Fund - Ayaltis

Background:

Ernesto Prado is clearly a hedge fund manager with an appetite for taking on new challenges. In 2005, he was a key player in a large team that quit Harcourt Investment Consulting to launch Geneva-based Peak Partners at the start of 2006. After serving as that firm’s chief executive officer and winning two InvestHedge awards in 2007 for the best Asset Based Lending Fund as well as the top Fixed Income & Credit Fund, Prado and his partner, Son Nguyen, left Peak Partners in late 2008 to form Areca Investment Management, later renamed Ayaltis. Their bold new Zurich-based venture coincided with the greatest financial crash since the Depression.

Ernesto Prado is clearly a hedge fund manager with an appetite for taking on new challenges. In 2005, he was a key player in a large team that quit Harcourt Investment Consulting to launch Geneva-based Peak Partners at the start of 2006. After serving as that firm’s chief executive officer and winning two InvestHedge awards in 2007 for the best Asset Based Lending Fund as well as the top Fixed Income & Credit Fund, Prado and his partner, Son Nguyen, left Peak Partners in late 2008 to form Areca Investment Management, later renamed Ayaltis. Their bold new Zurich-based venture coincided with the greatest financial crash since the Depression.

“The timing was decisive, not accidental, yet difficult because the best opportunities in a generation were emerging for the savvy investor, and you could buy crown jewels for peanuts,” recalls Prado, chief investment officer of Ayaltis.

“We saw the sub-prime crisis coming, were positioned and profited from it in 2007. While we were buying protection, we knew how awful the situation was going to be for the balance sheets of the top 15 banks in the world which, without government bailouts, would go belly up. In launching our new firm at the height of the crisis, we had very decisive backers who were impressed that we had started sub-prime protection conversations with them as early as 2006 and had delivered good returns throughout 2007.”

With their majority stake in Ayaltis, Prado and Nguyen, the head of marketing, are the senior controlling partners in the firm. They lead a team of six employees who are managing a small suite of three funds with assets approaching $250 million. Prado insists that although the firm has plenty of capacity in order to reach the billion dollar club, he is not aiming to become a mega fund. “We will always aim for the lower ranks of that club because we won’t have 150 best investment ideas at any given date,” he says.


Prado and his team deliberately chose to base Ayaltis in Zurich because, as Prado points out: “I like both locations but prefer Zurich. Geneva is generous but generally more risk-averse, second-generation money and one step removed from direct entrepreneurial risk-taking. Zurich, however, has entrepreneurial wealth that may have been inherited but, nevertheless, creates new world-class businesses that are in closer touch with a fast-moving world.”


Unlike many other Swiss FoHF houses, which typically have a very geographically diversified clientele, Swiss-based investors represent 87% of Ayaltis’ clients. Institutional investors account for half of the firm’s clientele with family offices and private clients constituting the other half of the client structure.


“Our main clients are families and institutions,” says Prado. “We have no money from the traditional banking distribution networks. Since the crisis, leading A-list families have tended to trust banks with less of their assets for obvious reasons. They have developed fully fledged investment arms but complement them with external specialists. Although we’re independent, we are seen as one of those teams because we share the asset-protection philosophy.”


With over $200 million in assets, an impressive annualised return of
xxxx%* and a standard deviation of 5%, the Areca Value Discovery Fund has met its targets since inception in December 2008. The Luxembourg-based SICAV’s concentrated portfolio of 22 underlying positions blends deep-value credit strategies with fixed-income trading strategies, while the core part of the portfolio invests in strategies with asymmetric return profiles such as relative-value fixed income, event-driven, capital-structure arbitrage and distressed credit. The satellite component of the fund invests in global macro strategies to take advantage of macro dislocation, market momentum and liquidity.


In March 2010, Ayaltis launched the $30 million Acantias Offshore Fund with seed money from family offices. The managers are targeting undervalued assets in the distressed credit space through a highly concentrated portfolio of just six to eight funds. Its annualised return of xxxx%* and standard deviation of 3.92% places it firmly within the performance range of its initial objectives.


Ayaltis takes a philosophical approach in terms of running concentrated portfolios. “How many best ideas do you have at any given time – five or 150?” asks Prado. “We only have five. Modern portfolio theory advocates strong diversification as the best strategy but, taken to the extreme, one only achieves average performance mediocrity while exposing oneself to all the risks, as is clearly visible in times of crisis like today.”


Ayaltis is viewed as a fixed-income and credit specialist. Prado insists that this is related to how it views the global economy through a balance-sheet perspective. “A company or the most structured asset or any country has a balance sheet that is either solvent or insolvent. All balance sheets enforce a direct relationship between fixed income and equity (i.e. liabilities = assets). We look at investments with a fixed-income mindset to understand if beyond the debt, the balance sheet’s assets justify its equity – irrespective of growth-hope charged multiples. We invest in the rare equity funds and selected fixed-income funds that thoroughly understand balance sheets in order to assess whether or not they retain any equity value.”

Prado points out that relative-value strategies account for 90% of the investment process in both main funds. Of those investments, one-third is targeting a specific subset of the event-driven space in which companies are refinancing and cleaning up their balance sheets in order to survive in a world lacking robust economic growth. Another third is focused on relative-value arbitrage vis-à-vis structured assets where mortgage-backed securities can perform a key role. “It’s a question of good versus bad assets,” says Prado. “The cash flow of good assets is great, whereas it’s poor for artificially propped up (QE) bad assets. We have found that relative-value trading has proven to be a great producer of returns.”


A further third represents the sovereign story, but with a twist. “We’re benefiting in a liquid way from over-levered sovereign balance-sheet dislocations netted between yield curves through foreign exchange: the residual negative equity (balance of payments deficit) of the US is a growing asset in China’s balance sheet,” explains Prado. “The world is a complex octopus. On the right-hand side of the graph, the tentacle yield curves of the West and Japan have dropped for 20 years as economies over-borrowed to prop up growth and pay for promised – yet unaffordable – entitlements. Creditworthiness will be revised downwards via upward pressure on yield curves driven by deteriorating balance sheets. On the left-hand side, emerging economies are not (yet) over-indebted, are young and have no welfare commitments.


“As the octopus world painfully crawls into the next chapter of balance-sheet mismanagement, left and right will rebalance through foreign exchange, the netting mechanism of the octopus that settles economic differentials between corresponding yield curves in the absence of capital controls.”

*For performance and contact details, contact Shaun Rajiah +44 20 7779 8367

Related Articles:

Ayaltis starts offshore fund of funds focusing on stressed and ... - InvestHedge

Ayaltis, a fixed income and credit strategies specialist based in Zurich, formerly called Areca Investment Management, launched the Ayaltis…More


Multi-managers who came through the storm - HFI

...“Zurich has entrepreneurial wealth that may have been inherited but, nevertheless, creates new world-class businesses that are in closer touch with a fast- moving world” Ernesto Prado, chief investment officer, Ayaltis…More


 

To find all articles on Ayaltis from our 12-year archive go to the search page.


The latest and historical performance figures for Ayaltis funds are available to HedgeFund Intelligence subscribers. Contact us on to enquire about gaining access to the HedgeFund Intelligence Database - 020 7779 8367 or srajiah@hedgefundintelligence.com.