Deutsche Bank’s managed investment platform, dbSelect, is a fast-growing platform for accessing liquid hedge fund strategies in a way that is not only efficient, but also transparent and secure
The hedge fund industry has faced a difficult year, and managers are increasingly wary of where the markets will head and when. There is evidence that in 2012 investors have shifted assets towards low-risk investments, as the eurozone continues to struggle and uncertainty in the markets remains high. Since the onset of the economic crisis in 2008, investors have been searching for different and more profitable investment solutions in order to counter or evade potential losses in such a challenging investment climate. A study commissioned by Hedge Fund Research showed that hedge funds outperformed a variety of stocks and bonds between 1994 and 2011, proving why the popularity of these investment options has endured.
The platform has attracted investors from every major jurisdiction, with more than $5.1bn in assets under management and over 200 investor mandates globally
Of course, the economic slowdown has greatly affected the hedge fund industry. Since the beginning of 2010, hedge funds have yielded returns lower than both global stocks and bonds, on average. Delivering performance in 2011 was particularly difficult, when only 27 percent of mutual funds yielded better results than their benchmarks, according to research by Lipper. One year on and the markets are as volatile as ever, responding to market and political trends and the enduring trouble in Europe.
But platforms like dbSelect have been rallying, and learning to adapt and overcome difficult economic climates. “We had phenomenal growth in terms of assets in 2011,” says Effie Datson, Product Head at dbSelect. “Yes, it has been a difficult environment, but we have been seeing inflows from the US; there have been steady flows in from Europe; and small but growing interest from non-Japan Asia.” She attributes the platform’s success to its commitment to transparency, liquidity and risk management; “How do you invest in a hedge fund strategy? Traditionally through offshore funds,” she explains. “We offer a less risky, more liquid and more transparent way to do that. It is a secular change that will endure.”
The origins of the platform date back to 2004, when Founder and Global Head of dbSelect Hans Feder launched this innovative business. “Deutsche Bank has a very deep and longstanding relationship with many leading global institutional clients who were investing in beta or passive strategies, and continue to do so. dbSelect was created to offer them alpha strategies as well,” explains Feder. The platform is unfunded in nature. “We don’t need investors’ cash in order to deliver a return stream,” says Feder, adding that these products are created on a customised basis for each investor.
Levels of exposure
For that reason, dbSelect caters to institutional investors rather than retail customers. The platform is cash efficient and dbSelect does not have to increase investors’ counterparty risk. For example, a large global pension fund may already have a relationship with the bank. Deutsche Bank can issue a swap linked to the performance of a single or multi-manager portfolio that can be netted against the other exposures the pension fund has with the bank, and collateral is exchanged. Total exposure to Deutsche Bank could be as little as one day’s worth of profit and loss. In other vehicles, the client could have full counterparty exposure.
Unique in the hedge fund industry, the platform offers institutional investors return streams of hedge fund trading strategies “in exactly the way investors want to receive them,” Datson explains. The platform has attracted investors from every major jurisdiction, with more than $5.1bn in assets under management and over 200 investor mandates globally. “We cover three major types of trading strategies,” explains Datson; “Forex, managed futures and pure commodities.” Within these classes, dbSelect offers over 170 managers and strategies, all of which are readily available for investment.
The main appeal of dbSelect is that nearly all its investment programmes are available on a daily liquidity basis. “We wanted to pass on the liquidity of the underlying market to investors,” says Feder, “and that is pretty unique in the industry. In uncertain markets, investors need to have the ability to adjust their portfolios whenever they want.”
In addition to the advantages already mentioned, dbSelect boasts a complete and transparent system of real-time reporting in order to provide investors with the most current information on their underlying investments. This is a fundamental tool for portfolio management and allows both investors and managers to react to new information and price movements in markets immediately. In addition, this is one of the only platforms to offer comprehensive profit attribution, risk analysis, trade and position information and mark-to-market data in real time. “Our full real-time reporting is comprehensive and timely, and I don’t think anyone else offers such thorough or timely reporting,” says Datson.
Today, dbSelect continues to add to its already vast catalogue of managers and strategies, ensuring that its investors will always find what they are looking for within the platform.
“The managers that have been the most successful are the ones that work in strong partnership with Deutsche Bank,” explains Feder, “and the ones who engage with us when they have opportunities and challenges we can solve together. We also try to work with our managers to bring opportunities to them when we see them. It is a two-way street.”
Because it is an open platform, which operates entirely based on what its investors need, dbSelect will add managers at clients’ request provided they pass stringent due diligence criteria. “It is completely investor driven and open architecture. We don’t give investment advice, but respond to what investors want,” says Datson. When an investor expresses interest in a certain fund or manager, dbSelect will carry out extensive background checks and engage Mercer Investments to carry out due diligence in order to ensure the suitability of the manager. “We need to ascertain quality,” explains Datson. But she is clear that the success of the platform is a result of both “the managers’ trading strategies and the way we deliver it.”
This flexibility when it comes to investor wants and needs is another key feature of the dbSelect platform. For example, an investor may require their transactions denominated in their own currency, or in gold. Or they might need a wrapper for their specific jurisdiction. This flexibility ensures that the platform can combine and wrap the return streams in whichever way is appropriate to each individual client, offering access to strategies which not only enhance investors’ portfolios, but also comply with regulations in their home jurisdiction.
“The main thing we do is to offer investment strategies that are different, uncorrelated and which bring diversification to portfolios,” explains Datson. “Over long periods of time our platform strategies have seen neutral or no correlation to other asset classes, and so create a real benefit for investors.”
The full might of Deutsche Bank operating behind the scenes is vital for the smooth running of the managed investment platform. “The bank enables us to have tremendous flexibility,” says Datson, “and a huge range of tools. We have structuring capabilities of tremendous depth and breadth, a strong IT platform, and a vibrant franchise to complement our platform offering.” This support has enabled dbSelect to continue growing. In the eight years since its inception, the platform has become a market leader and found success in spite of market conditions.