PROFILE

How Mehraj Mattoo is renewing the German giant's alternatives business. By Shamillia Sivathambu

Commerzbank goes global

ommerzbank Corporates and Markets (CBCM) is not a name that is traditionally synonymous with hedge funds. The investment banking arm of Frankfurt-based Commerzbank has thus far concentrated its alternative investment efforts in its home market, catering for the retail segment through its certificate linked funds of hedge fund platform called Comas - Commerzbank Alternative Investment Strategies. In fact, if you ask any hedge fund bigwig what role CBCM has played in the alternative space, many will simply utter the name 'Mehmet Dalman'. Dalman ran Commerzbank's investment banking division in London before venturing out on his own to launch his own hedge fund outfit, the Wealth Management Group, in 2004. He is recognised as one of the industry's star managers and after his departure from Commerzbank, the German's bank presence in the UK pretty much lost its springboard to brand name recognition. But it may be the tide is changing at the German firm. In a bid to turn round its investment banking business, which has struggled to report strong profit earnings over the past few years, CBCM roped in Mehraj Mattoo in April this year. His job was to create and head up CBCM's new global alternative investment strategies business, based in London. "Commerzbank felt it was time to widen its domain," Mattoo says. "We have spent the past few months re-focusing the [alternatives] business. The bank's funds of hedge funds [FoHFs] business is traditionally rooted in the German retail space but the aim is to gear the business towards the institutional market now." The new global business line retains the Comas brand name. Having spent five years at Dresdner Kleinwort Wasserstein (DrKW), as managing director and global head of its alternative investments group, Mattoo is well placed to take on the challenge of building a business from scratch.
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, The gro\ving number of investment banks getting into funds of funds has significantly improved the flow of asset gathering,
But Mattoo is acutely aware of the hurdles he is up against in a market that is essentially over-saturated and is increasingly coming under attack for its high fees and dwindling performance figures. "Investor dissatisfaction with [low] performance has meant that net inflows into FoHFs have been going down over the years. This is encouraging larger investors to invest directly into single hedge funds rather than FoHFs," Mattoo says. "But parallel with this [change], is the growing number of investment banks getting into the [FoHF] industry, which has significantly improved the flow of asset gathering this year. So

while 'independent' FoHFs have been shrinking in relative terms, asset flows into 'institutional' FoHFs have been growing significantly." According to Mattoo, investment banks, rather than large asset management firms, are best placed to host the development of 'institutional' FoHFs. He highlights a trend that is certainly developing in the industry at the present moment, best illustrated by Morgan Stanley's hunger for hedge funds acquisitions. It bought its fifth hedge fund of the year this month. "Hedge fund managers tend to originate from the [investment banks'] prop trading desks, so we are in a much better position to select and manage a bunch of [securitised] traders, which is why investment banks rather than asset managers attract hedge fund managers back into the fold," Mattoo says. Investments banks are also better equipped at handling the degree of opacity that is typical of hedge funds. "This is part of the investment bank's function," he adds. Comas' first multi-strategy FoHF, the Comas Global Alternatives (CGAL)Fund, will begin trading on 1 January 2007. The fund, which comprises eight underlying managers, has been internally seeded by CBCMand has asix-yeartrackrecord. Itwas seeded with $40m and opened to external investors for the first time 011 1 December

Mattoo - a 16-year career in finance

MATTOO JOINED CBCM from Dresdner Kleinwortli Wasserstein; where he was managing director and global head of alternative investments. He has more than 16 years' experience in the fields of structured derivatives, capital markets and alternative investments. He has a successful track record of establishing new businesses and is widely credited.for popularising the use of fund derivatives in the late 1990s. He was at :GNPParibas from 1997 to 2001, where he pioneered the use of structured products on alternative investments, especially hedge funds. Prior to that, he worked for CIBC Financial products as an executive director from 1995 to 1997 and Natwest markets as a director from 1989 to 1995 in Hong Kong and Singapore. Mattoo received his MBA and PhD in financial economics degrees from the University of London .

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t , Incentivisation is critical. If performance goes up by just 1%, you have earned your fee,
Mehraj Mattoo, Commerzbank Alternative Investment Strategies

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2006. The CGAL fund has been designed with the institutional investor in mind and is expected to be Comas' flagship institutional FoHF.

A new standard of quantative rigour

Arriving rather late to what is an already over-crowded market, Mattoo is keen to set Comas' FoHF business apart from the rest. With the advent of third-party due diligence services and the growth of recognised hedge fund managers, institutions are becoming more confident at making their own manager selections. This makes it difficult for FoHFs to continue down the same route, he says. In a move to add value, Mattoo plans to raise .the bar in terms of technology, product offering and performance. "There is a serious lack of quantitative rigour in FoHFs," Matteo says. "We need to put technology to better use and want to bring the engineering mindset into the space". Comas is currently working with London's Imperial College to develop research that will extend the boundaries of existing quant models, Mattoo says. One of the areas being researched with Imperial College is the feasibility of 'mathematical profiling' of managers. The way hedge funds are currently labeled into broad categories can be meaningless when constructiong portfolios or managing style drift. Capturing a manager's style more accurately will not only help create portfolios that better represent investment objectives, but will also allow better monitoring and management of style drift. "Clearly, such an approach will bring in significant computational complexity

Comas Strategy Fund (CSF) and Comas Global Alternatives Fund (CGAL) were the first to receive S&P ratings. While CSF is aimed at retail investors, CGAL is an institutional product. Both CSF and CGAL are rated 'A' by S&P. "It [fund ratings] bears no impact for us but it reassures the [institutional] investor," Mattoo notes. Plans are already underway to re-dornicile all its funds in Dublin. By building a fully integrated platform in Dublin and having the funds listed on the Dublin Stock Exchange, managers can focus exclusively on delivering returns without getting bogged down with the administration of the fund. Moving all the funds to Dublin makes better administrative sense, Mattoo notes.

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Tapping the sales force

In terms of distribution, Comas is planning to plug into the bank's institutional sales force as well as third-party distributors and pension fund consultants. It has just completed its first institutional road show in Germany, targeting pension funds, regional banks and corporates. But will a strong sales network be enough to convince institutions they are getting value-added investments for their money? Pension funds and endowments are increasingly contesting the double layer of fees FoHFs traditionally have imposed on them. Mattoo is acutely aware of this and intends to remain competitive in terms of fees, but he draws the line at forfeiting a performance fee. "Incentivisation is critical," he says. "If performance goes up by just 1%, you have earned your fee." Mattoo essentially believes that the whole debate surrounding the double layer of fees incurred by FoHFs will cease to be an issue if investors feel the funds are delivering strong returns. The recently opened CGAL Fund has delivered over 8% in annualised returns over the past six years with a volatility of just under 2.5%, Mattoo says. He also says that any FoHF launched under the Comas name will first be seeded by the bank, giving both itself and the investor confidence in the fund's ultimate success. "If performance is not there, the second fee level is not justified," Mattoo says. But by the same token, if you pay peanuts then be prepared to get monkeys. II
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HOME GROUND:Commerzbank is headquartered in Frankfurt, though its alternatives group is in london

, The way hedge funds are currently .divided into broad categories can be meaningless when constructing portfolios or managing style

drift,

into portfolio construction, which is the other area we are devoting resources to. The findings of the collaborative research will continue to inform Comas' portfolio analytics group, which is responsible for ensuring the portfolio's robustness and due diligence," he says. Comas is also keen to diversify into single strategy FoHFs and has just launched a fixed income FoHF. "This is in line with our aim to deliver themebased products," Mattoo says. There are also plans to offer global macro and an Asian manager FoHF in coming months. The group is also expected to recruit a chief strategist to guide the business through the economic cycle and inform of strategic launches. Apart from offering standard FoHFs, Comas also plans to offer "bespoke solutions" to institutions that may require a more tailored offering from what already exists through its product platform. Another way the new business plans to attract institutions is through mandatory exchange listings and fund ratings. Its flagship multi-strategy funds of HFMWeek

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