12.14.2011
By Terry Flanagan

Three is Better Than Two

For KLS Diversified Asset Management, a unique three CIO structure goes a long way.

From the financial crisis of 2008 until now, hedge funds have gone for a wild ride. From vilification to start-up boom, investors’ sentiments towards alternative asset managers have trotted through ups and downs. Undoubtedly, the hedge fund landscape remains competitive, as opposed to eight to ten years ago when hedge fund seeding capital was more plentiful for emerging managers.

“Larger managers are struggling a little but smaller managers that lack a quality structure, strong track record, and process are struggling also. Due diligence is up much more than it was five to ten years ago,” said said Jeff Kronthal, co-chief investment officer (CIO) of KLS Diversified Asset Management, a 1 billion plus hedge fund that offers alternative fixed income strategies in the mortgage, credit and rates space.

“In today’s world, you don’t want to be involved in a fund that’s too large and forgo liquidity. The philosophy within KLS has always been that institutional quality infrastructure is key and fund size must be managed carefully.”

Kronthal is optimistic about the 2012 prospect for mid-sized funds, such as KLS. The firm is also unique in regards to its three CIO structure. Kronthal manages the fund along with John Steinhardt and Harry Lengsfield. According to Kronthal, three minds are better than two.

“Three experienced people looking at a world as complex as the world today is extremely valuable. When creating the firm, we felt that very few places were able to offer clients expertise on a range of products, but we do that across mortgage, credit and rate products,” he told Markets Media. The three managers, who have 25 to 30 years of expertise across several of different fixed income markets can also collaborate and speed-up the firm’s decision-making process.

Since inception, a vast majority of KLS’s assets have been institutional, though initial growth came from the high net worth and family office community. More recently, robust growth has spurred from pensions and fund of funds, noted a spokesperson for the firm.

While the majority of investors have been left chasing yield in a low interest rate environment, mortgages continue to be a mysterious market for some investors.

“(Mortgage) opportunities are valuable enough that structured products do have a place in a diverse portfolio,” Kronthal added. “The risks, such as the size and liquidity of the market, make it all the more important to invest in a manager who has deep expertise in the product and understands scalability of such a strategy.”

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