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47 Degrees North Taps Inefficient Frontiers

47 Degrees North Capital CEO Claude Porret is staking the firm's future on emerging hedge fund talent.

Investors, still reeling from the credit crisis, have been beating a retreat from illiquid hedge fund strategies. But 47 Degrees North Capital Management, a fund-of-hedge-funds firm based in Pfäffikon, Switzerland, is doubling down on the opposite bet: that intrepid investors with a long-term view will continue to crave new sources of alpha. In June, the firm launched its second emerging-manager fund, called the Innovation Fund, which will target bespoke hedge fund strategies ranging from freight and shipping to insurance-linked securities.

“We want to profit from a first-mover advantage,” says 47 Degrees North CEO Claude Porret, who is targeting annual returns of 12 to 15 percent with volatility of 6 to 8 percent. “We get in when a new strategy starts to become liquid enough to exploit early inefficiencies and then sell out when those inefficiencies disappear.”

London-based Iveagh, for one, is a believer. The family office for the Guinness brewing clan has invested $25 million in both of the firm’s funds and, last April, took a small stake in the firm itself, with the option to buy up to 25 percent. It’s the second high-profile vote of confidence for 47 Degrees North, which was founded in 2006 by Porret and eight former colleagues from RMF Investment Management, part of U.K.-based Man Group. Just a year later the firm received a $150 million allocation from the emerging-managers program of pension behemoth California Public Employees’ Retirement Systems. Today 47 Degrees North oversees about $200 million in assets.

The Innovation Fund has a wide remit. It focuses on managers who ply their trade in off-the-beaten-path locales in Africa, Asia and the Middle East. The firm, named for its Swiss latitudinal position, is also keeping an eye on next-generation strategies for which appropriate financial instruments are not yet available, such as seafood futures and intellectual-property rights.

Porret says her firm began sourcing talent well before the launch of the new fund. Of the 700 managers it has already analyzed, only 100 to 150 met its investment criteria, she notes, and only 20 to 25 will ultimately be in the fund. “We always prefer to have the best trader in the market rather than having three or four,” explains the chief executive.

One fund the firm is betting on is London-based Clive Capital. The fundamentally driven, diversified commodities trading shop was founded by Chris Levett, a former top trader at Louis Bacon’s Moore Capital Management. It delivered a 44 percent return after fees in 2008, a treacherous year in which oil prices gyrated.

Like CalPERS, Iveagh has turned to 47 Degrees North to further diversify its hedge fund program. Finding fund managers early in their career arc is crucial, according to Paul Ross, Iveagh’s chief investment officer. “New managers tend to try harder,” he asserts.

Not that picking the right ones is easy. The objective is to develop a pipeline of talent while balancing the need for liquidity with the desire for unique sources of return. The challenge is that “as more people become invested and liquidity improves, the strategies are likely to become more correlated,” points out Jeff Majit, who analyzes early-stage funds as the London-based head of European investments at Neuberger Berman’s alternative-investment management group.

Leverage, which forced many hedge funds to sell at the height of the credit crisis, is also a concern. But Porret says the turmoil taught her firm a lesson it has taken to heart: Not only does 47 Degrees North steer clear of highly leveraged strategies, it also makes sure that its managers offer liquidity terms that are consistent with the firm’s policy of quarterly redemptions. “It is the opposite of the macro managers’ chasing a few basis points and having to leverage up to deliver returns,” Porret says of her target managers’ strategy.

It may be too soon to judge the Innovation Fund’s performance, but 47 Degrees North’s CalPERS portfolio has proved to be relatively resilient. In the 12 months ended March 31, the latest period for which data is available, the allocation fell by 13 percent, compared with a 15.9 percent decline for the benchmark HFRI fund-of-funds composite index.

“In times of systemic risk, it is extremely difficult to find something that doesn’t correlate,” notes Porret. But as markets stabilize, the fund manager’s high-profile backers are betting that well-timed moves into exotic strategies will yield portfolio-stabilizing returns.

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