Aussie hedge fund's redwood-sized ambitions

Sequoia Capital Management, a Sydney-based Asian macro fund, has opened its doors to international investors with the launch of its offshore fund on September 1. The managers hope the fund, which launched with $10 million, will quickly ramp up to its $200 million capacity.

"We've been seeing interest from investors in Europe and Japan," says Toby Chapple, Sequoia's CIO. "We're expecting to be about a quarter full within the next month or so."

Chapple says the fund's Sydney location has caused no hindrance to its ability to attract capital. "Investors who are planning their trips to Asia have been contacting us, and including Sydney as a stop on their agenda. It appears that Australia has reached economies of scale in number of hedge funds required to make these trips worthwhile."

Sequoia's high profile team has been attracting industry attention. Ross Garnaut, the fund's executive chairman and investment director, was formerly Australian ambassador to China and chief economic advisor to the prime minister. Investment director Peter Jonson is the ex-head of Research for the Reserve Bank of Australia, and previously was managing director of ANZ's funds management business. And CIO Toby Chapple brings a trading background to the team with previous experience as an Asia Pacific interest rate swap trader for Toronto Dominion Bank and prop trader for Ulster Bank.

"Our team's high-level contacts throughout the region gives us an information flow advantage," says Chapple. The fund has also recently appointed ex-Citibank chief economist and regional strategist Alex Erskine to the team.

Sequoia's investment strategy seeks to invest in a range of products, including bonds, interest rates, equity indices, currencies and commodities, to exploit opportunities that exist due to financial market prices overshooting macroeconomic equilibrium levels. Chapple says the strategy is particularly suited to Asian markets: "One can generate a higher level of return in the Asian markets compared to the same amount of risk in the G7 markets. In Asia there are more inefficiencies as well as less players looking to exploit them."

The Sequoia team has been running a domestic onshore version of its Asian macro fund since January 2003, which stands at A$10 million. Investors are mainly high net-worth individuals, although the team is targeting the institutional market for its offshore fund.

Sequoia returned 40% in 2003. Performance has been relatively flat so far in 2004. "There hasn't been much alpha opportunity for our fund over the last six months, as random range bound flows have dominated the market. We're pleased with our fund's ability to protect capital and limit downside risk in these circumstances," says Chapple.

Goldman Sachs is the fund's prime broker and HSBC is the custodian.

Despite the recent number of US firms setting up shop in the region, Chapple does not see this as crowding out opportunities in the Asian market. "There's a small pool of quality people with the breadth of experience in the various Asian markets that can run this type of strategy effectively" he says.

Chapple also points out the Sequoia is unique amongst other Asian macro funds for its ability to add a well-informed Australian and New Zealand component to its strategy. "Australia has a very liquid futures and bond markets, and very few Asian macro teams have the expertise and knowledge of this market to take advantage of it at present," he comments.

A core feature of the Sequoia fund is the proprietary risk management system it uses. "Our mathematical allocation system ensures limited downside risk, but allows for exponential returns on the upside. The system has been independently verified by Mercer," says Chapple.