PROFILE

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

Commerzbank goes globalC ommerzbank Corporates

and Markets (CBCM) is nota name that is tradition-

ally synonymous with hedge funds.The investment banking arm ofFrankfurt-based Commerzbank hasthus far concentrated its alterna-tive investment efforts in its homemarket, catering for the retail seg-ment through its certificate linkedfunds of hedge fund platform calledComas - Commerzbank AlternativeInvestment Strategies.In fact, ifyou ask any hedge fund big-

wig what role CBCM has played in thealternative space, many will simply utterthe name 'Mehmet Dalman'. Dalmanran Commerzbank's investment bank-ing division in London before venturingout on his own to launch his own hedgefund outfit, the Wealth ManagementGroup, in 2004. He is recognised asone of the industry's star managers andafter his departure from Commerzbank,the German's bank presence in the UKpretty much lost its springboard tobrand name recognition.But it maybe the tide is changing at the

German firm. In a bid to turn round itsinvestment banking business, which hasstruggled to report strong profit earningsover the past few years, CBCM roped inMehraj Mattoo in April this year. Hisjob was to create and head up CBCM'snew global alternative investmentstrategies business, based in London."Commerzbank felt it was time to wid-en its domain," Mattoo says. "We havespent the past few months re-focusingthe [alternatives] business. The bank'sfunds of hedge funds [FoHFs] businessis traditionally rooted in the Germanretail space but the aim is to gear thebusiness towards the institutional mar-ket now." The new global business lineretains the Comas brand name.Having spent five years at Dresdner

Kleinwort Wasserstein (DrKW), asmanaging director and global head of itsalternative investments group, Mattoo iswell placed to take on the challenge ofbuilding a business from scratch.

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, The gro\vingnumber ofinvestment banksgetting intofunds of fundshas significantlyimproved theflow of assetgathering,

But Mattoo is acutely aware of thehurdles he is up against in a mar-ket that is essentially over-saturatedand is increasingly coming underattack for its high fees and dwindlingperformance figures."Investor dissatisfaction with [low]

performance has meant that net inflowsinto FoHFs have been going down overthe years. This is encouraging largerinvestors to invest directly into singlehedge funds rather than FoHFs," Mattoosays. "But parallel with this [change],is the growing number of investmentbanks getting into the [FoHF] indus-try, which has significantly improvedthe flow of asset gathering this year. So

while 'independent' FoHFs have beenshrinking in relative terms, asset flowsinto 'institutional' FoHFs have beengrowing significantly."According to Mattoo, investment

banks, rather than large asset manage-ment firms, are best placed to host thedevelopment of 'institutional' FoHFs.He highlights a trend that is certainlydeveloping in the industry at the pres-ent moment, best illustrated by MorganStanley's hunger for hedge funds acquisi-tions. Itbought its fifth hedge fund of theyear this month."Hedge fund managers tend to origi-

nate from the [investment banks'] proptrading desks, so we are in a much bet-ter position to select and manage abunch of [securitised] traders, whichis why investment banks rather thanasset managers attract hedge fundmanagers back into the fold," Mattoosays. Investments banks are also bet-ter equipped at handling the degree ofopacity that is typical of hedge funds."This is part of the investment bank'sfunction," he adds.Comas' first multi-strategy FoHF, the

Comas Global Alternatives (CGAL)Fund,will begin trading on 1January 2007. Thefund, which comprises eight underlyingmanagers, has been internally seeded byCBCMand has asix-yeartrackrecord. Itwasseeded with $40m and opened to externalinvestors for the first time 011 1 December

Mattoo - a 16-year career in financeMATTOO JOINED CBCM from Dresdner Kleinwortli Wasserstein; wherehe was managing director and global head of alternative investments. Hehas more than 16 years' experience in the fields of structured derivatives,capital markets and alternative investments. He has a successful trackrecord of establishing new businesses and is widely credited.for popularis-ing the use of fund derivatives in the late 1990s. He was at :GNPParibasfrom 1997 to 2001, where he pioneered the use of structured products onalternative investments, especially hedge funds. Prior to that, he workedfor CIBC Financial products as an executive director from 1995 to 1997and Natwest markets as a director from 1989 to 1995 in Hong Kong andSingapore. Mattoo received his MBA and PhD in financial economicsdegrees from the University of London .•

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PROFilE, Incentivisation is critical. If performance

goes up byjust 1%, you have earned your fee,

Mehraj Mattoo, Commerzbank Alternative Investment Strategies

2006. The CGAL fund has been designedwith the institutional investor in mind andis expected to be Comas' flagshipinstitutional FoHF.

A new standard of quantative rigourArriving rather late to what is an alreadyover-crowded market, Mattoo is keen toset Comas' FoHF business apart fromthe rest. With the advent of third-partydue diligence services and the growth ofrecognised hedge fund managers, insti-tutions are becoming more confident atmaking their own manager selections.This makes it difficult for FoHFs to con-tinue down the same route, he says. In amove to add value, Mattoo plans to raise.the bar in terms of technology, productoffering and performance."There is a serious lack of quantitative

rigour in FoHFs," Matteo says. "We needto put technology to better use and wantto bring the engineering mindset into thespace". Comas is currently working withLondon's Imperial College to developresearch that will extend the boundariesof existing quant models, Mattoo says.One of the areas being researched

with Imperial College is the feasibility of'mathematical profiling' of managers. Theway hedge funds are currently labeled intobroad categories can be meaningless whenconstructiong portfolios or managingstyle drift. Capturing a manager's stylemore accurately will not only help createportfolios that better represent investmentobjectives, but will also allow bettermonitoring and management of styledrift. "Clearly, such an approach will bringin significant computational complexity

, The way hedgefunds are currently.divided into broadcategories canbe meaninglesswhen constructingportfolios ormanaging styledrift,

HOME GROUND:Commerzbank is headquartered inFrankfurt, though its alternatives group is in london

into portfolio construction, which is theother area we are devoting resources to.The findings of the collaborative researchwill continue to inform Comas' portfolioanalytics group, which is responsible forensuring the portfolio's robustness anddue diligence," he says.Comas is also keen to diversify into

single strategy FoHFs and has justlaunched a fixed income FoHF. "Thisis in line with our aim to deliver theme-based products," Mattoo says. There arealso plans to offer global macro and anAsian manager FoHF in coming months.The group is also expected to recruit achief strategist to guide the businessthrough the economic cycle and informof strategic launches.Apart from offering standard FoHFs,

Comas also plans to offer "bespoke solu-tions" to institutions that may require amore tailored offering from what alreadyexists through its product platform.Another way the new business plans

to attract institutions is through man-datory exchange listings and fund rat-ings. Its flagship multi-strategy funds

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Comas Strategy Fund (CSF) and ComasGlobal Alternatives Fund (CGAL) werethe first to receive S&P ratings. WhileCSF is aimed at retail investors, CGAL isan institutional product. Both CSF andCGAL are rated 'A' by S&P. "It [fundratings] bears no impact for us but itreassures the [institutional] investor,"Mattoo notes.Plans are already underway to re-dorni-

cile all its funds in Dublin. By building afully integrated platform in Dublin andhaving the funds listed on the DublinStock Exchange, managers can focusexclusively on delivering returns withoutgetting bogged down with the adminis-tration of the fund. Moving all the fundsto Dublin makes better administrativesense, Mattoo notes.

Tapping the sales forceIn terms of distribution, Comas is plan-ning to plug into the bank's institutionalsales force as well as third-party distribu-tors and pension fund consultants. It hasjust completed its first institutional roadshow in Germany, targeting pensionfunds, regional banks and corporates.But will a strong sales network be

enough to convince institutions they aregetting value-added investments for theirmoney? Pension funds and endowmentsare increasingly contesting the doublelayer of fees FoHFs traditionally haveimposed on them.Mattoo is acutely aware of this and

intends to remain competitive in termsof fees, but he draws the line at forfeit-ing a performance fee. "Incentivisation iscritical," he says. "If performance goes upby just 1%, you have earned your fee."Mattoo essentially believes that the

whole debate surrounding the doublelayer of fees incurred by FoHFs will ceaseto be an issue if investors feel the fundsare delivering strong returns.The recently opened CGAL Fund has

delivered over 8% in annualised returnsover the past six years with a volatility ofjust under 2.5%, Mattoo says.

He also says that any FoHF launchedunder the Comas name will first be seed-ed by the bank, giving both itself andthe investor confidence in the fund'sultimate success."If performance is not there, the second

fee level is not justified," Mattoo says. Butby the same token, if you pay peanutsthen be prepared to get monkeys. II

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