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Alternative Investments - May 23, 2007

Interview with Mark Anson

In this month's interview we speak to Mark Anson, Chief Executive Officer of Hermes and a member of the EDHEC Risk and Asset Management Research Centre's International Advisory Board, about his latest book, Handbook of Alternative Assets, the role of corporate governance in operating performance, and the contribution of hedge funds to the equilibrium of the financial markets.

Mark Anson

You have just released a new book, the Handbook of Alternative Assets. Could you tell us a little bit about the book?

Mark Anson: The Handbook covers five different areas of Alternative Assets: Hedge Funds, Commodities and Managed Futures, Private Equity, Credit Derivatives, and Corporate Governance. It is designed to be both a reference book for actual investors in the alternative asset space as well as a learning tool for those investors who plan to invest in alternative assets. One of the things that I strive for in the book is “real world” examples of how alternative assets work. To this end, I include many charts, tables, graphs, and numerical examples to demonstrate how alternative assets add value to a diversified portfolio.

What is your view on the activism of hedge funds and their role as shareholders?

Mark Anson: Activist hedge funds have increased dramatically in recent years. Simply good corporate governance can extract return premiums significantly in excess of the public stock markets. This is why I highlighted Corporate Governance as an Alternative Asset class in my Handbook. The key driver of activist investing is to engage the executive management and Board of Directors of a company to improve their corporate governance and strategic vision which in turn leads to better operating performance. I have often found that poor corporate governance leads public companies into a “status quo” operating model where key decisions and changes to their operations are either deferred, ignored, or delayed. This reduces the value of the company significantly below that of the public stock markets. Corporate Governance can remove these barriers, provide for a more robust business plan and unlock hidden value. Hedge funds have recently discovered this form of investing and the value it can add and are moving in the activist space in record numbers.

What do you think of the fears of certain regulators and governments over systemic risk being increased by hedge funds – are these fears well-founded?

Mark Anson: One well-known phenomenon associated with hedge funds is called “beta expansion.” This occurs when hedge funds that have shorted the stock of a public company quickly react to positive news by covering their short sales. This leads to greater sensitivity of the stock price to movements in the financial markets — in effect, increasing the stocks’s beta, or movement with the broader financial markets. Beta expansion is a short term dis-equilibrium created by the trading patterns of hedge fund managers.

However, I believe that on the whole, hedge funds bring greater efficiency to the financial markets, not less. The issue of Beta Expansion is an isolated case. Many hedge funds perform arbitrage strategies that force the prices of securities with similar economics to converge over time. This enhances the pricing efficiency of the market.

What is Hermes’s attitude towards and conception of alternative investments?

Mark Anson: Hermes wholly embraces alternative investments. We have committed significant resources to invest in hedge funds, commodities, TAA, currencies, private equity, and infrastructure. At Hermes, we like to “Think outside the benchmark” to find new investment opportunities in advance of other large investors.

Why have you chosen to become involved in EDHEC’s research work?

Mark Anson: EDHEC has demonstrated in a very short time a level of commitment to, and excellence in, the research of alternative assets. Given that this is a personal interest of mine as well as a professional interest on behalf of Hermes and its clients, I want to stay at the cutting edge of research on hedge funds, ETFs and other alternative investment vehicles. EDHEC pushes me to maintain my professional skills at the highest level.

About Mark Anson

Mark Anson, became Chief Executive of Hermes on 1 February 2006. Previously he was Chief Investment Officer for CalPERS, which he joined in 1999.

He is a qualified Attorney, Certified Public Accountant, Chartered Financial Analyst, and Chartered Alternative Investment Analyst, as well as author of five books and over 80 journal articles. He has served on Advisory and Executive Committees for the New York Stock Exchange as well as a number of international corporate governance bodies. He is currently Chairman of the International Corporate Governance Network ("ICGN").

Previous appointments include Oppenheimer Funds Inc. (1996-1999), Salomon Brothers (1994-1996) and Chapman and Cutler Schiff, Hardin and Waite (1989-1994).

He received his Master's degree and PhD in Finance from Columbia University, New York and his law degree from Northwestern University School of Law, Chicago, both with Honours.

Mark Anson is a member of the EDHEC Risk and Asset Management Research Centre's International Advisory Board. His latest book, the second edition of the "Handbook of Alternative Assets" is published by Wiley Finance.