$18 billion hedge fund CQS is targeting America’s largest investors with specialized strategies as part of a US push

CQS CEO Xavier Rolet joined the $18 billion London-based hedge fund in December 2018 after taking a year off following his near decade-long run atop the London Stock Exchange.
Rolet spoke with Business Insider about his growth strategy and focus on creating "bespoke strategies."

A multi-billion London-based hedge fund wants to expand its presence in the United States, and thinks customized strategies built for specific investors is the way to do it.

CQS, an $18 billion hedge fund manager founded by a billionaire who was knighted by the Queen, named a new CEO, Xavier Rolet, at the end of last year. The firm had been run by Sir Michael Hintze for its first two decades of existence.

Rolet, the former head of the London Stock Exchange, plans to focus on scaling the operations and expanding the distribution abilities of the asset manager, while Hintze focuses on the investment side as a senior portfolio manager and the firm’s senior investment officer, Rolet said in an interview with Business Insider in CQS’ New York offices.

See more: Stock-pickers are starting the year hot, but investors still pulled billions. It shows how the hedge fund game has fundamentally changed.

And the key to growth will be evolving from offering the hedge funds that have made the firm successful and Hintze a billionaire to creating "bespoke strategies with bespoke fees" in partnership with the world’s largest investors, Rolet said.

In order for the largest asset owners in the world to hit their return targets, they need more than the "cut-and-paste" approach of portfolio management, where different strategies and vehicles from different managers are patched together to make a portfolio, Rolet said.

"The largest asset owners are increasingly looking for strategies that meet specific needs. That cannot be achieved by investment in a co-mingled fund to meet the risk/return objectives they have."

This level of sophistication is becoming increasingly common in the hedge fund and broader alternative investment industry as the biggest institutional investors use their clout to demand specialized strategies. A quarter of new money that went into the quickly maturing hedge fund industry last year was invested in customized funds offered in a separately managed account or fund-of-one, according to data from Jefferies.

A bulk of CQS’ $18 billion is invested in its credit strategies that Hintze is well-known for, but the manager has 31 different strategies in total, Rolet said. The teams are forced to communicate and work with each other internally, he said, making them a better fit than other diversified hedge fund managers for an investor looking to place billions in a customized strategy because their teams are not walled off from each other.

CQS

With only 20% of its asset base coming from the United States, CQS believes it can attract return-starved pension plans with this approach. It plans to hire portfolio managers and distribution professionals in the US, Rolet said. He declined to give specific numbers on the fee structure beyond commenting that it is performance-based, and that customized strategies’ fees would be even more focused on performance barriers.

When making a customized strategy, the firm focuses first on what an investor’s return "hurdle" is, he said, and CQS has found that once returns pass the hurdle, investors are willing to pay up.

"Asset owners are very open to sharing the gains made," he said.

For fees to not be a constant sore point between the two sides, "alignment is critical," Rolet said.

"That revolves around a partnership approach to investment solutions. We are not shy about having conversations about our remuneration. The balance of management and performance fees as part of discussions around bespoke solutions is something we are open to."

See more: Investors are asking hedge funds to move to a ‘0-and-30’ fee model, and it’s putting pressure on a big chunk of the industry

The hedge fund industry is moving from "where the titans of the hedge fund world ruled the conversation to where the winners will be client-centric managers," he said, and thinks the numbers back him up.

With overall industry asset growth slowing, the way hedge funds have been run "doesn’t indicate a growing industry," he said. The CEO of the Certified Alternative Investment Analyst association, William Kelly, recently wrote in a blog post for Preqin that hedge fund managers need "to recognize that hedge funds are no longer an asset class, but an industry wrestling with maturity and purpose."

"As the hedge fund industry moves towards maturity, it is certainly expected to grow but not at the same torrid pace that we have seen," he wrote.

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