CHARLES SCHAFFRAN, ALLIANCE-APRIL 1998|
Charles Schaffran started his career as a lawyer and rose to become a partner at Schulte Roth & Zabel, a firm well-known for its hedge fund and investment adviser practice. In 1986, he became Chief Legal Counsel of the investment firm of Weiss, Peck & Greer where he later took on the additional title of Director of Alternative Investments. In November 1994, Charles Schaffran joined Alliance Capital Management to take over the management of its recently created hedge fund division. Since then, Alliance has launched twelve domestic and offshore hedge funds covering five different equity and fixed income strategies and accumulating hedge fund assets of $2 billion. Alliance's $1.2 billion US Growth Strategies Fund was one of the leading performers in 1997 with a net return of 44% and again in the first quarter of 1998 with a net return of 21%. While overall hedge fund assets are dwarfed by Alliance's $219 billion capital under management, the success of its hedge fund division in terms of the size and performance of its products is unique among the number of investment management and mutual fund companies that have ventured into the traditionally private hedge fund arena. Charles Schaffran spoke to HFN publisher, Antoine Bernheim, in mid-April 1998.
Profile of Charles B. Schaffran
Born: February 1, 1950 in New York
Education: BA, University of Rochester;
JD, Northwestern University School of Law
Family: Married to Laurie; two sons: Scott, 15;
Last vacation: Aspen in March
Last book read: A Civil Action by Jonathan Harr
Hobbies: golf and skiing
Favorite quote: "I hate quotations; tell me something you know"
How he best describes himself: "Lucky "
Q. Where do hedge funds fit into Alliance's overall business?
A. When I was first approached by Dave Williams, our Chairman, regarding Alliance's interest in the hedge fund business, his goals were to augment our ability to attract and retain the best investment management and analytical talent and to meet what he saw as the future demand of our traditional institutional clients for hedge fund products. We are well on our way to accomplishing these goals and, in doing so, have built a highly profitable business which is making a substantial impact on the company's bottom line. Importantly, our portfolio managers believe that the more expansive ways in which we look at the markets in our hedged strategies have made them better managers in our traditional long-only investment areas.
Q. Could you describe the main strategies followed by Alliance's hedge funds and who manages them?
A. We are presently offering five hedge fund strategies. Our Minneapolis large cap group led by Al Harrison, Vice Chairman of Alliance, started our first hedge fund in April 1994. Al's group runs approximately $30 billion of long-only large cap equity institutional accounts and $1.2 billion in a long-biased hedge strategy focusing on leveraging the 360 basis points of annualized outperformance of the market which they have generated over the last twenty years. Jim Reilly, a key member of Al's Large Cap growth team, serves as lead portfolio manager. They utilize shorting, options and other structural leveraged techniques to achieve returns of at least 1.5 times the S&P while controlling volatility. In December 1996, we launched our second equity strategy with a portfolio management team led by Bruce Calvert, Alliance's 20 year veteran Chief Investment Officer, and two experienced managers of short portfolios. They seek to utilize the best long and short ideas of Alliance's top equity research analysts to deliver 12% to 15% net returns on an annualized basis with no net market exposure, plus the flexibility to take a net long or short overall position. These managers generated a 25% net return in 1997 with no net market exposure, leading a number of clients to request a fund utilizing the same strategy and team but committed to maintaining no net market exposure. In response, we started up a market-neutral version of that strategy in March 1998.
In February 1997, we launched our first hedge fund offered by Alliance Capital Fixed Income Investors. This group actively manages over $90 billion in fixed income securities under the leadership of Wayne Lyski, its Chairman and Chief Investment Officer. Our first fixed income hedge fund seeks to provide superior risk-adjusted returns in excess of 15% by moderately leveraging our best relative value investment strategies in an interest rate-neutral framework.
The success of this initial strategy led to the launch, in January 1998, of a second fixed income strategy utilizing our expertise in the credit arena to seek similar returns through investments in a diversified pool of credit sensitive securities, primarily bank loans, subordinated asset-backed securities, private placements, distressed debt and high yield bonds. This newest strategy is managed by a team led by Andy Aran, Alliance's Director of corporate bond credit research.
Going forward, we should be able to offer two new products per year which would allow us to take in new assets of at least $500 million annually.
Q. Could you describe the development process of Alliance's hedge fund products?
A. The one constant in every strategy to date has been the utilization of Alliance's very fine research team and the breadth and depth of our investment management experience. I normally consult with Bruce Calvert, Dave Williams and others about where I may find the talent within Alliance that would lend itself to a successful hedge fund strategy. Through a series of meetings, I then attempt to focus portfolio managers and analysts on how best to utilize their strengths with the objective of achieving at least 15% annualized net returns with acceptable volatility in various market environments. I emphasize that the hedge fund investor is generally not seeking leveraged products or outsized returns but rather 15% to 20% returns with limited volatility, and an eye to downside volatility in particular. Once the managers understand the nature of the marketplace, they have been able to design strategies with surprising ease to achieve those goals.
Q. What is your marketing strategy and how does it fit with Alliance's existing distribution channels?
A. I view marketing as a secondary function of our group. As I repeatedly emphasize, if we get the product right, marketing is easy. We currently have three salespeople dedicated to our hedge funds. Mark Marxer focuses on domestic high net worth individuals, family offices, funds of funds, banks and brokerage houses. Douglas Morse focuses on the East Coast high net worth market. I focus on overseas marketing, particularly in Europe. We have attempted to utilize Alliance's traditional marketing teams in the sale of hedge fund products with mixed success. Our mutual fund group was quite successful in selling our long-biased strategy offshore through two different brokerage firms, and I anticipate that this group will be involved in future hedge fund offerings, albeit with a separate line of products from my team. On the institutional side, however, investors are primarily interested in absolute return products with strong long term track records and consultant endorsement. To date, we have had no such product to offer as our absolute return products have sold out capacity before generating a record which could support an institutional sales effort.
Q. How do you deal with the issues that have traditionally hampered the development of hedge fund products within mutual fund companies such as code of ethics related issues?
A. This has not been a significant issue. We have a central trading desk through which all equity trades must flow. It is the job of the trading desk to assure that trades are appropriately allocated where allocations are necessary. We do not short securities which we hold long in our traditional accounts even where we might have a short term view which is substantially different from our long term view. We will, however, add to or sell positions in the hedge funds which may have a different time frame than our institutional accounts.
Q. Do you think that changes in mutual fund regulations will cause some of them to compete successfully with hedge funds?
A. The repeal of the short short rule and the liberalization of mutual fund trading rules will enable mutual funds to incorporate strategies which had earlier been foreclosed to them, including strategies that many would describe as hedge funds. Mutual funds may very well be able to offer the general public the ability to participate in highly liquid large capacity strategies. These would typically be long-biased or leverage oriented. On the other hand, most absolute return oriented hedge funds are greatly aided by maintaining a smaller size and periodic liquidity which is not consistent with a mutual fund.
Q. How do you view the recent transactions involving the sale of interests in hedge fund management companies and does that have implications for your business development?
A. When I first arrived at Alliance, I actively tried to attract hedge fund managers to our firm and pursued a number of hedge fund acquisitions and joint ventures without success. I could have closed many deals but found that the people I coveted wished to stay independent or were too expensive compared to Alliance's home grown talent. While we remain open to bring in people with the skill sets to run absolute return products not now within our experience, I consider acquisitions to be a very expensive way to grow. The group heads who are currently involved in our hedge fund effort certainly have an increased sensitivity to the types of hires that will augment their ability to offer absolute return oriented strategies and I anticipate that, over time, they will add that type of talent to their teams.u