Anthony Clemente, chief executive of Manhattan-based Canaras Capital, speaks about the challenges facing new start-ups, the unavailability of third-party software to support the trading activities of firms like Canaras, and the difference between his organisation and a typical hedge fund trading credit instruments. Anthony Clemente, chief executive of Manhattan-based investment manager Canaras Capital, knows a thing or two about the credit markets. He speaks with Victor Anderson about the challenges facing new start-ups, the unavailability of third-party software to support the trading activities of firms like Canaras, and the difference between his organisation and a typical hedge fund trading credit instruments

Can you tell me a bit about Canaras Capital?

Canaras Capital Management is an alternative credit asset management business. Its emphasis initially is on the syndicated or leveraged loan market with portfolio strategies ranging from highly leveraged portfolios including cash flow and market value CLOs, to total return portfolios or low or unleveraged strategies. In those strategies we invest predominantly in leveraged loans but will also have some ability to invest in credit derivatives and other forms of alternative credit. In the next few years, starting possibly as early as the end of this year, we will expand our focus into European leveraged loans and eventually we will look at opportunities in the Asian loan market, primarily out of Hong Kong, where M&A and leveraged loans are growing rapidly. Ultimately, we would like to add an emerging market bond capability.

Are there any specific areas of emerging markets to have piqued your interest?

We are attracted to sovereign and corporate emerging market bonds. Presently, the volatility in many emerging

markets has dramatically increased due to political and economic changes within a number of South American

governments, steady improvements within Eastern European economies and the political instability occurring in

several regions of Asia.

With reference to your emerging market interest, does that include the traditional BRIC (Brazil, Russia, India and China) countries or would you be looking further afield to the Middle East and South Africa?

We plan on concentrating on the traditional emerging markets. Our focus has been to assess the effects of political instability and volatility on their sovereign portfolios – these levels of changes we are seeing has not occurred, in

many of these countries, in over a decade.

When you described your organisation you used the term 'initially' which implied the firm had recently been founded. Is this the case?

Yes, Canaras Capital was formed in September 2006. Prior to that, I was one of the architects of the INVESCO's bank loan and CDO business out of New York and London (and a global partner). Prior to that, in 1989, I was part of

the founding team that put together Merrill Lynch's Asset Management Bank Loan business, based in Princeton, New Jersey.

What is the size of your operation in terms of funds under management and head count?

We have ten people in New York and one in Jersey (Channel Islands). Seven of us were formerly with INVESCO and so, as a team, we have that shared experience of working with the loan asset class and managing complicated

structured products, like CDOs. We intend to have about $600 million under management by the end of April.

How would you describe your business?

We are not a hedge fund. The difference between Canaras and your typical hedge fund is that most funds tend to employ value-added or alternative strategies on top of traditional asset classes like stocks and bonds or derivatives of

stocks and bonds. For example, some of these strategies using stocks would be market-neutral, long-short, or other forms of quantitative equity strategies. There are a variety of strategies employed within the more common hedge

funds and yet some hedge funds are just beginning to venture into alternative asset classes like leveraged loans. This is a phenomenon of the past few years. Our business – leveraged loans – is considered an alternative asset by most investors, meaning that the fundamental risk and thus return of a leveraged loan has a low or uncorrelated relationship to other traditional assets. This is because we buy or invest in an instrument that is not a typical security – it is a privately negotiated loan and each individual loan is different. That is why we would be considered an alternative asset manager in the credit space; that is very different from most hedge fund strategies.

Are you targeting high net-worth individuals or are you after institutional capital?

Predominantly we deal with institutional players; this includes pension funds, insurance companies and global banks. I would say the dominant investors in this space are, for the most part, non-US based. A typical investor may include

high net-worth individuals and even boutique situations like a fund of funds. There are a number of investors looking for the uncorrelated return/risk that the leveraged loan asset class has to offer.

Have you found that like a lot of the hedge funds in the US, institutional investors are driving the demand for greater transparency in the nature/activities of the business?

Yes, our portfolios and their strategies will be highly transparent to our investor base. We use third-party custodians that not only function as custodians and trustees but also as calculation and reporting agents. Our investors typically

receive our entire portfolio holdings on a monthly basis. Those holdings are marked to market and opportunistically we do not vary significantly from one asset class to another. Hedge funds typically are able to move from strategy to strategy and often the investments they hold and the strategies they employ are not fully disclosed to their investor base. They are also under a significant lock-up provision as it relates to liquidity within those investments.

Do you see your transparency as a significant advantage over your competitors when it comes to attracting capital?

Yes, definitely, particularly in the environment we find ourselves now, as we compete against the hedge funds for the same pool of funds that an investor would typically allocate to alternatives.

How important do you see individual track records and reputations in the establishment and success of specialist investment management operations such as Canaras?

The performance track record of an asset manager is often legally owned by the institution and not the individuals that may have been responsible for that success. In the case where you have talent departing large corporate asset

managers – either as individuals or teams – you will rarely see these track records follow as the entirety of the team would need to be part of this movement and that is rare. This holds true even if that individual or group may have

been responsible for the establishment of the investment process and the overall strategic direction and success of the business and its performance.

Let us talk about sell side people moving across to the buy side, a phenomenon that has been around for a while. What are the challenges associated with leaving a large financial organisation and starting up a new shop?

There are a number of different challenges; the biggest is investor perception of appropriate experience in managing assets. This is my third association with a new venture – first with Merrill Lynch, then INVESCO, and now, with

Canaras. Investors look for people who have direct experience in successfully developing and managing both new businesses and the investment process around certain portfolio strategies. Most people who come from the sell side are experienced salesmen especially when it comes to assessing how to construct a transaction and move it to the market place. They usually lack experience in establishing asset management businesses, hiring and managing teams around an investment strategy and the follow-on management and execution of portfolio strategies. They would not have had that level of experience in a line job at an underwriting bank or in a structured finance role. Their experience in selling is often confused with management experience. This may be where an investor could run into a problem.

Let us talk a bit about the technology underpinning your business; I should imagine that in terms of providing transparency and developing a robust risk framework, technology plays an important role?

It is significant for predominately all alternative asset mangers and certain hedge fund strategies. Alternative asset and hedge fund strategies do not have off-the-shelf software packages that you can necessarily buy which fully wrap

around your investment process – it is a different type of business after all. For traditional bonds and stocks there are a number of packages out there to support the core strategy. But for alternative assets you have to customise much of

the software that you utilise to fit your investment process. The second component, which is about half of what we do, is how we communicate as a group in order to implement a strategy. As a private asset class, our trading systems are not something generated from Bloomberg because our investments are not listed there. Our communication with the market place is not something we typically do through a Bloomberg distribution – it is something that is done through a phone call or a personal email. We need systems that are able to categorise, monitor, and assess that communication and as a result we find that we need to develop our own systems or customise a third-party package to fit the process.

How did you achieve that?

I hired the head of technology from my previous venture. This guy has been busy – extremely busy – establishing systems and developing and implementing software applications customised around our future strategies. If you look

at the two businesses in which I have been involved, they are very different in many respects but they are built upon a technology platform that comfortably supports a process and the asset class.

Is all your technology proprietary?

Most, but not all. Everything has a certain level of customisation depending on the fund and its risk guidelines.

You mentioned certain credit derivatives that make up part of your portfolios. Is valuing some of the more illiquid instruments a challenge for you?

Valuation, typically for many credit derivatives, is not an exact science. However, we do manage products that need a daily valuation particularly to support part of our investment process. Most of our institutional portfolios will be

priced by a pricing service and for those derivatives we often will not get a daily valuation. When we do invest in CDSs and LCDSs, we are more interested in the long-term value rather than where we feel we can exit those

instruments at any given time.

How has the re-pricing of the US sub-prime mortgage risk affected the US credit market?

The turmoil we are seeing in the sub-prime mortgage market is significantly distanced from the leveraged loan market, which is driven by M&A activity. Where we will see some effect – and this could be positive or negative –

are credit spreads on the debt that we use to leverage our portfolios possibly widening or contracting as a result of the general view in the CDO marketplace. Many investors may see loans as a flight to quality away from the

mortgage-backed securities, and, if that is the case, we could see some tightening on the spread of the notes that we would use to leverage our portfolios.

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Clemente condensed

Chief executive of Canaras Capital

Your first job in the financial services industry?

A bank training programmer for Fidelity Union Bank in Newark, NJ.

What and where did you study?

I have a BA in economics from St Lawrence University, Canton, NY.

When you were still at school did you ever think you would end up where you are?

Absolutely not, but I always ended up doing things that piqued my interest and I think you tend to be good at the things you really enjoy doing.

If you did not work in this industry what would you be doing?

I would probably be writing, possibly non-fiction.

Do you have a favourite book, author or genre?

No. I do know that I do not like fiction, except for science fiction, like Stephen King.

Is the hedge fund industry as glamorous as it is made out to be?

If glamorous means high paying, then I think it could be. If it means to be on the cutting edge of asset management technologies and strategies, then definitely. But I do not think it is easy money, which it is often characterised as in the press.

What's on your CD player?

Something by Diana Krall.

Marrying Elvis Costello did not hurt her career?

Yes, but she is also unbelievably talented.

Favourite holiday destination?

Brazil. I was an exchange student and lived in the interior as a teenager. I love the Brazilian people. They are very warm and open.

Your most recent extravagance?

I am relatively low maintenance. [Clemente does, however, mention his

passion for Vespa scooters, which he describes as the nearest thing he has to an extravagance – VA]