Dear Investors and Friends,
We hope that this letter finds you well.
We recently marked our one year anniversary since the launch of Highmore as an alternative asset management firm with an opportunistic approach focused on growth stage and capacity controlled investments in both public and private markets. Highmore focuses on the most important, yet probably the most overlooked asset of all, human capital, and the link between behaviour and performance, since generating differentiated investment outcomes places a premium on investment skill.
A Value-Added Approach
When we evaluate investment opportunities, we always ask ourselves the question of why a business deserves to exist. In particular, we focus on whether the value proposition is better or different relative to other firms in the industry. In our view, there is no point in pursuing a ‘me too’ commoditized approach and we were explicitly focused on ensuring that we were not just another alternative investment firm when we founded Highmore. We believe that Highmore’s independent thought process and focus on growth stage and capacity controlled investment approaches represents a value-added proposition for investors, given the opacity and analytical complexity of analyzing these opportunities and the necessity of incorporating these approaches given the malaise with mainstream alternative managers. Through a proprietary process focused on behavioural analytics, and the scientific application of investment research and portfolio integration, we aim to de-risk growth stage investing and identify the true outliers and original thinkers.
Highmore: A Team with a Shared History, Culture and Approach
We founded Highmore as a continuation of the team, culture, and investment approach that we have implemented successfully at our prior firms. Brian and I have a long shared history having started our careers together in London over 16 years ago and more recently managing the $3bn alternative investments business at Oppenheimer & Co. We have also individually invested capital through a range of market environments at a number of pre-eminent investment firms including FrontPoint Partners and Man Group.
Is The Investment Case For Alternative Investments Still Valid?
Highmore was formed at an important juncture in the asset management industry. Some investors increasingly deem active management in general and alternative investment strategies in particular to be ineffective and expensive. In our view, investors have less of an issue with fees and more of an issue in terms of the differentiation in the manager value proposition, specifically the investment ideas within their portfolios and the profile of return streams. If investors can see true differentiation they can at least justify fees. The central issue is that investors increasingly find it difficult to differentiate between managers and investment ideas. As correlations between asset classes and investment strategies have continued to increase, original insights and truly idiosyncratic investments have become rare with size being the enemy of performance.
Furthermore, the overall industry has gravitated towards lowering volatility at the expense of an attractive return stream and has become increasingly myopic in terms of evaluating performance. At Highmore, we have a dual focus on risk mitigation defined as a permanent loss of capital versus low volatility and an attractive return profile over a 5 year investment cycle.
Scarcity of Investment Talent and Analytical Complexity
Investors look to alternative investments as a solution to reduce correlation to equity and fixed-income markets, yet they are constrained by the fact that investment talent is scarce and the most interesting investment opportunities are analytically complex. This has resulted in recent years in gravitation towards consensus choices resulting in muted returns. Despite the issues raised by investors about alternative investments, we believe that investors should exercise caution before de-emphasizing or completely eliminating alternative investments from their portfolios. At a time when both equity and fixed-income valuations are elevated, global growth is anemic despite massive monetary policy stimulus and policy effectiveness and credibility is increasingly an issue, it is dangerous to invest based on trailing performance of assets and investment strategies. This is one of the main reasons why the most sophisticated investors continue to allocate to alternative investments to increase idiosyncratic risk and reduce market risk. Given the juncture we are at, both from a financial markets and economics standpoint, we believe that it is critical to increase idea specific risk and reduce market directionality.
We would argue-although investors can state that we are talking our own book given the financial and economic backdrop, incorporating differentiated approaches that reduce market risk and increase idea specific risk is critical. Investors should not paint all strategies with the same brush but should look to incorporate strategies and managers that exhibit differentiated thought processes that is reflected in their portfolio ideas and who invest with conviction- attributes that have been sorely lacking with many of the larger and more established managers. We believe that the probability of investment success and the alignment between Limited Partners and General Partners can be increased by focusing on highly specialized investment teams that are in the growth phase of their business life-cycle.
Transparency and Communication: the Bedrock of Trust
In our view, the foundation of the asset management industry is based on trust and confidence. We view transparency and frequent communication as the most important aspect of our business values and a key determinant in engendering trust. As a result, we will write to you in the spirit of openness on a frequent basis.
We look forward to a long and successful partnership, and to consistently demonstrating the seriousness with which we approach the privilege and responsibility of investing your capital.
Dipak P. Jogia Brian M. Altenburg, PhD
Managing Partner and Co-Founder Managing Partner and Co-Founder