Senrigan outlines approach to event-driven risk

Sen-ri-gan is a Japanese compound word, meaning "the eye that can see a long distance" --appropriate perhaps, given the lengthy and winding road that led to the firm's inception.

UK-born Nick Taylor founded Senrigan Capital in early 2009, and in one of that year's most prominent Asian hedge fund launches, the Senrigan Master Fund commenced in November. It has $180 million under management, with private equity firm Blackstone having already chipped in $100 million and committed to invest a further $50 million.

Until 2008, Nick Taylor had worked for Credit Suisse in Europe and Asia, initially co-founding a wholly owned subsidiary of the Swiss bank, Modal Capital, in Europe and running an event-driven strategy. He expanded the strategy to Asia and ultimately headed Modal's 18-strong team, while also running Asia-Pacific proprietary trading for Credit Suisse.

The team hadn't planned to strike out on its own, unless Modal reached a size inconsistent with Credit Suisse's balance sheet, and that didn't seem likely to occur.

From 2006, US hedge fund behemoth Citadel began talking to Taylor. However, his team was happy at Credit Suisse, which had always delivered on its promises to them, and the internal fund had made money every year, so there was a lot of goodwill there.

Nevertheless, Taylor met Citadel boss Ken Griffin and, since he wasn't looking for a job, didn't feel shy about posing some tough questions. He liked the answers and they continued to meet up over the next couple of years, during which time Taylor was won over to the virtues of the Citadel set-up.

So he and, eventually, some of his team joined Citadel in July 2008, and Modal Capital shut down. Taylor was a senior managing director and a member of the portfolio committee at Citadel.

That's history now, but fortune's rudder turned at that moment. The timing was unfortunate: Citadel decided to exit event-driven strategies globally and indeed most businesses in Asia, leaving it with a much smaller footprint in the region.

So that was that. The team's departure from Citadel was friendly, and Nick and his team understood the difficulties faced by investment firms such as Citadel at the time. According to the hedge fund community, it seems Citadel has been supportive of Senrigan's launch.

A new start

The whole team was now no longer at a dealing desk, but sat in a metaphorical coffee shop, wondering what to do next. Should they go it alone or join a platform?

There were a couple of big hedge funds who were keen to do something with them. However, the Senrigan team decided it was time to build something themselves, being mindful that by now they had a good idea of the requirements of institutional investors and some well developed views about what the right investment platform should look like.

The decision was made to set up Senrigan Capital in Hong Kong in March 2009 and offer their event-driven strategy to investors. Between them, they capitalised the management company and launched in November.

The perception from investors took the positive line that this was a team with genuine pedigree and verifiable track record from Credit Suisse, thereby attracting the Blackstone investment and backing mentioned above.

The Senrigan investment philosophy involves seeking to remove beta and hedge away other risks that have nothing to do with the event being focused on.

The team limits geographical focus to Japan, Greater China and Australia, because that is where they perceive most of Asia's deals taking place. In the past, they had spent a lot of time looking at South Korea, but they feel the deals there are either all sewn up in advance so there is no spread, or extremely complicated, necessitating an on-the-ground presence if one is to be adequately informed. As for Southeast Asia, they found the politics from an event perspective difficult to penetrate for the same reasons.

Senrigan has an overlap with other event-driven funds vis a vis the names of companies in its portfolio; they see their in-depth research, experience and the rigour of their risk management process as their edge.

"For example, in a cash-bid takeover, people tend to think of those situations as not having any market beta," says Taylor. "The deal either goes through or not, and if the market goes up or down a bit, that doesn't affect the price of the security. However, if the market really collapses or soars, it can have an effect."

A manager might control that effect by modifying position size. Senrigan conducted a research project of looking at every takeover globally since 1987 to discover correlations during market-stress periods. They found that beta was re-introduced during stress situations, with the amount depending on the market and whether it was a voluntary bid (which tend to have lots of conditions, so the effect would be major) compared to a mandatory bid (where the effect would be minor).

"For deals where companies announce that they're in talks but there is not a hard announcement, the average number of those deals completing is about 60%," adds Taylor. "It is tough to estimate beta, but if you look at hundreds of these deals, you can see that in soft announcements the beta of those securities falls by about 20-30%. If I have say, 10 of those situations and I am less than 70% market-hedged, then I am under-hedged and taking a market risk contrary to my investment thesis."

Senrigan sought to rigorously and historically quantify these correlations to work out how to hedge such exposures, and to build risk curves for different countries to figure out how much stress beta occurs in a given situation.

"The country and the idiosyncrasies of the situation determine whether it's a lighter or heavier market hedge," says Taylor. "That hedge can't just be a futures short and most of the time can't be buying a vanilla put, but something more related to a crash event that more specifically protects the risks of the positions we hold."

Senrigan has different categories of investments. One is only for announced deals. Another may be for soft announcements or where someone buys 20-30% of a company, where they can find acceptable hedges.

To this end, Senrigan uses a checklist it has developed over the past decade. This tool evolved into a historical repository and a multi-functional analytical tool for almost any situation the team is looking at. It might include anything from risk/reward ratios for deals, scenario modelling, to live risk-management information, to the details of conversations held with investors.

Meeting institutional standards

The team believed they should set up a firm that would have a control, operational and business structure that would meet their own standards and requirements and satisfy the best-practice demands of the world's largest institutional investors. They invested in systems and built something that might be characteristic of a much larger institution.

"One of the roadblocks we faced when deciding between the nine different risk management systems we were presented with was that our business is focused on corporate transformation," says Daniel Wolff, a principal at Senrigan. He worked in structured derivatives for Credit Suisse before moving to the proprietary trading side.

"While we believe that the right framework for assessing ex ante risk is in a linear factor model, when you look at the mathematics of how they are assessing these things, it is basically looking at historical data," Wolff adds. "We invest on the cusp of changes in the price dynamics. So using something that relies on data and correlations around the last 180 days tends to be meaningless."

The team found they needed to get into their system and make adjustments to the model based on the risk situation. Some systems may get the right answer in the end, but Senrigan needed to reach that point much more quickly.

"We don't just blindly push our entire portfolio through a mechanical system," adds Wolff. "Rather, we partition deals between those that have the cash-bid situations with more binary payout situations, as opposed to the softer, pre-announcement situations."

Senrigan put the latter into an adjusted Sungard APT framework. "We have our own Monte Carlo risk calculator for the other live announced situations," he adds. "We bring the portfolio together by quoting everything in a common risk currency."

The 12-strong Senrigan team has worked together between four and six years and includes: Yasutaka Kuga, former head of private equity at Morgan Stanley in Tokyo and who before that spent nine years as an M&A banker; Julia Tsai, an ex-Merrill Lynch M&A banker; and Kevin Kwong, formerly in risk arbitrage at Lehman Brothers. Senrigan's chief operating officer is Chris Nash, who was previously the prime brokerage COO for Asia at Credit Suisse and prior to that Taylor's COO for proprietary trading at the same firm.