COVER FEATURE CQS

>SIR>MICHAEL>HINTZE>>>>>>>>>>>>>

>27>JULY>1953>AB0123456789>>>>>>

NAME MICHAEL HINTZETITLE SIRDOB 27 JULY 1953PLACE OF BIRTH CHINADATE OF ISSUE JULY/AUGUST 2018

CITIZENOF THE

BORN 1953

1982 BEGINS FINANCE CAREER

LONDON

1999S TA R T S C Q S I N

WORLD

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he hedge fund world is not short of colourful characters and idiosyn-cratic individuals – nor,

indeed, of people with some pretty remarkable personal and professional stories. But few have had a more ex-traordinary journey than Sir Michael Hintze – the British-Australian founder, chief executive and senior investment officer of London-headquartered asset manager CQS.

Born in northern China on the day the Korean War ended, Hintze’s jour-ney as a trader, investor, businessman and philanthropist has been driven by a voracious appetite for information and insight, the desire to create some-thing of lasting value and an aspiration to do good in the world.

Celebrating his sixty-fifth birthday this month, he shows no signs of slow-ing down. If anything – judging from interviews with colleagues, peers and time spent with the man himself – it is quite the opposite.

His working day begins with a 5.30am trip to the gym and he is usu-ally at his desk and trading by 7am. A self-confessed “news junkie”, Hintze’s appetite for information and consump-tion of research are legendary. On a Monday morning his people at CQS might receive up to 50 or more emails of research and analysis pieces that he has read and annotated in detail over the weekend.

“Most people who have been run-ning hedge funds for 20 years lose the obsession, lose the drive,” says in-dustry peer and Man Group CEO Luke Ellis. “But Michael is just as passionate about running money, and about try-ing to drive his fund and his firm on, today as he was 20 years ago. Normally money dulls people’s ardour. But that hasn’t happened to him at all.”

Since founding CQS in 1999 he has transformed it from a convertible arbitrage-based prop trading unit

at Credit Suisse First Boston into a multi-strategy credit-focused asset manager running more than $16bn in client assets. The firm’s flagship strat-egy, which Hintze personally runs as portfolio manager, has produced out-standing performance over the past 13 years.

Since its inception in 2005, the fund has been named EuroHedge Fund of the Year three times, an achievement matched only by Sir Chris Hohn’s The Children’s Investment Fund. The duo also share a status as two of the most notable philanthropists in the financial world. Hintze’s family foundation has provided funding to more than 200 charities, making major contributions in education, culture and the arts, health, the armed forces and natural history.

In recent years he has built up sig-nificant interests in the agricultural sector, driven by a commitment to sustainable production and environ-mental sustainability – owning and op-erating properties covering an area of more than 70,000 hectares, mainly in Australia and more recently in the UK.

In recognition of his various activ-ities and achievements, he has been made a Knight Commander of the Pa-pal Order of St Gregory, appointed as a Member of the Order of Australia and

knighted in the Queen’s birthday hon-ours in 2013. He also serves as a mem-ber of the Vatican Bank board and sits on the finance and audit committee of the Duchy of Cornwall.

It is quite some journey for a man who was born in Harbin, in the north-eastern region of China, on 27 July 1953, to a family that had fled from Russia after the Bolshevik Revo-lution in 1917.

A fluent Russian speaker, he was raised and educated in Sydney – after his family left Maoist China and were taken in by Australia as stateless refu-gees – where he obtained degrees in physics and pure maths, in engineering and in acoustics before joining the Aus-tralian Army (where he rose to the rank of captain) and working as an electrical engineer.

To the consternation of his father, he then took the first of numerous shrewdly assessed risks in his subse-quent career, borrowing enough mon-ey to fund himself through an MBA course at Harvard Business School. And it was there that his life took a decisive change of direction.

Attending a Harvard talk by John Mack – then head of fixed income at Morgan Stanley, later to become the firm’s CEO – he realised the world of investment banking was poised to undergo a fundamental transforma-tion, with the power in capital mar-kets shifting from the bankers to the traders.

A visit to several Wall Street trading floors convinced him that this was the path to follow: “I felt I really belonged,” as he puts it. He first joined Salomon Brothers as a Yankee bond trader in New York during the firm’s 1980s hey-day, a period immortalised by author Michael Lewis in Liar’s Poker. He then moved to Goldman Sachs (where he ended up as head of UK equity trading) and latterly to CFSB, where he occu-pied senior trading roles.

T

It’s all about the ability to deliver alpha in a bespoke manner

MICHAEL HINTZE

JULY/AUGUST 2018

BY NICK EVANS

As Sir Michael Hintze turns 65 and his firm, CQS, nears two decades in business, Nick Evans,

who interviewed the manager at the EuroHedge Summit last month, profiles one of the

industry’s leading figures

>SIR>MICHAEL>HINTZE>>>>>>>>>>>>>

>27>JULY>1953>AB0123456789>>>>>>

NAME MICHAEL HINTZETITLE SIRDOB 27 JULY 1953PLACE OF BIRTH CHINADATE OF ISSUE JULY/AUGUST 2018

CITIZENOF THE

BORN 1953

1982 BEGINS FINANCE CAREER

LONDON

1999S TA R T S C Q S I N

WORLD

BORN 1953

1982 BEGINS FI

NANCE CAREER

LONDON

1999S TA R T S C Q S I N

COVER FEATURE CQS

With the backing of $200m from CSFB, Hintze span out his Convertible & Quantitative Strategies proprietary trading operation as the independent firm CQS in 1999 – during the “golden generation” period of European hedge fund industry expansion that saw the launch of other firms that have also gone on to become brand-name lead-ers such as Marshall Wace, Lansdowne, GLG, TCI, Brevan Howard, BlueCrest and Cheyne.

If anyone can be said to fit almost perfectly the description of a “citizen of the world” it is Hintze. Not just in his diverse personal and cultural back-ground, but in his interest in the world around him and in his thirst for knowl-edge and insight.

As a young boy growing up in Syd-ney in the early 1960s, he would spend his pocket money at the local cinema watching Pathé news reels – which, at that time, was pretty much the only way of consuming news.

A combination of his love of puzzles and problem-solving, his studies in maths and science, and his own fam-ily history have made Hintze acutely aware of the significance and unpre-dictability of events.

“I love markets and maths,” he told attendees at the EuroHedge Summit in London last month, in a wide-ranging and very personal live interview. “I en-joy problem-solving and puzzles, and the market is one big puzzle.”

Hintze’s personal background has arguably helped to imprint on him the need to understand and recognise risk in its broadest sense. His paternal grandfather, Michael Alexandrovich Hintze, was an entrepreneur – and a man, as his grandson recalls, of “enor-mous aspirations”.

He borrowed money to make a substantial investment in a forestry business in what was then Dutch New Guinea. This proved disastrous. He lost

everything when Indonesia invaded in 1962 and expropriated his assets. As Hintze says: “I learnt that governments can and do matter.”

Those formative family experiences helped to inspire in Hintze a deep-seat-ed philosophical and ideological com-mitment to free markets – as demon-strated in his extensive support for the UK’s Conservative Party over the years, as well as in his voluntary work in areas of market structure and practice.

With regards to his own attitude and approach as an entrepreneur, they may also have played a part in shaping an

almost fanatical focus on business risk – both in terms of investment risk and, every bit as importantly, operational risk – that Hintze has himself previous-ly described as verging on “paranoia”.

In an interview with EuroHedge back in 2005, when CQS was already man-aging more than $5bn, Hintze outlined the risk management ethos that has remained firmly embedded in the CQS culture as the business has continued to grow and diversify over the years.

“If we make a mistake investing, that’s bad news and we hate it – but our investors may possibly forgive us,” he said. “But if we were to make an operational risk error, it would kill the business.”

He added: “We owe it to our inves-tors and our staff to spend money pro-tecting what we have built. I need to be able to sleep at night, and I need to have people around me who think the same way.”

SIR MICHAEL HINTZE: A 65-YEAR JOURNEY

Sources: CQS, HFM data

1953

Born in Harbin, China. Family leaves China for Australia

Obtains BSc in Physics and Pure Mathematics and BEng in Electrical Engineering (Sydney), MSc in

Acoustics (New South Wales) and MBA (Harvard Business School). Joins Australian Army, rising to rank

of captain, and works as electrical design engineer

1982

Begins career in finance with Salomon Brothers in New York, completing the firm’s Graduate Training Program

and working as a Yankee bond trader

1984

Joins Goldman Sachs, holding senior trading roles in London, ending up as head of UK equity trading

1995

Moves to Credit Suisse First Boston

1999

Spins out Convertible & Quantitative Strategies prop trading unit as London-based independent asset

manager CQS, with $200m of backing from CSFB

2004

CQS opens Hong Kong office

2005

CQS AuM passes $5bn, starts flagship hedge fund. Hintze is made a Papal Knight (and later a Knight Grand

Cross in 2008)

2007

CQS opens New York office. Hintze establishes MH Premium Farms, a group of agriculture companies

based primarily in Australia

2008/2009

CQS AuM falls by almost half from $9.5bn to $5bn in wake of global financial crisis. Hintze honoured as

“Australian of the Year” in the UK in 2008, receives The Prince of Wales Award for Arts Philanthropy in 2009

2010

CQS opens Sydney office. Flagship hedge fund named EuroHedge Fund of the Year

2011

Hintze wins HFMWeek ‘Outstanding Contribution’ award

2012

Flagship hedge fund wins EuroHedge Fund of the Year award for second time in three years

2013

CQS launches long-only Multi-Asset Credit business. Hintze made a Member of the Order

of Australia and awarded a knighthood in the Queen’s Birthday Honours for philanthropic services to the arts

2016

Flagship hedge fund wins third EuroHedge Fund of the Year award

2018

CQS AuM passes $15bn for first time (currently stands at $16.5bn). Hintze celebrates sixty-fifth birthday

Michael is phenomenally clever and incredibly intense – which are two attributes that, when you apply them to running money, give you a great abilityLUKE ELLIS

BORN 1953

1982 BEGINS FI

NANCE CAREER

LONDON

1999S TA R T S C Q S I N

A recent dossier for investors on CQS’s investment capabilities makes plain just how deeply ingrained within the firm’s DNA that culture of risk iden-tification, analysis and control lies.

Some 25 out of the document’s 80 pages are dedicated to an exhaustive and graphic description of the firm’s operational and risk management processes – compared with around 20 pages assessing an array of geopo-litical, macro-economic and market themes and challenges (which forms a comprehensive and thought-provok-ing global analysis). A further 15 pages outline CQS’s investment strategies and approach.

As anyone who has ever invest-ed knows, the possibility of losing everything is real. Having seen the im-pact at first hand, Hintze’s instinctive feel for, and even fear of, risk is perhaps even more deep-rooted than in most other people who take risks for a living – at least in the financial world.

And it is that intense focus on risk in all its guises that drives his desire to be as informed as possible about the myriad factors that might affect any in-vestment – and his innate understand-ing that things can and do go wrong, usually very quickly, and that almost anything can happen at any time.

“Michael is phenomenally clever and incredibly intense – which are two at-tributes that, when you apply them to running money, give you a great abili-ty,” says Man Group’s Ellis, who had his first due diligence meeting with Hintze when he was still operating from CS-FB’s offices almost 20 years ago.

“The times when he has done best have been the times when applying a massive brain to the problem is the answer. When things are easy and the way to make money is just to own everything that’s going up, that’s not really Michael’s gig. But the more dif-ficult things become and the more complicated the problem is, the more his intellect kicks in and the better he gets.”

Over the years CQS – in common with most long-running alternative asset managers – has faced its own share of challenges and threats, and it has had to keep adapting as a firm to anticipate

and reflect the continuous process of evolution that has shaped the hedge fund industry in recent years.

Hintze has often referred to “the alpha challenge” facing asset manage-ment firms such as CQS – again echo-ing his interest in problem-solving and puzzles. The challenge of solving client problems by providing a diversified range of strategies, products and vehi-cles to suit the varied needs of different

investors has been central to the way CQS has developed in recent years.

Originally a convertible arbitrage specialist, CQS extended its remit into capital structure arbitrage early on and the firm has gradually expanded its investment capabilities to span the full capital structure – encompassing convertibles, corporate credit, struc-tured credit, ABS, equities, CLOs, loans and illiquids, special situations and multi-asset strategies.

These specialist teams – which number some 50 portfolio managers, traders and analysts – are backed up by a fundamental research group staffed by about 30 analysts and sector spe-cialists.

Individually and collectively, these various specialist capabilities are offered to clients via a broad and ex-panding mix of commingled hedge funds, bespoke and discrete alterna-tive funds, long-only portfolios and

IDIOSYNCRATIC INVESTING – EXTRACTING VALUE THROUGH ‘IMAGINATION’

Given Sir Michael Hintze’s personal history and intellectual curiosity, it is not surprising that geopolitical risk analysis plays a big

role in the investment process at CQS.

The firm was one of the first to hire an in-house geopolitical strategist and the investment team’s radar screen spans the

widest possible spectrum of big-picture global themes, trends and challenges – which help to inform the core processes of

idiosyncratic security selection and trade timing that dictate the composition of its various portfolios.

At a time when volatility is being exacerbated by a dizzying array of potentially significant global events and trends, the list of

issues and challenges that could impact on asset markets – both positive and negative – is lengthening by the day. “There’s a lot

going on,” says Hintze, with some understatement.

He describes himself as being “constructive” about markets in the medium term, but more worried in the short term about

“noise” – notably around Trump and trade. But he believes that it is always important to distinguish what he terms “potholes”

from “black holes”.

And the “elephants in the room”, as he puts it, centre on how markets will adjust to higher rates and the end of quantitative

easing, to which asset prices have been addicted for so long – and a potential trade war.

Key to the CQS process is identifying what Hintze calls the “transmission mechanisms” by which these global themes are

translated into opportunities/risks and trade ideas across credit markets generally and in specific securities.

In an era where knowledge is increasingly commoditised, this insight and “imagination” – driven by deep fundamental analysis

assisted by, but never dependent on, financial models – is, he believes, essential to give CQS its edge.

“How do you find the insight? The kernel of information, that anomaly that enables you to generate alpha?” he said in a recent

CQS document. “Pure analysis will only get you part of the way. You need to join the dots to unravel the puzzle – to find the

dislocation, the mispricing.”

The paper adds: “We believe that alpha generation comes from disciplined hard work which enables us to be imaginative and

to see the opportunities that others do not.”

The document details more than 100 potential “events” – listed under four generic groupings of Populism, Challenges to the

World Order, Challenges to Global Growth and Emerging Issues – that have the potential to create opportunities and risks in credit

and equity indices.

“Geopolitics is poorly understood in financial markets and often mispriced,” says Hintze. “That is largely because for most of

the time it doesn’t matter at all, until it really matters.”

He adds: “For us, geopolitical analysis informs our assessment of price risk and the timing of taking on risk – both long and

short – as well as being a source of alpha.”

But, for all the depth and detail of its top-down analysis, CQS is fundamentally a bottom-up investor. “At the end of the day it’s

all about the idiosyncratic risk, about finding the right opportunities at the right point in the capital structure for the amount of

risk that you want to be taking,” says Hintze.

“At this stage in the cycle we are moving into a credit-pickers’ market – with volatility going up, with dispersion rising and with

increasing long and short opportunities in an idiosyncratic world. There should be plenty of value to extract if we continue to

do our homework properly in terms of fundamental bottom-up analysis, and if we remain careful and nimble in the way we size

positions and trade.”

JULY/AUGUST 2018

BORN 1953

1982 BEGINS FI

NANCE CAREER

LONDON

1999S TA R T S C Q S I N

COVER FEATURE CQS

In 2009, in common with many oth-er hedge funds, CQS’ assets collapsed – almost halving from $9.5bn to $5bn in just nine months. The firm was forced to cut costs and revisit its processes as its investor base changed almost over-night from funds of funds and Swiss private banks to institutional clients – triggering a wave of institutionalisa-tion that has transformed the firm just as it has the entire industry.

More recently, that period of indus-try institutionalisation has brought the need for further fundamental ad-justments to the nature and structure of the firm, as CQS has sought to keep adapting to a constantly changing business. One key driver, of course, has been the accelerating trend of indus-try fee pressures – with institutional investors increasingly focused on cost limitation and value for money.

But equally important has been the fact that clients have increasingly wanted to access in new and different ways the alpha that CQS can gen-erate – not just through traditional hedge fund structures but now also in long-only, bespoke and other formats.

In response, the firm has expanded its offering of products across the risk/return spectrum – spanning a broad range from high-vol to low-vol strate-gies, and in both bespoke and commin-gled vehicles.

Underlining how much the na-ture of CQS’ corporate make-up has changed as a result, assets in the firm’s long-only business – including its mul-ti-asset credit operation, which was only launched in 2013 – now account for some $8bn, almost 50% of its $16.5bn total.

“You’ve got to work very hard to keep being successful and to keep be-ing relevant to investors,” says Hintze. “You’ve got to keep performing first

and foremost, obviously enough, but you’ve also got to be constantly adapt-ing and evolving and you’ve got to be able to provide clients with the in-vestment solutions that are right and appropriate for them.”

He believes these pressures are only going to increase in a complex and fast-changing world that is creating an ever-widening array of challenges for clients – and for asset managers themselves.

“The industry is changing all the time,” says Hintze. “Costs are going up and fees are under pressure, so margins are getting squeezed. The big firms will keep on getting bigger, but the lines are blurring between hedge funds and other asset managers. You’re seeing private equity firms moving into hedge funds, hedge funds moving into long-only, long-only firms moving into hedge funds and so on.”

For a firm like CQS to continue to thrive and endure, he believes two things are essential: the need to be constantly in step with what clients want and expect; and the need to iden-tify, recruit and retain the right people and talent.

“It’s all about the ability to deliver alpha in a bespoke manner,” he says. “The two imperatives are solving client problems and performance. You’ve got to be very cost-conscious and you’ve got to keep evolving the business model to make it as diversified and re-silient as possible, and to keep ahead of the game.”

As Hintze sees it, alpha is about cre-ating and harnessing the value that turns knowledge into insight. “Knowl-edge is a commodity,” he says. “There’s endless noise – there’s a plethora of prices, news, events and so on – and you’ve got to have the right data sets and analytical tools to process all of

customised mandates – any of which can be tweaked and tailored to fit the specific requirements of the individual client.

The firm’s investment capabilities are managed by experienced and dedicated teams – with the average market and industry experience of the firm’s 80 or so front-line investment professionals being more than 15 years.

Like most other asset managers that had to navigate their way through the potentially business-threatening global fi-nancial crisis of 2008 – and the sea chang-es the crash subsequently triggered across the alternative investment management world – CQS has undergone significant evolution over the past decade and the road has, at times, been bumpy.

80PORTFOLIO MANAGERS,

TRADERS AND ANALYSTS

CQS KEY DATA

$16.5BNASSETS UNDER MANAGEMENT

15YEARSAVERAGE MARKET AND INDUSTRY

EXPERIENCE OF THE FIRM’S INVESTMENT PROFESSIONALS

I want CQS to be a firm that matters to its investors and makes a contribution to society. To do that we must build a business for longevity. It’s no good having peo-ple who will just leave again after a couple of years – you need people with at least a 10-year horizon who can make a real and lasting impactMICHAEL HINTZE

BORN 1953

1982 BEGINS FI

NANCE CAREER

LONDON

1999S TA R T S C Q S I N

that and isolate the information that is useful to you.

“But true alpha lies in insight, and that’s what we are paid for. To get from knowledge to insight requires imagi-nation – and for that you need context and deep analysis. You’ve then got to construct the investment, trade it and risk manage it. So you need to have a process that is repeatable, investible and scalable – and you need to have the right talent.”

Inevitably there is turnover of staff in an intensive, high-performance business such as CQS. There have been times when the firm has had to experience occasionally painful cut-backs – notably 2015, when there was significant rationalisation across the board – not least to position it better for future growth.

CQS has retained a core of senior people who have been with the firm since the start – including its chief operating officer, chief risk officer and several senior portfolio managers.

Over the years some high-level investment personnel have moved on – sometimes, it is said, because while CQS has always had a reputation for paying its people well and fairly, its founder is also well-known for a

determination to preserve his equity ownership of the business.

But Hintze has his eye fixed on the future. A partnership structure was set up a few years ago to align senior ex-ecutives with the firm’s long-term aims and to enable them to help shape its direction going forward.

Insiders say the partnership – which now comprises 30 people – has created a greater sense of belonging and own-ership across the firm, encouraging commitment and continuity.

Hintze sets a high store in fostering CQS as an intellectually stimulating environment, and in maintaining a structure that maintains the firm’s core culture: of rigorous research and anal-ysis; of constant curiosity and debate; of deep attention to detail; of imagina-tion, discipline and hard work.

“I want CQS to be a firm that matters

to its investors and makes a contribu-tion to society,” he says. “To do that we must build a business for longevity. It’s no good having people who will just leave again after a couple of years – you need people with at least a 10-year horizon who can make a real and lasting impact.”

He adds: “I want this to be a place where people are intellectually stim-ulated; where there is true alignment with clients; where we are being paid to take investment risk, not operational risk; where we do what it says on the tin. If we keep doing all of that, we should be well positioned in the years ahead.”

As for Hintze’s own plans, there would seem to be little prospect of him putting his feet up anytime soon. De-spite reaching the official UK state pen-sion age this month, he is still relatively youthful in an industry where iconic in-vestors like George Soros and Warren Buffett are in their late eighties.

“I’m doing what I love to do,” he says. “I love markets and investing. I’ve been an early riser since army days and I maintain that routine today. And I devote any spare time to my family, the foundation and my agricultural interests.

“There’s always more to do. Much more to do.”

JULY/AUGUST 2018

BORN 1953

1982 BEGINS FI

NANCE CAREER

LONDON

1999S TA R T S C Q S I N