Hedge Funds Q&A: Philip Seager, CFM

Alternative investment managers running strategies in both liquid and illiquid markets are increasingly turning to the high net worth segment and the Registered Investment Advisor channel to raise assets. Greg Winterton spoke to Philip Seager, Head of Portfolio Management at systematic investment manager CFM, to get his thoughts on this trend. 

GW: Philip, there has been an increasing movement in the alts industry generally towards the RIA segment. This group has always had money to invest, so why now? 

PS: We have been in contact with the largest wealth platforms for the last 20 years. The progression in the US wealth market is that, while these platforms have remained significant hedge fund investors, more and more advisors left the large private banks and wirehouses and chose to work as independent advisors. Initially, this progression made it more difficult to continue to work with independent advisors, as the previously available infrastructure was left behind at the prior bank platforms.  

However, over the last 10 years, two things have changed. First, the infrastructure is no longer captive to the banks; other firms are now providing these to both banks and RIAs. Secondly, advisors have recognized that there is value in scale. Many former smaller advisors have merged, leading to larger RIAs that have the scale and need to differentiate themselves. Their investment capabilities have expanded, and many have hired dedicated fund researchers that have the time and skill to evaluate and onboard alternative managers.

GW: Some of the strategies that firms like CFM run can be complex; arguably, many RIAs and individual investors don’t have the level of understanding of the underlying exposures and the drivers of returns of these products that larger, institutional investors have. How much of a barrier is that and how do you solve for it? 

PS: There are distinct differences between the institutional and the advisor segment, but we find well educated investors on both sides. On the wealth side, we often don’t see the final client, but work with a dedicated financial advisor that is able to understand our strategy. What matters here, is that the organization we face can communicate what CFM and our strategy stands for, first to their advisor network and then the advisors to the final clients (and sometimes there are even more layers). That makes a distinct firm and strategy profile, established track records, and good materials an important part of the process.

On the topic of complexity, I would note that what our clients are looking for are attractive returns, a predictable risk profile, and for the investment to be differentiated from their existing investments.  Our processes allow us to monitor and execute on potentially multiple investment opportunities simultaneously. While that may reduce the intuitive ability to assess exactly what is going on at any one point, we aim to control and communicate on how much and what type of financial risk we are taking at any moment in time, maybe to an even higher degree than other investment styles.

GW: It’s well understood that RIAs and their clients get turned off by many alternative investment strategies because of the paperwork and administration, as much as the complexity of the strategy in question. Are you seeing any progress here to solve for that issue? 

PS: Historically, it wasn’t possible to manage strategies that use leverage and short-selling in regulated fund structures, such as 40act or UCITS – in which the documentation process is much lighter. Private funds and partnerships do come with more extensive documentation requirements. Some of the new platforms have moved such processes online, making it somewhat easier for advisors and their clients. There is a next group of fin-tech providers that is trying to take this even further, and we are monitoring the situation closely.  

GW: Your Discus program launched originally in 1991. How has CFM’s approach to constructing the portfolio changed in the past 30 years? What are some of the lessons learned from more challenging times? 

PS: Having been in the business for so many years means we have undoubtedly navigated some tough periods. While these struggles are difficult in the moment, firms in this industry always come out the other side enriched in some way, and CFM is no exception. I would say the main lesson from leaner periods is to resist complacency and to maintain focus on the job at hand. We have built a very solid research platform that now enables us to scale our research effort, which puts us in a good position to recruit more researchers, test more datasets, and to keep abreast of the latest developments in research and technology.

Our work in portfolio construction is an example of how a sound research process can be additive to an investment program. We have spent years understanding how to robustly diversify portfolios and how traditional methods are simply flawed in many environments, and our proprietary portfolio construction techniques have meaningfully contributed to the success of the firm.

GW: Lastly, Philip, regardless of whether an investor is a high net worth individual or large institution, what’s your message to them with regards to why they should allocate to products constructed with a systematic approach vs a discretionary one? 

PS: Algorithms and data seem so ubiquitous in many areas of daily life, from the use of apps to navigate an inner-city journey in the shortest time, to a chatbot using an LLM to concisely summarize the contents of a long document. Pilots flying commercial aircraft are also dependent on algorithms to more safely navigate – to such an extent that likely, if the computer in the cockpit was not working, people would refuse to board the aircraft! So, with the tremendous uptick of data and computers available today, why would investing be any different? The direction of travel is one way, and we believe that the advantages of a systematic approach to investing will only grow, as it is better informed and positioned than a data limited discretionary approach.

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Philip Seager is Head of Portfolio Management at CFM