Louis Gargour, the founder of LNG Capital, a fixed-income firm specialising in European credit, talks about his approach to investing and his view of the markets - with video.
Hedge funds regain their status - and $2tn
At the height of the financial crisis in 2008, hedge funds were perceived to be among the biggest villains of the piece.
Regarded by some observers as no better than spivs or speculators, when they started to lose money, people began to withdraw from loss-making funds, which in turn tried to keep the cash to avoid a meltdown.
From being highly regarded, they suddenly went to being shunned as pariahs. But within a year, people with money had realised there was no sensible alternative. Paying "2 and 20", then the industry standard, which translates as an annual fee of 2 per cent of invested capital and 20 per cent of profits, appeared good value, certainly better than trying to do it oneself.
The trend to withdraw capital has now been reversed. Money is flooding into successful funds, with industry analysts claiming hedge funds now have US$2 trillion (Dh7.34tn) under management.
Louis Gargour is a veteran of the capital and hedge fund markets, with a successful career that has taken him from Goldman Sachs to JPMorgan and RAB Capital. In 2006 he set up his own venture, LNG Capital. Last week he was in Abu Dhabi and gave us his forthright view on European debt, the Arab spring and the value in hedge funds.
Can you tell us about LNG Capital?
It's a boutique, fixed-income firm that specialises in European credit. It has four principal partners. We specialise in European debt with a 10-year track record with very good results.
And what brings you here?
We have found there is a desire in the Middle East to increase exposure to European investments. Fixed income and Europe have both been ignored and underweighted relative to what they ought to be in a significant portfolio.
Are we talking government or corporate debt?
The opportunity ranges across government to corporate debt. Our speciality is corporate debt. We tend to look for opportunities that may exist in places such as Greece and Ireland because of the dislocation of government debt. Europe is very interesting now from an actively managed perspective … that of a hedge fund where we can focus on event-driven trades.
From a European perspective, what is your take on the implications of the Arab spring of the past few months?
My interpretation from talking to a number of clients is that Dubai and Abu Dhabi are going to benefit significantly from what has happened in Egypt, is happening in Libya and Syria and the situation in flux in Yemen. The real estate question is still hanging over the region, but there is capital coming in and people requiring property.
While it may be good for the UAE, what about other countries?
There is regionally a shift away from various countries, but the question is: is what is happening now in Libya the end of a type of regime and the beginning of a systemic shift towards a more democratic type of government?
And for the economics? Would you say invest in Europe instead?
No. There are opportunities locally, although I'm not an expert. But the stability here means that capital will be coming here, and as a diversifier, Europe must be considered, particularly fixed income in Europe. It's an asset class that is bigger than the equity markets in Europe, has been ignored and producing significant returns. Last year the index was up over 12 per cent; we were up 70 per cent.
How do you make investment decisions?
We have a process that begins by being top-down. What sectors do we want to invest in, what is our risk appetite and where do we think the opportunities are? We then move on to the analysis, trade execution and risk management. In terms of the sectors, we like minerals, mining, oil and gas. We don't like TMT [technology, media and telecommunications], utilities, European peripherals and European financials. What we do is construct a portfolio of longs and shorts, depending on our sectoral viewpoint.
What explains the return of hedge funds after the collapse of 2008?
Hedge funds are an optimisation of how you would run money. The tools are greater for a hedge fund than a simple long fund. The industry was under pressure and beaten down, but has bounced back to the $2tn mark again. In some cases the fees have come down, although the performance-related element remains. The fees are now 1 to 1 and a half [per cent], down from 2 or 2 and a half, with the bonus remaining at 20. It is incentivising for the manager, but also good for the client.
Finally, why should Middle Eastern investors be bothered with European debt?
First, there's the diversification element that we've already touched upon. Second, it's an exciting asset class that is not predicated on continuing growth like emerging-market equities. Nor do we see spreads tightening further as in US debt, and there are also huge opportunities on the long and short side because of the dislocation between the core of Europe and the peripherals. I guess you could say the opportunities are analogous to the US municipal debt markets, with a heterogeneous landscape due to the differences in economic growth across Europe.