A small but perfectly formed fund
Aref Karim is the founder, chief executive and chief investment officer of Quality Capital Management (QCM), a hedge fund based near London.
He is a tall, imposing figure with a prosperous air and the voice of James Mason, the late British actor.
When he left Pakistan in the early 1970s with a one-way ticket to Britain Mr Karim's future seemed somewhat uncertain. With no family to greet him at the airport, it must have been a rather bleak arrival. He had been caught in the middle of the Pakistan-Bangladesh civil war. His family was from what is now Bangladesh, but he was studying in Karachi when the opportunity came to flee.
Once in London he found a job as an articled clerk and qualified as a chartered accountant, "I hated it initially", he says, but he stuck to it before his sister persuaded him to come to Abu Dhabi where she was living. He joined the Abu Dhabi Investment Authority (Adia) as a financial manager on a two-year contract. He liked the idea of the tax-free income and lifestyle, although "it was quite an adjustment in the initial stages, very nice but different". Two years became four years, became six, became 12, as his role morphed into investment management.
At the time, Adia had a commodity investment department, mainly investing in gold, and serving as a proxy for the central bank. But it did not have an alternative investment arm.
"Gold shot up in value, then started declining," he says. "The issue was whether we should make an allocation shift away from a single asset. We started looking at hedge funds. The essence was the divestiture of a single asset to a more alpha-generating source of returns."
The one area that really interested him was managed futures. There were only a few hedge fund managers at the time, and those at the top of the game were demanding high fees.
"They were making money but we did not invest at their terms or we negotiated with them," he says.
In 1995 he turned from gamekeeper to poacher, taking the decision to run his own hedge fund, moving from the buy side to the sell side.
He relocated to Weybridge in Surrey, an affluent suburb close to London, partly so his children would be educated there. "It was relatively straightforward once the decision had been made where to go," he says.
In the 16 years since, QCM has returned more than 600 per cent growth to its investors, with only two negative years.
Mr Karim enjoys reading, travelling, sport, art and opera - but investing is his passion.
He here talks about speculating, the life of a hedge fund manager, and the future of futures.
q You set up QCM on your own?
a Yes. Then it was one, two and three. We have not done too much active marketing, but we have been running now for 16 years and are beginning to attract more assets other than just friends and family. In 2004/5 we started to build on marketing. It is quite a small operation. I was quite happy just running it with my own money and other peoples' but I knew that if I wanted to take it to the next level we needed to build an institution.
Is there a lot of investment in software?
Yes, and that grew with increasing sophistication in the markets and strategies, you need a nuanced way of executing trades. You need to develop and invest.
What is the typical amount of investment?
At QCM we manage about US$900 million (Dh3.3 billion). We are not massive. I rather like where we are because we are in a good transition point to go into the $1bn plus, maybe go up $4bn to $5bn. What is important is the passion that I have for the business itself, working with the research team. It gives you an incredible feeling of joy to do well for your investors. Over the years you learn to deal with the good times and the bad times. What we are trying to do is offer a solution to investors for building wealth.
Traditional methods of building wealth seem to have disappeared?
Absolutely. We ask potential investors: from the housing bubble to the banking crisis did your portfolio suffer? Would you like therefore a strategy that would give you some protection? The answer to both is usually yes. And were you able to get your money out? There definitely the answer is no. But liquidity is something we all cry out for in times of panic.
But wasn't it the case that a lot of people weren't able to get their money out of hedge funds in 2008?
Yes, some of it got stuck. Investors have become a lot more conscious of liquidity. Yes they want returns, but not at any price.
Does your interest in liquidity make you a short-term investor?
No. But it is a feature of the instruments we use. These tend to be highly liquid. For example, you could just buy gold. Once you take delivery that is immediately quite illiquid. However, I could express a similar view in owning gold through the futures markets. They are exchange traded, much bigger than the physical market, regulated and mark-to-market on a daily basis. That means your gains and losses and holding on a daily basis gets realised. That's the nature of futures.
Do you run just one fund?
No, a variety, but they have a similar construction. They are all futures-based. It's a very diversified portfolio with equities, bonds, currencies and commodities. By nature, hedge funds are quite opportunistic and agnostic. We run a diversified portfolio based on our quantitative models and algorithms.
What do you think when politicians call for companies like yours to be stopped from speculating?
They think we should overlook weaknesses in the system. We see an opportunity. If we don't do something our investors will lose money so we need to take action. In the process if it means a company's shares go down, that is happening for a reason. We may have added a bit more fuel, but that's what creates efficient markets. And don't forget, for every buyer there's a seller. What may be an opportunity for me may not be for somebody else.
What is your advice to somebody investing now?
It's a very challenging, difficult environment. I don't think we can easily see attractive returns from any one strategy. I think investors need to keep in mind the liquidity focus and that makes approaches such as ours particularly compelling. If you don't like it you can get your money out. But you also have the potential to take the opportunities. Just holding equities or fixed income may be rewarded over the next couple of years, but it looks dangerous to me.