kodmani points out. By focusing on a location, on a two to three-year view, is to
manager’s particular skill set “you end up ultimately be inflationary shift from cash into more relative-value arbi-
with something that fits your own risk param- trage and hedge strategies, Souede says.
eters”, he notes. Permal’s long term plan is to locate its ana-
In July, Permal launched what is probably 5% since launch. lysts close to their local markets. The compa-
the second UCITS-compliant fund built en- Souede believes that the increased correla- ny has been so cautious about retaining its
tirely of managed accounts. Goodhart Part- tion in equity markets owes a lot to globalisa- core values and culture that it had never
ners is known to have launched one in 2007. tion, but also to the ‘China factor’. This, in based an analyst outside Manhattan until Ste-
The Active Trading Fund was launched in turn, has had a major effect on Permal’s asset ve Zhang was relocated to Singapore in early
partnership with Strategic Investments allocation strategy. Recognising that geo- 2009. Analysts may eventually work out of
Group, its distributor. graphic spread will be of limited use in diver- London, Tokyo, and Beijing, Souede says.
Permal is also looking to broaden its geo- sifying risk for multi-strategy funds such as Another challenge is to convince institu-
graphical reach, and China has become a key Permal Investment Holdings, Permal has in- tional investors to accept Permal’s directional
focus. Souede grew interested in China in creased its macro allocation. funds as a substitute for equity, which Souede
2002, predicting that the country would be- At some point, Souede sees emerging mar- admits is “a leap of faith”. Permal has had
come the major driver of global wealth be- kets’ performance diverging once again, as lo- some success with European investors on this
sides the US. China is “of great intellectual cal consumption becomes an economic driv- front and Souede is convinced that the con-
appeal to me, and a source of alpha for us”, he er, but believes that is some way into the cept will ultimately be accepted.
says. future. As Permal continues to evolve, Souede is
The Permal MMF (Lux) China Strategy Fund As for fixed income, Souede believes mar- constantly on guard against diluting the com-
was launched on 1 April 2010. “The timing kets are approaching a tipping point. Towards pany’s culture and losing sight of its roots.
was impeccable,” Souede says. The index the end of 2009, the Permal Fixed Income That, he believes, is the most dangerous as-
plunged 25% over the next quarter, though Fund had a 65% exposure to credit sensitive pect of growth. “You can’t forget who you are
Permal China slid only 4%. It is now up 4% to investments. That exposure is now 50% and is and what your skill set is,” he says.

Permal’s bespoke risk management system – CubeRisk

Permal’s new CubeRisk system is the brainchild than most. One difference is that it draws on meaningful exposures over time, Duvallon notes.
of Julian Shaw, who heads the London-based risk statistical disciplines from the non-financial CubeRisk can be used on portfolios of funds as
department and is a long-time sceptic of world, such as bio-pharmacology. well as at the individual fund level. In isolating
off-the-shelf solutions to risk management. While most risk tools give static exposures to a performance drivers, it also signals where Permal
CubeRisk is designed to isolate which of all the beta over time, CubeRisk places greater weight can buy exposure via ETFs for faster top-down
different forms of beta a hedge fund is exposed on more recent returns. Over a three-year period allocation.
to. By measuring these risks more precisely, “a zero average is useless” points out Pierre- Permal is anxious to dispel the notion that its
Permal believes that it can build a more accurate Antoine Duvallon, senior quantitative analyst. risk team consists of boffins in an ivory tower.
picture of a manager’s skill (the residual Another key difference is that CubeRisk looks CubeRisk sits on the desktop of each portfolio
performance that is not attributable to beta). It for the most relevant factors (breakouts by geog- manager, who can run the analytics themselves.
may turn out that the manager has none, and is raphy, market cap, asset type, currency and so “It is an integrated process. We don’t just sit
just playing different market factors. on) that will ‘explain’ performance. Throw in there on our own in some vacuum,” says senior
Many funds of funds have similar tools, but enough factors and you will get a perfect ‘fit’, but executive Omar Kodmani, who sits on Permal’s
Permal claims that CubeRisk is more powerful the result will not be much use in isolating risk committee.

Important Information: Past performance is not a guide to future results. Performance is for Class A shares, reflects the reinvestment of dividends and is net of Fund level fees/expenses but not sales charges which will reduce returns. Performance for each strategy does
not include fees at the Permal Fund level. Performance may be volatile and the NAV will fluctuate. Investors may not receive the full amount invested upon redemption. Indexes listed do not represent benchmarks for the Funds, but allow for comparison of a Fund’s performance
to an index. An investor cannot invest directly in an index. Index performance does not reflect fees and expenses. Hedge funds are speculative and involve Risk. Fund of fund risks include dependence on the performance of underlying managers, Permal’s ability to allocate assets
and expenses at Permal and underlying fund. Risks of underlying hedge funds include, among others, leverage, options, derivatives, distressed securities, futures, and short sales, and investments in illiquid, emerging and developed market securities or specific sectors. Exchange
rate fluctuations may affect returns. Allocations and holdings are subject to change. There is no assurance that the Fund’s objective will be attained. This material is not an offer or a solicitation to subscribe for any Fund, and is not investment advice. Sales of shares are made on the
basis of the offering circular only and cannot be offered in any jurisdiction in which such offer is not authorized. The Fund is not for public sale in the US or to US persons and its sale is restricted in certain other jurisdictions. There are restrictions on transferring shares. Investment in
the Fund may not be suitable for all investors; investors should consider risks and other information in the offering circular and consult their professional advisers regarding suitability, legal, tax and economic consequences of an investment. To UK investors: This was prepared by
Permal Group Inc. (“PGI”) and (i) if issued in the UK by Permal Investment Management Services Limited (“PIMS”), (authorized and regulated by the FSA), it may be transmitted only to persons reasonably believed by PIMS that it is permitted to communicate financial promotions
related to the Fund or otherwise promote the Fund under the Financial Services and Markets Act 2000 (“FSMA 2000”) (Promotions of Collective Investment Schemes)(Exemptions) Order 2001, or (ii) if communicated by PGI into the UK may only be transmitted to persons reason-
ably believed by PGI, that it is permitted to communicate financial promotions pursuant to the FSMA 2000 (Financial Promotion) Order 2005. The Fund is not regulated under the FSMA 2000, and is not available to retail investors. No protection is provided by the UK regulatory
system and the benefits available under the UK Financial Services Compensation Scheme do not apply. To Singapore investors: This material is distributed in Singapore by Permal (Singapore) Pte. Limited, which is regulated by the MAS. To Dubai investors: This material has
been distributed by PIMS’ DIFC Branch which is regulated by the DFSA. This information is only intended for Professional Clients as defined in the DFSA Rulebook; if you do not meet this definition you must not act upon this information. To Hong Kong investors: Permal (Hong
Kong) Limited is licensed by the SFC for dealing in, and advising on, securities.

October 2010 © InvestHedge