Interview with Suman Bannerjee-CIO at Hedonova Hedge Fund

We recently introduced Hedonova platform to our investors. There was a strong interest shown by many readers. Many readers had follow-up questions. I know investors have difficult and tough questions to ask portfolio managers. I can say that because I am myself an Investor and have similar queries!

Hedonova Review

I had the opportunity to interview the Chief Investment Officer of Hedonova and I was not disappointed

Bio-Suman Bannerjee

Suman is the co-founder and CIO of Hedonova. Suman pursued his BA in Economics and Management from University of Cambridge and thereafter completedin Master’s education from The London School of Economics and Political Science. Prior to starting Hedonova, he was working as a portfolio manager for alternative investments at Davidson Kempner. You can check his complete profile on Linkedin.

Suman, how did you get started in investments? What’s your story?

I was born in a town called Purulia near Calcutta, India. A cricket scholarship brought me to Cambridge where I started a degree in psychology. One of my academic peers got me interested in the economic applications of game theory which led me to change my major to international trade and economics. My background in applied economics brought me to institutional investments.

Who are the people behind Hedonova? Can you also share a bit about the founders?

Alex is our CEO. He and I are the co-founders. I met Alex while he was working for MS [Morgan Stanley] where he provides operational support to my book [Basically Alex’s team in Morgan was a trade executor to Suman’s team in Davidson]. He’s razor-sharp, a generalist, and a great operator. He’s also amazing with people. I guess I complement his breadth of knowledge with depth in investing.

How did your background and experience influence your investment philosophy?

This question makes me quite nostalgic, Rohan! My first job was in the equipment finance team of Societe Generale. Equipment finance is really interesting because it teaches you everything about a business – manufacturing, pricing, demand analytics, production efficiency, the entire supply chain. I’ve developed a knack for picking out financial efficiencies in supply chains and then building investment structures to capitalize on them.

Can you give me an example?

Sure, take the case of the wine and whiskey business. That’s around 2% of our portfolio. When distillers have the liquid ready, they have to put it in barrels and store them for 25 to 30 years [for high-end, investment-grade whiskey]. That means the distiller does not get paid for two decades and also has to bear the cost of storage. That’s insane economics that no company can bear. That’s where investors like Hedonova come in. We buy the whiskey barrels from distillers, store them in Government approved warehouse, and sell them to the next investor after a few years. That’s how the alcohol industry keeps going.

What kind of investment approach is employed at Hedonova?

We take a top-down approach. A very high-level approach would be:

  1. We select an alternative asset class that is attracting money flow
  2. We look at different models in the space (equity/debt/income sharing). We invest in equity and income-sharing opportunities only.
  3. We select a few specialized firms whose offerings fit our preferred models.
  4. We then need to do adequate due diligence on the firms. This can include understanding their process, compliance, availability of insurance (like in the cases of physical investments like wine, art)
  5. We negotiate lower fees or other favorable structures to lessen our ongoing costs
  6. We make a few investments, usually starting with a 0.2% allocation of the fund

Speaking of the portfolio, can we see details of holdings and assets held by the fund? How often is the NAV/Portfolio report shared?

Alex and I write a fourth-nightly newsletter talking about the investments we have made, mistakes we made, what we sold and what we’re thinking is going to happen to different alternative assets. Their last newsletter can be checked here

What kind of returns can investors expect in the long run? With the stock markets booming and giving double-digit returns, why should one invest in alternative assets which are risky?

Stock markets are driven by money flow. Alternative assets prices are driven by supply chain requirements. [Example GripInvest leasing rates are a function of how much demand is there in the market for the assets and how much they can procure, any widening or contracting gap between the supply and demand impacts price dynamics].

We are currently in a liquidity-driven regime. Coupled with higher inflation, stock markets are bound to rise for some time and would fall once the liquidity dries up. Stocks markets oscillate between liquidity and volatility-driven regime and institutional investors abhor volatility.

When the stock markets enter a volatility regime, a lot of return-hungry institutional investments are bound to move to private equity. PE firms have around 22% of their AUMs as dry powder, cash waiting to be deployed. This would amount to around $2.5 trillion. PE firm’s capital flows to businesses that are plugged into the global supply chain. The introduction of fresh capital would cause an effect where alternative assets could benefit.

Take our previous example of the whiskey distillery. The introduction of private equity into a distiller would allow it to increase the production of barrels of scotch, giving us more opportunities and optionality to fund. More scotch would require more warehouse storage, once again allowing us to invest in logistic properties. Investment opportunities will open up across the supply chain.

What are the major risks associated while investing with Hedonova?

The fund faces two kinds of risk – illiquidity, and granularity.

  1. Illiquidity: Many of the asset classes we invest in, like art, real estate, startups are illiquid. They cannot be sold easily. Because of this, we invest around 35% of our portfolio in liquid assets like cryptos and listed equities.
  2. Granularity: Large chunky redemption can cause fund to unwind assets at unfavourable prices and impact overall NAV. Hence, we encourage small investments also to have a more homogenous investor base

What is the legal structure of Hedonova? Can you elaborate on governance and regulatory structure?

Like any other US hedge fund. Hedonova uses the SEC’s Rule 506(c) of Regulation D for private investment funds. Reeling out of the Great Financial Crisis of 2008, the US took a lot of the steps in the right direction to spurt economic growth and reduce unemployment. One of these was the Jumpstart Our Business Startups or, cleverly named, JOBS Act. The JOBS Act made significant changes to fundraising and investing structures. For example – Regulation A is for investment syndicates (people coming together to invest in a single asset like real estate), Regulation CF is for crowdfunding into startups and Regulation D is for private investment funds like Hedonova.

How does the valuation of illiquid assets happen?

Illiquid assets are typically valued by the fund custodian at the end of every quarter. For some asset classes like art and wine, we work with specialized firms. Valuation firms look at factors like asset quality, agreement terms, insurance coverage, etc.

How does one invest in Hedonova from India? What are the tax implications involved?

When you invest with Hedonova, you become a member of a Delaware LLC. This structure we use offers a complete tax passthrough, meaning investors are taxed in their home country. In most countries, including India, profits are taxed as capital gains.

How has been the investor’s response to Hedonova?

Most investors use Hedonova to complement their 401(k) or their stock and mutual fund portfolios since our returns are uncorrelated to the stock markets. Our European and Asian investors use us as a gateway to American alternative investment space.

We thank Suman for taking out time from his busy schedule for this interview.

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