Investors flee Sofaer as Asia team disintegrates

Sofaer Capital, a pioneer in the Asia hedge fund universe that launched its first Asia-focused strategy in 1989, has suffered mass defections of its top people. FrontPoint, a US-based investment management firm has poached Sofaer's Asian hedge fund managers, Giampaolo Guarnieri and James Soutar to establish its own Asian hedge fund team. The two have also brought their three-person team of analysts along with them.

In addition, Tony Smith, Sofaer's global CFO, has quit to join Hong Kong-based hedge fund broker KE Absolute as COO. The defections have already damaged Sofaer's business, with investors pulling out of its Asia hedge funds and AUM plunging from $450 million to $175 million. Its Japan fund, which recently closed at $255 million, now holds a mere $15 million in assets.

"We were attracted to the FrontPoint model," says Soutar. "It effectively marries an institutional approach to the business with a hedge fund's entrepreneurial spirit and operations."

FrontPoint, which manages $3 billion, is targeting long-term institutional investors such as pension funds. Guarnieri and Soutar have worked together for 16 years, most recently as partners at Sofaer running $450 million in Asia and Japan absolute return portfolios.

Now as FrontPoint's regional executives, they will begin by launching a Japan strategy in August and an Asia (including Japan) one in September. Later strategies will focus on Asia and Japan small caps and on China. Morgan Stanley is the prime broker.

Guarnieri will lead a team based in New York and Tokyo, while Soutar will oversee the FrontPoint Asia team based in Hong Kong once proper licensing becomes available.

Soutar says, "While the direction of the business is driven by us, we're fully supported by FrontPoint's infrastructure which is first rate, and they are committed to continuously investing in it. FrontPoint has a dedicated legal team, senior market professionals and state of the art portfolio management software and risk management framework.

These resources will enhance our investment edge," he adds. "Sofaer was not committed to developing its business in this way."

In a letter informing investors about the departure of the Asian team, Sofaer founder, Michael Sofaer says Guarnieri and Soutar shared a different vision from other partners about how to run and expand the business. Andrew Graham is stepping in to pick up the pieces at Sofaer, joining as the new manager for the Japan fund. Graham is a 17-year industry pro, most recently managing Japan and Asia money for Putnam Capital International.

"Much of the inflow into this fund was new money that had not yet developed a loyalty to Sofaer as a firm, so we were not surprised to see this flow out with the departure of Asian team," says Sofaer's investor relations executive, Kirsty Barr. "Given Andrew's long-only background, investors will probably wait to see the fund's performance."

The Asia and Asia-plus-Japan funds each currently have about $80 million under management and are being managed by founder Michael Sofaer. "We didn't see as much outflow with the Asian funds because many of the investors have been with Michael Sofaer for several years," says Barr.

She says that the appointment of a new manager for the Asian funds is imminent, and that discussions are in their final stages. In a letter to investors explaining the changes, founder Michael Sofaer says he will work closely with both managers, particularly with relation to hedging the portfolios and the management of risk.

"We got in touch with all our investors as soon as possible to inform them about the departures and managed to retain much goodwill, although clearly this is not the kind of news any investor wants to hear," says Barr. "James and Paulo had a different view about how to develop the business as it grew and the separation was for the best."

Barr says Sofaer continues to stay focused on expanding the business in appropriate areas and is set to launch an emerging markets hedge fund on September 1. Meanwhile, ex-Sofaer global CFO, Tony Smith, is set to take on the role of COO at Asian hedge fund service provider KE Absolute.

KE managing director Tom Ashworth says Smith will be responsible for enhancing the firm's operational infrastructure and driving several new initiatives, such as the opening of KE's recently launched Asian fund of hedge funds to new investors, and the formalising of strategic alliances with industry partners and service providers.

"We've grown rapidly since our launch last year," says Ashworth. "Tony brings financial, management and operational expertise in the absolute space, making him the ideal candidate to drive these projects."

Before his time at Sofaer, Smith worked in the fund administration side of the business with Bank of Bermuda and Hemisphere Management, prior to which he worked at several large accountancy firms. Smith says his decision to leave Sofaer was made prior to the departure of the Asian hedge fund team and was unrelated to it.

"My role as global CFO at Sofaer did not really fit my specific interest in Asian hedge funds," he says. Smith says he was looking to join an organisation with good initiatives that could provide him with a new challenge in the Asian hedge fund context, an opportunity that the role at KE Absolute provided.