Interview with Mario Unali, Kairos Investment Management

Mario UnaliMario Unali started his career as an analyst at KMPG Corporate Finance. He joined Kairos Investment Management in 2008 and is a member of the investment team in the multi-manager group. Based in London, he covers global investments in absolute return strategies, with a focus on both UCITS and offshore hedge funds. As Kairos entered the UCITS space early on and is a pioneer in the Italian alternative funds of funds sector as well as alternative single manager sector, we were curious to find out more about their market view and what drives their investment decisions in the UCITS space in particular. Mr. Unali, Kairos successfully manages multiple alternative UCITS fund of funds while other UCITS fund of funds struggle to gain assets. What is your secret?

Mario Unali: In May 2009 we started the first fund of UCITS funds in Europe. Thanks to this first mover advantage we were able to immediately gain some traction among existing private investors, quickly reaching a significant size which then attracted the interest of large institutions in Europe. Today we manage an institutional business close to $ 1 billion in assets under management in several UCITS-compliant funds and managed accounts, with much higher liquidity and better transparency standards compared to offshore hedge funds. Moreover, thanks to our size we are able to get favourable fee terms from the underlying funds and we can also seed new UCITS vehicles ran by managers that we have known for a long time in the offshore space.

As European clients demand more and more onshore products as opposed to traditional hedge fund structures, the UCITS products will definitely be an area of focus not only for Kairos, but also for the European asset management industry in general. How do you select the funds you invest in?

Unali: The investment process is exactly the same as the offshore funds of funds, with some minor tweaks in order to take into account the differences in set up, legal structure and third parties involved. While our selection process is truly bottom up, we also try to gather market views from all the managers so we can get a clearer picture of the current market environment, which often drives us to the right decisions in the day-to-day portfolio management. It also helps us to keep track of the managers‘ behaviour in different market cycles, and therefore to identify any style drift. The due diligence process is particularly thorough in terms of administration, counterparty risk and the pedigree of the management company, as we try not to take anything for granted even in a regulated space like UCITS, whose perception of safety might lead other players to conduct a less tight due diligence. With the latest change of the UCTIS guidelines CTA managers have to adjust the most with their UCITS vehicles. Do you expect these changes to have an impact on performance will you change your selection process of CTA managers?

Unali: The recent developments of the UCITS regulation will certainly have an impact on CTA strategies, at a time where performance is already suffering from the volatile price action of several markets these systems are involved in. It is possible that the investable universe in this strategy will shrink as players with expertise in commodity trading will abandon plans to go UCITS. Although we have no CTA investments at the moment, we have been involved with them for a very long time and will possibly be again in the future, considering the success of the vast majority of our investments in this space. However we don’t believe that the selection process of these managers should change significantly because of the new regulation. If anything, investors should pay even more attention to the same elements that made the process successful for us over the past 13 years: quality of people in the organization, resources available for research and soundness of the trading systems. What are your expectations for the UCITS hedge fund market in general for 2013 and what influence will this have on your portfolio allocation?

Unali: Alternative strategies will gain further traction in the second half of the year, as investors start to question an asset allocation still heavily skewed towards bonds but are reluctant to face the volatility of directional equity investments. In fact many investors admit that there’s very little juice left in developed markets‘ bonds, but they are still haunted by the ghost of 2008. We think that the alternative space provides the most efficient way to add exposure to risk assets while keeping volatility under control. In this context the UCITS framework will help giving comfort to investors in terms of regulation, liquidity of the underlying investors and counterparty risk. It will be important for UCITS strategies to minimize the tracking error vis a vis the equivalent hedge fund strategy, and to prove that it is often possible to replicate the same exact portfolio of trades in a more efficient format. Thank you for the interview.