Robert Sorrell founded the hedge fund Sorrell Capital last fall. He talks about his investment strategy, why more regulation is good, and why he’s short gold.
It seems that an increasing number of high-powered money managers are feeling the entrepreneurial bug these days, eager to set up their own shops. While many of the moves stem from regulatory changes that will force banks to cut down on their proprietary trading businesses, some are taking the plunge to capitalize on what could be a new renaissance in the industry.
Robert Sorrell, 36, is one of those newly minted hedge fund hopefuls. The 14-year Goldman Sachs veteran recently left his job as a managing director at the bank — passing on the chance to potentially become a partner in the firm — so he could start his own hedge fund, Sorrell Capital LLP.
Sorrell’s new London-based fund received a lot of buzz when it was launched in October thanks in part to his namesake. His father, Sir Martin Sorrell, is the chief executive of WPP (WPPGY), the massive advertising and marketing conglomerate, and his brothers, Jonathan and Mark Sorrell, occupy powerful positions inside Goldman Sachs (GS).
Robert Sorrell recently sat down with Fortune in his first extensive interview with the media since launching the fund in October. He lays out the reasons why he left Goldman and why he believes it’s the right time to start a new fund. He also gives a peak into his investing thesis and what he has his eye on in 2011.
Why start a hedge fund now?
I am fundamentally a contrarian. I’m a contrarian in how I invest and I’m a contrarian in probably the way I think about most aspects of the world. I have always wanted to start a business and I felt strongly that when I do that I would want to start it at the bottom of the cycle. Point being, at the bottom of the cycle you have pretty asymmetric risk to the upside. If you started a hedge fund at the top of the cycle, like the beginning of 2007, you would have thought that things are great and it is really easy to raise money but your business would have gone off a cliff.
How has your work as a banker at Goldman Sachs prepared you for being a portfolio manager? They aren’t similar jobs.
I did a number of things during my time at Goldman. I started out in classic investment banking but when I made managing director in 2006 I was asked to start a new business called private finance. It was an extremely entrepreneurial exercise. The business was focused on investing across the capital structure, cutting across all products from equity on through to debt. That experience certainly pushed me into the investing side of the business.
So while it may not be classic pedigree for starting a hedge fund, I view that as one of my biggest strengths. As a contrarian investor, I don’t want to think like the herd, I don’t want to trade like the herd, and frankly, I think the key to my success in investing during this horrible period that we have just been through is that fact.
You employ a macro strategy in your fund. With the markets more erratic than ever, how can you convince your investors that you can handle the risk?
I tell my investors that I seek volatility because volatile markets are the markets where I think I can make the most money for them. I am not afraid of volatility — in fact, I market to my investors that they should expect more volatility than the average macro fund.
But obviously, you have to have very good risk management systems in place. I invest across all asset classes, so while I embrace volatility, if I don’t like or understand the volatility in a certain market, I can move out of it quickly. Everything I invest in is highly liquid.
On aggregate, hedge funds underperformed the broader market last year. Why do you think that is?
I think using an average of all funds is misleading because if you look at the type of investing strategy they employ, the variance is pretty big in terms of performance. The market has been topsy-turvy while the correlation with the broader market has been very high. So if you’re a stock picker, it has been an incredibly difficult market to beat the benchmark. I think 80% have not been able to beat the benchmark, as correlation has been massively high and the market has been driven by macro forces. That market actually is a plus for macro investors like me, but it hurts the stock picking types.
Have you found it tough at all to raise funds? Are the big money managers requiring you to show more returns before they invest?
I haven’t tried to raise institutional cash because I didn’t start out with a formal track record. So my focus is on generating the best track record performance I can. Once I have six or nine months of track record in place, the goal is to go out and market that track record to family offices and institutions. Many institutions won’t even look at you until you have a 24-month track record in place anyway. So I’ve focused on marketing the fund to high net worth individuals and plan to build up.
How is your father, Sir Martin Sorrell, involved in your fund?
My father is an investor in the fund and he is also an advisor on the board of the management company. But he has no economic interest in the management company. He has no day-to-day involvement in the business. He is still the CEO of WPP and that’s his full time job. He just happens to be an investor. My father is also a good advisor when it comes to building businesses.
Why set up shop in London and not New York? Is it a lifestyle choice or is it a regulatory concern?
No, I don’t think of any of those things. I was born in London and my family is here. You can call that a lifestyle decision if you want, but this business is very portable. What I really like about being in London for global macro investing is the time zone. I like very much that I can get up in the morning and catch the last part of Asian trading. I can also follow European trading and get a six or seven hour jump on the US before the markets open there. I don’t think there is a regulatory arbitrage to think of. I think the rules are becoming tighter across all geographies – and rightly so. There is a cost and a time commitment for sure. Actually, you can say that the UK has been getting tougher on banks and hedge funds, but it still hasn’t been a primary consideration for me.
Are you concerned about efforts in Europe to beef up regulation of hedge funds?
No, not at all. For a startup fund it’s time consuming and costly. At the margin, fewer funds will start up because of that, but more won’t choose to start up because it’s hard to raise assets. But I view all that as a long-term positive for the industry because as industries evolve and become more mature they become more regulated – that’s a fact of life if you are in the hedge fund industry or the widget industry.
What markets do you trade? How much leverage do you use?
We like to have a diversified approach and we are taking a discretionary approach both long and short. We tend to have investments in commodities, equities, fixed income, currencies, and volatility as well all at the same time. We don’t use leverage aggressively. The fund mandate is capped at 200% of gross exposure. We are not doing quantitative trading so we are not trying to extract a few basis points levered up.
So it is a fundamental approach, longer term and across all asset classes. We prefer positions that are defined loss so we use options because they have a defined downside. The leverage is strictly controlled. As a contrarian investor it’s important to have spare powder on hand to pounce on opportunities. I like to always have 20% of the fund in cash at any moment, but that can go to zero in a heartbeat if you find the right opportunity.
What are you seeing as hot markets for 2011 and what’s your view on the global macro structure of the economy?
I think there are two major asset-class-specific moves that we are already at the beginning of that I see continuing in 2011. The first is the flow from bonds to commodities and equities — on a geographic level I think you will see a rotation out of the emerging markets and back to the developed economies. So I am pretty bullish on the US equity markets. I find the emerging markets a little over-priced right now and frankly I think inflation is starting to tick up to pretty heady levels. Rates are going to have to go up in the emerging markets and that will have an impact on growth.
All emerging markets?
Some are more overvalued than others. China has started to pull back meaningfully. India is very pricey compared to historic averages. Indonesia is very pricey. Even in Brazil where the growth level is intense I think they will come under pressure to tighten and I think that will have an impact. As a contrarian investor I tend to shy away from markets like Brazil on the long side. I am much more interested in indentifying a turning point to go short Brazil than I am piling into trades that are already heavily on peoples’ books.
For example, gold is very overbought in my view and I shorted gold last month. I don’t know if I will be short for a long time. I was looking for what I felt was the key trigger point of a gold sell off, which was a rally in US rates and that’s been the case so far.
It seems like you have to time the market very well, which is usually the hard part of investing. How are you able to overcome this?
You don’t have to time the market unless you are throwing everything on the trade. But it does require you to be careful. For example my gold short is a small-sized position for now because the risk of being wrong or the market going the other way on a trade like that is high.
There are other times where you have huge conviction on a trade. In 2007-2008 when the credit and equity markets dislocated and the credit market sold off and the equity market didn’t, I had very strong conviction that the equity market was wrong and I was prepared to lose money before making a lot of money.
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