After nearly 15 years of managing hedge funds and, before that, 14 years of trading fixed-income securities, Michael Hintze has earned sufficient life experience — and money — to become one of the most generous donors within the hedge fund community, already well known for its largesse to charitable causes.
Mr. Hintze, the founder, CEO, senior investment officer and 100% owner of hedge fund manager CQS (UK) LLP, London, and his wife, Dorothy, started the Hintze Family Charitable Foundation in 2005. The foundation has donated more than $30 million to about 150 different charities, including restoration of Michelangelo's frescoes in the Pauline Chapel at the Vatican, and refurbishment of galleries at the Victoria and Albert Museum and restoration of the Old Vic theater in London.
Mr. Hintze has endured the glare of the British press in recent weeks, a phenomenon he suggested is at least partly due to the financial help he gives to the Conservative Party in his adopted country. Mr. Hintze said the media flap over his private foundation's donation to Atlantic Bridge, a now-defunct charity that promoted U.S.-U.K. relations, is completely unrelated to CQS and its management of $10.2 billion in six hedge funds, two long-only funds and two closed-end funds that are listed on the London Stock Exchange.
The multistrategy hedge fund company, which invests in asset-backed securities, convertible securities, corporate credit, distressed debt, loans and equities, has been enjoying increasing popularity with institutional investors. Assets jumped 46% between year-end 2007 and Aug. 31, 2011, with about 66% of assets managed for institutions.
Mr. Hinzte draws on his background — which includes a fluent command of the Russian language, a papal knighthood, a stint as a captain in the Royal Australian Electrical and Mechanical Engineers Corps of the Australian Regular Army, an early career as an electrical design engineer, a passion for self-taught higher mathematics and his long experience as a trader — to manage the firm's $450 million flagship CQS Directional Opportunities Fund.
You once wanted to be a mathematics professor. How much do you and other CQS portfolio managers rely on quantitative analysis in managing your portfolios? Our edge is understanding how the models work and also interpreting the models. It's not going to be a battle of the models. It's a battle of the experience, of the intuition in reading the models' output.
Describe your investment approach. I believe the real key to our approach is the fundamental analysis, specifically the fundamental credit analysis, but also the detailed analysis of the security's prospectus and of the various offering memorandum.
The other thing that gives us our edge is the interconnection between the different parts of the firm, between the strategy teams.
Convertible arbitrage, as we do it, means that you have to understand the whole spectrum of the investment: the credit and converts and volatility and equity trading. That's really our heritage.
We need to understand how the convert models work, but from a practical perspective, we also need to understand how the equity works because the various inputs are path dependent. It's alright to talk about volatility in isolation, but there's path-dependency there. It is about the interaction of inputs such as credit quality, future stock price volatility and dividend flows. Analyzing the credit component is particularly important given the significance of the fixed-income component of a convertible bond.
That credit piece has been developed into a credit strategy that now is offered in our credit long/short fund. It has also been developed in a slightly different way in our ABS (asset-backed security) offering, which again uses fundamental analysis not only of the securities but also of the financial institutions where these securities sit. There can be a material difference between the mark-to-model valuation used by these financial institutions and the current market value of those securitizations or assets held. If there was a ... further housing decline, one could expect some of these financial institutions to take significantly greater hits from charges against equity.
The way that we've structured the broad flow of information (within the firm) helps inform our decisions across all of these credit strategies.
What route took you to hedge fund management? I started my investment career after Harvard Business School in 1982 as a fixed-income trader in Yankee Bonds for Salomon Brothers in New York. Then in 1984 I went to Goldman Sachs to run convertible arbitage on a global basis from Asia to the U.S. from London. At Goldman, I was very fortunate to work very briefly with Fischer Black. What a wonderful guy. Now I am not one of his quant jocks, but it was a privilege and a pleasure to work with him.
Goldman asked me to run their U.K. domestic equity product. Frankly, that was a rude shock, going from something that is very precise — fixed income — to equity trading, trying to understand where do you get value out of equity. Because let me tell you, what is the difference between a (price-to-earnings ratio) of 18 and 20? Yes, you can look at the Gordon dividend discount model and maybe get there, or relative value or whatever else. Good luck understanding exactly what that is. But that's a 10% difference and I'm sorry, you're going to lose your shirt on that.
I joined Credit Suisse First Boston in 1996 ... and headed derivatives at FB. While there, I developed the strategy and management team for the CSFB Convertible & Quantitative Strategies Fund. In 1998, I went to my boss, Brady Dougan, and told him that it was time for me to move on. He asked what I wanted to do and I said wanted to start a hedge fund. Brady said `Great idea. You've made me a lot of money in the past, we've got fund available within the group, why don't you do that for us?' And he gave me $200 million off his balance sheet and I gave him $500 million back.
How long did it take you to accomplish that for Mr. Dougan? Five years. It was a great trade for him, a great trade for me; we all were happy.
Where do you see investment opportunity and how are you taking advantage of it? There will be a number of opportunities both in the short and long term as a result of the sovereign issues in the eurozone, the liquidity in the system, as well as the unintended consequences of regulation.
Long term, we need to be cognizant of the effects of excess liquidity in the system that could lead to strong inflationary pressure.
In the near term, we see tremendous stressed and distressed opportunities across multiple asset classes in Europe. For example, in the ABS space, we're seeing 12% to 14% yields in high-quality senior CMBS paper.
We are also seeing extremely attractive high-yield opportunities that we are taking advantage of in a number of different forms, including buying the bonds outright and utilizing more complex structures. This will be an area that will continue to provide opportunities as Basel III and Solvency II continue to catalyze supply from financial institutions.
We also are looking at European stressed & distressed opportunities, across the credit spectrum. Not just restructurings, but also distressed European converts, ABS, etc.