Catherine Shiang

Jennifer Bruno

Welcome to Hedge Interview. I'm your host Jennifer Bruno, and today on the Investor Views series, I'm speaking with Catherine Shiang. Catherine has been the managing director of a single-family office with offices in Asia, North America, and Europe. She has extensive experience in limited partnerships, and she's had many principal and advisory roles in venture capital, private equity, mergers and acquisitions, and hedge funds. She has served as an advisor to CEOs, and she has been a member on numerous boards and nonprofits. She is also an accomplished attorney, previously associated with three global law firms, Catherine holds a Bachelor of Arts from UC Berkeley with a minor in biochemistry, and she earned her law degree from Georgetown University. Thank you so much for joining me today, Catherine.

Catherine Shiang

Thank you for inviting me, Jennifer. Appreciate this.

Jennifer Bruno

So, tell me a little bit about your your firm and your primary focus.

Catherine Shiang

Well, we're a little bit different. We are a single family office, and we've been in existence, I'd say, officially since the early 1900s. But we were loosely doing what we're doing now since the late 1800s, and we originally began in Asia, and when World War II came, the family fled due to the Japanese had seized the family's assets, and many of the family lost their lives. And so, over the decades, the family regrouped. We're still in manufacturing, which is the core operating companies. So our family began in rat hen making bamboo furniture, exporting. And if you look in old movies, you'll see a lot of those furniture during the Bella Poh period.

Jennifer Bruno

Wow, that's that's a long history there.

Catherine Shiang

We're we're a little different in that in that capacity in the sense two things we have operating capital that throws out cash every year, so we're not in the cash preservation mode. So our risk profile may be a little different from families that don't continue to have operating companies, or companies or families that are younger and are still in their operating capacity and still building and aggregating their wealth. So those are important features for your audience that are looking at asset gathering, the takeaway from this chat would be how to demystify how one family looks at fund managers. Sure, and we don't see one size fits all because hedge is only one asset class within our portfolio management, we see hedge as a risk adjustment, if you will, a way to manage our overall capital that's at risk. So we don't have the traditional look of for managers that just look for rate of return. We have actually much more of an institutional perspective, which is risk management. So our managers and the hedge strategies. We are a broad array of managers that we have, from event driven to CTAs to futures, if you will. So it's a different type of managers across the long short different markets, so we use hedge as a way to manage our other portfolio risk.

Jennifer Bruno

Okay.

Catherine Shiang

So there's no one size fits all. So a lot of younger families might want specifically long long short or the or a strategy only for event, and they only look for the return. We don't. We are a lot more. We look at how that fund will fit into our overall asset, our overall portfolio management, portfolio construction,

Jennifer Bruno

towards towards capital preservation, as you said. So would you say you're more risk averse, or no? No,

Catherine Shiang

because we have operating capital that throws out. We are less, we are more, we are less risk averse, and we have a healthier risk appetite. So that's a little different. And for for the risk aversion side of it, similar to the institution, let me clarify: we're looking at risk aversion in terms of new emerging managers that do not have the the compliance in place. They don't have the investment in technology to help manage their front and mid office communications, third party accountability for their fund admin. Registration, so risk in that in in much more the portfolio management itself. Resistive return.

Jennifer Bruno

Do you have a specific mandate, or or for certain types, or as you said, it's pretty broad. How do you make your decision as far as which types of managers are you are you pretty open or there is how how do you sort of narrow down your choices since there are so many?

Catherine Shiang

That's that's a very good question. There are two things that your your question is actually two questions in one. How do we look at funds strategies? What type of strategies, and then two, what type of managers so that manage these funds. Right. So on the strategy, right. So the strategy is the strategies that we look at really fit are those that fit into our overall portfolio construction, and as I said, we use certain we use hedge as a way to manage our overall risk, if you will. So, for example, current market trends. Investco just came out with a report about how the repo market is. There's a lot of stress in that market, and and there's a lot of pressure on central banks. Italy just issued bonds in U.S. dollar denominations. So if you're in in the European market, you would feel a lot of pressure. And so what we use for CTAs is that in is is we look at currency that are less like the well by the fact that Italy issued bonds in U.S. dollar signals that the euro is is not as healthy, and so there is now more flight to the U.S. dollar. So we would use CTAs to support that. So if we had currencies in those markets, we would certainly put some pressure on those CTAs to, or or look work with CTAs to de-risk our our our currency risk, especially since I said we have operating capital, operating companies that have have relationships in Europe. So that's one example. So the other is we would probably we are looking at much more flight quality, and I think a lot of people are. So with hedge long short is much more interesting to us because those managers are more nimble in these volatile markets. They allow us risk and deleverage, and they get in and out. Versus a lot of families just redeem, and we don't believe in that. Once we're with a manager, we're with them for a period of time, and we give that. And that may be a little different from other institutionals. But as a family, we we tend not to rotate our managers out. And on that same statement, we also take a while to familiarize ourselves with managers when they pitch to us, we take a long time to get to know them. We take a long time to watch them from A to Z. That means from the from their strategies, from their return, historical if they're new. We even seed managers if they come from if they have a strategy that fits what we're looking at, so we we operate more like a fund of fund hedge, if you will.

Jennifer Bruno

How do you how do you typically find managers that you're interested in? How do you do they approach you? Do you use a consultant? How do you sort of qualify who who you even become interested in watching for a while.

Catherine Shiang

Well, that's sourcing managers is something that I don't manage our hedge strategy. So I manage the overall portfolio construction, and I sit on the overall IC. So we have a hedge professional that manages that, and part of his role is to go and seek these seek managers, and we have manage manage we have managed accounts with global funds with global names, but we feel a little at loss. So we're much more interested in on an AUM that is below 1 billion, and so and often we follow that manager as they grow and they leave that one 1 billion plus fund and build on their existing strategy. We know them. We've worked with them.

Jennifer Bruno

How do how does your firm feel about some of the newer trends like artificial intelligence or cryptocurrencies, and and some of those new arenas that are opening up.

Catherine Shiang

AI is is a big broad word. It's like cybersecurity. Do you invest in cybersecurity? Well, everybody is by default investing in cybersecurity. One way or another, whether it's in a new language format or whether it's in hardware, it's so to say AI. So we look at AI a little differently. We look at what it supports the application. So we do look at funds that are obviously hedge funds that do look at the emerging markets and tech specifically, but for tech we are so excited about tech that we do direct investments ourselves, both in PE and VC. So less hedge. Hedge U.S. equities is doing very well. We are very bullish on U.S. equities in all asset classes. We do have also a group that looks at mid-market size for direct acquisition in a vertical, so trade sales. But that's a different asset than hedge. And for the event-driven hedges, we're very excited about that. Not just in the U.S. market, but also in the emerging markets such as the sub-Saharan African countries, less so in Southeast Asia. That's a not for everybody, but in our own portfolio construction, we're not as long short there in event driven. We are in long short. Let me clarify, but not in event driven for Southeast Asia, but we are very active in event-driven strategies for other markets. As you know, China does not have a long-short hedge fund sector because of regulation.

Jennifer Bruno

Okay. Yeah.

Catherine Shiang

So the way the regulation works, it it doesn't have an effective short strategy. It's just okay.

Jennifer Bruno

And so, are there any any strategies that are an automatic no that you just typically shy away from?

Catherine Shiang

No, not at all. We are very we're both market and sector agnostic when it comes to hedge. It just depends on the duration of our portfolio cycle, again, it has to be a piece of that fits into our overall puzzle, if you will, and that puzzle constantly gets balanced. When I say constantly, we have a five-year mandate and then an annual mandate, and so when we constantly balance, and a one-year mandate is very short, so we tend to take a long, longer vision when we when we invite new managers into the fold. That goes from FDD to LDD, but most importantly, we usually follow a manager that has left a larger, larger fund and has starting to hang their own shingles at them. That's exciting to us to give a manager an opportunity.

Jennifer Bruno

They usually have a little more capital to start with and some infrastructure under those circumstances, so that gives them a little more. But I could see how that would give you more confidence.

Catherine Shiang

Let me go back to AI because that is very exciting in crypto. I think for crypto we are less just because the the regulations are all over the map between the there's no so for example Singapore and Japan recognize crypto as a currency the U.S. IRS does not it's still a commodity so that is that obviously affects our return by investing in crypto by holding crypto so there's a tax ramification versus it being designated as a currency, and the SEC has issued. So the SEC has considered it a security, but not all cryptos are security. Depending on are not ICOs issued, crypto issued and ICOs are security. So, it we're taking a longer view, especially with quantum computer, so we're much more interested in machine learning and AI for what what you know the broader definition of AI, especially investing in. But this is not necessarily in hedge, but directly in that look at different language development for AI. There is, we don't see one size fits all for the language. So there's R, there's Python, which is the leader. But we don't. They're both. There's over 12. There's actually much more than 12 languages already in AI. So we see all the language have limitations, and so depending on the application that they're pursuing, but we'd like to see AI in portfolio management, in hedge. The use of technology, especially going forward, is important to us. So we do look at hedge managers that have invested in tech, whether it's for research, analysis, or or looking at trending of their own portfolio, developing their own, using not necessarily AI to predicate a market signal, but at least using the AI to understand that there are market signals that. Can pull out of so they're not wholly dependent upon that research, but certainly technology using that is we think is relevant to our review and look at when how a manager comes to us. That's an important point, right? Okay, and it's a very still a nascent arena. It seems like there's still a lot of there's not that many AI hedge funds. If I think they're as far as I know at this point, it's still still very a very new space. Well, there's a lot. I disagree. There's a lot of funds that use AI, and that's what I meant. Okay. They use AI and portfolio optimization. So that is important that they do that, that they leverage tech and external expertise to support their their their their fund, their portfolio construction, and constantly look at that. I think that is relevant to any hedge manager going forward, and it's just and if they don't, it's like, well, you have a tool, why not use it? It's like why go to combat without a shield when everybody has a shield. So it's kind of to us that that seems so. When a manager doesn't embrace or know how to use tech in their fund management in their portfolio, we find that interesting, but not in a positive way necessarily for us, because we think that there is a lot of value right now in data management, and data analytics tools.

Jennifer Bruno

So, as far as your sort of like your investment strike zone or the the criteria that you would require for an investment, you would would you say that some infrastructure has to be there, some some pedigree in terms of coming from a coming out of a spinoff to some extent from a larger, more well known manager. What else would what other criteria are really important to your your firm, whether it's a hedge fund or I guess I'm speaking in the hedge space at this for this instance.

Catherine Shiang

Well, so unlike some people that just look at Sharpe ratios, what we do is we do look at the managers and yes, some pedigree, but we found people with a passion and especially for a certain strategy and a basis for that, and that they've shown whether it's in modeling or in regression tests or that we're always interested in new strategies and new views, and I think technology has allowed for that because it allows for people to rotate a market or a sector and spin it to and and and see something that others might not see. For us, we will for the managers. Of course, I said FDD and LDD; those are standard, but we spend time in in and that usually is a six months process. So we can't just write a check and say, especially if we're going to commit to a, and this might be a good time because our family has to push out a substantial sum of capital per year, and hedge is allocated where we have about 100 bucks a year to to to put into hedge, so and that's for existing and new managers. And so new managers, we have, and that's not quite a lot because that's per year. So we already have allocation that's substantially more than that into this asset class. How much again? New capital, 100 bucks. So 100 million.

Jennifer Bruno

100 million. Okay, haven't hadn't heard that reference. Okay,

Catherine Shiang

yeah, one buck, two buck. So 100 bucks. Yeah. Okay. We have 100 bucks new capital, new dry powder, new capital per year for this asset. But that's not to say that we, and if you add all those years, there is a healthy a healthy sum allocated to this asset class. Yeah,

Jennifer Bruno

right. That's what you capital. Yeah,

Catherine Shiang

per year. So and you know how old we are. So that's a lot. That so so that's that is a lot. So that's why some families are some managers will say, well, complain. Well, that's 100. That's only 100, and we say, well, for our portfolio, our asset management, that's that's enough per year, and so we don't allocate. We don't usually see new managers that expect more from us. We have our own internal mandate on which strategies. Again, it it builds off of our overall portfolio construction. So some years we may be big on CTAs, other years not. So, I think the for this year we've been heavy, much more heavily with our CTAs, just because of the political risk and the market. We're seeing. Europe having struggling with their central bank, we see interest rate bouncing lower and lower. So we think that to leverage our our own portfolio, we we've been a little bit more weighty in the CTA market for ourselves. But that doesn't mean that's the right size for other families,

Jennifer Bruno

and so that 100 bucks is across roughly how many managers per year?

Catherine Shiang

Well, depends. Some year it might just go to one. We like that. We like that strategy. We will never give anything more than 20 to and to a new manager. We don't seed, and then that's quite a healthy, right? So some people, some seed are looking for 3030, We tend to be a little bit more cautious until we know, even though we may have worked with them until they they get their back office, middle office, you know, lined up, until they get the fund administration set up until they to us that is more that's relevant for an ongoing to see how much they they invest in that and how much they value that to us that's meaningful when a manager commits to that their own internal infrastructure and their team obviously so I'm just assuming that the manager qualifies for FDD LDD, and the manager is somebody that we spent time with. I know that's the capital that we would look at. But if somebody walking off the street coldly through LinkedIn or something, we would probably take much more time unless that we can validate who they are and who they've worked with.

Jennifer Bruno

So, so without naming names, for an emerging manager, tell us about a success story where you were really impressed. Like for six months under review, month after month, you're just they they just really impressed you. What did they do that that made you aside from performance? Like what would you say made you feel like this is they've really got their act together.

Catherine Shiang

Well, we think that all our managers that we have right now are quite impressive, so we think that we think the world of them.

Jennifer Bruno

Emerging managers, in particular, because it's a higher bar in terms of pulling up, pulling out, hitting all of the right cylinders, I guess, all at once, since they're usually don't have; they're just not as established as some of the more well-known managers. It's a little harder, so that kind of a success story is kind of interesting. When, when certainly when an emerging manager is able to impress a, you know, an institution.

Catherine Shiang

The we've we've been very pleased with trying to get some of the managers that in the emerging market, such in African countries, off the ground, and we've been very pleased at the community impact that has provided job training, new jobs opportunities. A lot of the, but it is still a very nascent market, the hedge market, because of the regulation. So hedges essentially it's long versus long short. So we've been very pleased at how they've been able to work with us, and how they've been able to leverage our ability to provide them with resources from our other managers, and also how open they are in terms of the use of not only the tech but the research and part of our commitment in in seeding new managers is really much more not just ESG, but much more of an impact that they that they that we can build a sector there that we can assist in building that. And when we have managers that are receptive to that, we're always excited because we can see that they can grow much their AUM much faster and much further, so those managers have always impressed us when they are very very collaborative, and that's part of the reasons why we do seed we continue to seed managers in these markets, is that we want to see that sector grow and add financial stability and add financial growth for that those countries that a lot of people have that find it a little bit more outside of their risk profile. So that's

Jennifer Bruno

do you have a little bit more of a bias or favor a little bit more ESG and impact funds in those areas if if they've really can make a difference if they're doing something. Well, yeah, I think

Catherine Shiang

ESG is kind of well. Let me clarify this. I think everybody should. I think ESG has been in existence. It's a buzzword now. To be environmentally compliant, social responsibility, corporate governance, the. Things should be in place already. I think the Europeans have really moved it much further than the Americans, and the Americans have. We have kind of slow climbed on it slower, but that's actually something we have always, as American managers, have always been doing anyway. And any fund that hasn't been compliant is suspect. It's just a new buzzword. We think ESG is just a part of due diligence and continuing compliance. Right? You want to be environmental. You want to be environmentally compliant. You want to be socially responsible. Those are. But we. That's something that is interesting. Is that those are just compliance for us. That doesn't mean we focus on funds that are that that's their mandate. That's that's not that should be just part of their ongoing practice, ongoing governance, if you will. Impact is very different. You don't have to be ESG to be impactful. Right. So funds. So for hypothetically, I want to provide education to all children under five, and I want these funds to look at anything that has an impact on kids under five, whether it's education, health, retail, anything. But they don't have to be SG. So that's kind of a you know a contradiction, but that's really what it means. So we look at impact, but ESG is always part of our overall due diligence and review. But that that is a but those those are those are subcategories to the overall fund strategy. Right. So the strategy is more relevant to us. What kind of strategy? And as I said, for those markets, event driven is always very exciting because they know their own markets. I think for the we are very interested in the energy sector for Sub-Saharan Africa and going forward to your 2020 trends. We think that it is a volatile period in our in in our overall market sector, but we continue to see energy, new forms of energy, and any and so funds looking at that for probably much in the long short category. We look at new food groups. Obviously, people are getting so much excitement and buzz over all the beyond burgers and and impossible and so forth, we're very excited that new food groups not only be healthy, but are in fact and in manufacturing our ESG and in manufacturing is not draining the resource. It would be really ironic to go into new food group and that company is in fact more of a drain and a destruction into our environment.

Jennifer Bruno

That makes sense.

Catherine Shiang

So those are things that is exciting and funds that hedges that look at different strategies. But those are much more for our PE and VC space, and we are very active in that those sectors. So energy energy continues to be something. But as but as I said, for our overall hedge, how to approach us for capital is really to to listen to the segment of your your interview because it's quite I laid it out right there. Yeah, it's 100 bucks per year, and and having their eyes dotted and T's crossed. Well, I was just going to conclude that one strategy may not, one set of strategies may not be exciting in 2019, but may be very exciting in 2020 to really looks at the macroeconomics of our market.

Jennifer Bruno

And then on that note, is there anything you know that you're wary of right now, whether it's in the macroeconomic or in political climate, that that would that you're keeping your eye on globally?

Catherine Shiang

Nothing other than what I had opened up, which is I think that the that the European currencies, euro, and I think the the crown is at issue. There's a lot of pressure. I also think that repos will be the repo market is under some duress, which leads to us to continue to keep an eye out on, and there is a continuing flight to quality in 2019 in the hedge, and I think there is a role for hedge. A lot of families have left hedge, and hedge has gotten a lot of a lot of taint, if you will. How come their their returns have not really kept up. There are fewer alpha out there. There are much more really beta pretending to be alpha, and so for the capital at risk in this, when you could actually have a better return in in another asset class. So you see that

Jennifer Bruno

affecting fees that. You know that sort of mediocrity and performance is forcing. Do you do you feel that that should make hedge funds reconsider their their typical two and 20 fees?

Catherine Shiang

Well, I'm not sure if the many funds are getting that two and 20. I think that they are getting something. They are certainly, and I think that every fund, whether it's every fund manager deserves fees and commensurate to their performance, but to allocate the fee management and their performance is beta gives one. Well, you start looking at redemption terms when you go in, and and then also we also look at how the fees are commensurate. And there's a variety from waterfalls to hurdles to different ways of negotiating those fees, depending on the size block you're investing in. So somebody coming with one one buck certainly won't have as big of a voice as somebody writing 100 buck check, right? Right, right. So we do expect if we come in in a larger ticket size that we have a little bit better. We get MFN status. So so those are. But what I'm saying is not something unusual in the market. What is unusual in the market would be to come to us with more interesting or our investments, our our investment objectives are aligned. I think that that and to show us that we are aligned, that they qualify as a manager versus they're living off of fees. Right. And some of the performance we've seen with other managers is that they are just living off of the fees and their return is beta, and after you look at their sharpe ratio, you know it's beta. So, so these things, and whether you want to use Torino ratio, I mean, there's a whole bunch of tech tools that we use to review a manager's performance. But we, but again, it's at the end of the day, it's getting to the the manager and there's a lot of enthusiasm in in providing seed to new managers and to continue to grow and then there's almost a parental affection when their their AUM becomes quite sizeable, and so what would what would be the number one thing you would advise a manager to do before contacting you, before reaching out, how? And I think you kind of already hinted that that your interests should be aligned, and so how would they find that out essentially? Well, when I say interests aligned, most most LPs and managers should have that, and the GP should be aligned. That's their fiduciary duty. When you have young emerging managers, they don't see that, but the mature managers, it is that. That's part of why they are regulated. It's not them and us, LPs and us. So there has to be that fiduciary obligation. So in terms of alignment, that's what I mean. In terms of strategies, in terms of strategies, we're you know our we're open for business to pitch. And again, just because there's a rejection one year doesn't mean that we're not excited about that next year. Again, it has to fit into our overall portfolio construction.

Jennifer Bruno

That makes sense. And so, lastly, what are you looking forward to next year, or as this year comes to a close, and that could be on a personal level or global macroeconomic level, anything.

Catherine Shiang

Well, for the global macroeconomic, I hope that things calm down. The trade the trade war is resolved in some capacity, that has a lot of impact on Europe. The U.S.-China trade has has indented the European market, and we have a lot of assets there. So that's that, and we hope that the Hong Kong-China relationship smooths out. I won't weigh in on the politics. We're not a political group, but again, China has over what 1.2 to 1.5 trillion dollars of currency in the Hong Kong market. It also serves as the largest debt market for China. China has their largest unicorns listed on the on the Hong Kong Exchange, so Hong Kong is very meaningful to China, and it's also meaningful for many of us. It is a financial hub, and that we hope that for 2020 that that gets resolved in a happy place for all of us. It's

Jennifer Bruno

a really tricky, delicate situation. I can totally appreciate that. I really hope so too. But thank you so much, Catherine, for your insights today. This has been really helpful, and I know that our viewers will find this very valuable and meaningful. So thank you so much for your input today.

Catherine Shiang

Thank you very much, Jennifer, for inviting us to speak. I know a lot of people here were excited to to be part of your new project.

Jennifer Bruno

Thank you again. Thank you. All right.