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Know Thyself

May 17th, 2021

Market Views

For passionate football (soccer) fans from a few generations ago, the name Socrates likely does not evoke ancient Greek aphorisms.  Rather, the name conjures happy memories of the legendary, 6-foot-3 central attacking midfielder who captained one of the sport’s greatest teams, Brazil’s 1982 FIFA World Cup squad.  “Doctor Socrates” – he was also a practicing physician – was a graceful player, leader, goal-scorer, and master of precision, back-heel “no-look” passes.  Even when not winning games, he stuck to his style and played the beautiful game that fans loved to watch. He knew himself.

Knowing oneself is equally important in the alternative investment management profession.  Managers launch a fund around an investment strategy that generally reflects their expertise.  Capital seeks out these managers and chooses to allocate to their funds based on that strategy, and with it, certain performance expectations as a function of certain risks.  For example, a capital allocator who selects a low volatility private debt strategy knows not to expect equity-like return or risk.

At times, some managers can get distracted from their product’s core strategy, seeking supplemental performance from seemingly parallel investment opportunities.  Profitable or not, this mandate drift raises several important questions, including:

  • Does the drift change the risk profile of the investment?
  • If so, are the fund’s clients aware of the change in risk profile, and do they want this risk?
  • Does the fund manager have the expertise for the new strategy?

For example, a digital private credit fund focused on buying loans and holding them to maturity involves low, if any, market risk.  If that same fund starts to invest in and trade asset-backed securities (“ABS”) with similar underlying loans, does it introduce market risk to the portfolio? If so, how will the fund react to market events, good and bad? Are other concomitant risks (e.g., residual/equity, subordination, liquidity) also introduced?

According to a recent feature in the May 6 issue of The Economist, Fintech operators are invading traditional bank turfs fast and furiously.  Per the article, Ant Financial now represents 10% of China’s consumer finance market, from zero several years ago.  Last week, the FT reported that Ebay has jumped into small business lending, joining Fintech giants Paypal and Square.  With the financial services digitization trend intact, we believe that digital private credit will continue to expand as an asset class, presenting investment managers with a considerable and expanding opportunity set.  Those who know themselves and stick to their mandate should be best positioned to achieve their strategy’s objectives.

Confidentiality and Non-solicitation: No information herein constitutes an offer or a solicitation to buy or sell any securities or any interests in any product or investment strategy managed by HCG Fund Management LP (“HCG”).  Any offer or solicitation relating to any such investment will be made only by means of confidential offering documents relating to a particular fund  or investment contract and only in those jurisdictions where permitted by law.
Reliance: This information may not be relied upon for investment decision-making purposes. It does not contain all the information necessary to make an investment decision, including the risks, fees, and investment strategies of investment products advised by HCG. Eligible investors are described in official offering documents, all of which must be read in their entirety and will supersede the information contained herein.  No offer to purchase any securities or interests by a prospective investor will be made prior to receipt of all official documents, and no offer to purchase any securities or interests will be accepted without receipt of all official documentation that has been completed to HCG’s satisfaction.
Opinions — No obligation to update:  The information contained herein represents the views and opinions of HCG.  It is intended solely for informational purposes and is not intended to constitute investment, legal, tax or accounting advice.  The views about digital finance investing and estimated future investment opportunities expressed herein reflect those of HCG management as of the date herein and are a reflection of our best judgment at the time.  They are subject to change based on market and other conditions, and we have no obligation to update.  Actual results, however, may prove to be different from our expectations.  No warranty is given to the completeness or the accuracy of the information contained herein.
Suitability and Risks:  Any investment in products managed by HCG is appropriate only for financially sophisticated investors capable of analyzing and assessing the associated risks fully disclosed in the Private Placement and/or Information Memoranda. Investors should consider the investment objectives, risks, and charges and expenses of the investment carefully before investing. The Private Placement and/or Information Memoranda contain this and other information about the investment. A prospective investor should have no need for liquidity with respect to its investment and should view it as long-term and not a trading vehicle.  Additional risks are disclosed in the Private Placement and/or Information Memorandum including, including, limited liquidity and restrictions on transfer of the securities, dependence on HCG’s principals, and short operating history of certain productsAs with all private investment funds, investments are deemed speculative and involve risk of loss.
Third Party Data: We do not verify third party data used in certain calculated metrics shown here.