‘Big Short’ star leads Neuberger UK fund launch

Commentators say lack of performance fee could put pressure on other funds

Eisman

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Neuberger Berman is launching a UK domiciled fund range with a global long/short portfolio, headed by star fund manager Steve Eisman (pictured).

The onshore range will sit alongside the firm’s Irish-domiciled Ucits range, which manages around $30bn (£23bn) for UK investors, but will not purely replicate it. Neuberger said the new structure may allow UK investors to access its strategies “more efficiently than in the past”.

Eisman, whose character was dramatised in Hollywood movie The Big Short, was famous for being on the right side of the global financial crash in 2008.

Adrian Lowcock, head of personal investing at Willis Owen, said this is a “very interesting announcement” with Eisman being a high profile US star manager.

“He has a unique way of looking at markets enabling him to identify opportunities missed by other managers.  His track record is also impressive and not limited to his actions during the global financial crisis.”

The fund

Eisman will run the TM Neuberger Berman Absolute Alpha Fund and it will be co-managed by Michael Cohen and Dana Cohen. The fund seeks to exploit both positive and negative opportunities created by sector, company or management disruption and change.

The team also employs a four-step analytical and portfolio construction process, headlined by a financial system overlay and the evaluation of key metrics such as credit spreads and credit quality.

The fund does not aim to be consistently market neutral and is expected to be between 65% net long to -20% net short.

It is based on an existing equity long/short strategy managed by Eisman, launched on 1 November 2016. Since inception to end-December 2018, the strategy delivered a net return of 11.42%, in US dollar terms, against just 1.27% for the HFRX Equity Hedge index.

Performance fee structure

Michael Paul, fund research analyst at Brewin Dolphin, said: “Steve has demonstrated over many years his ability to think differently from the crowd, and by doing so identify compelling investment opportunities ahead of the competition. While he made his name for the one “big short”, his track record points to a much more consistent ability to add value.

“While you might expect a ‘star US hedge fund manager entering the UK market’ to come with an eye watering charging arrangement, it is to Steve and Neuberger Berman’s credit that they have shunned the performance fee structure so prevalent within the peer group, and launched with much more client friendly fees.”

Similarly, Lowcock added: “Given his impressive track record in the sector recently, it is great to see that Neuberger Berman have not elected to go for a performance fee, if successful and widely available this could put pressure on other funds in the sector.”

Lessons from the crisis

Eisman said the financial crisis was caused by four trends – excessive leverage, a blow-up in sub-prime mortgages, sizable ownership of sub-prime securitisations by systematically-important organisations, as well as derivatives. While these issues are not evident in the system today, Eisman does believe there are lessons to be learned.

“The first lesson to remember is that paradigms can last a long time, even when they are wrong. Wall Street thought it knew how to manage its own risk and therefore increased leverage continuously. It took a crisis to prove the paradigm was wrong,” he said.

“Secondly, incentives trump ethics almost every time. Mortgage originators and securitisation departments were all incentivised on volume, not quality. They kept originating until credit quality imploded. Finally, Regulation matters and changes in regulation can matter even more.

“How do we apply these lessons to today? We believe it is important to reassess compensation structures, with a focus on long-term return-on-equity over volume. It is also crucial to understand underlying risks.”

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