invest hedge september 2010 - billion dollar club

8/2/2019 Invest Hedge September 2010 - Billion Dollar Club

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billion dollar club

Blackstone topslean and cleanfund of fundsrankingsManager selection beyond the brand

names with a wist of macro view is thewinning cocktail for the future

By JVikiJVatarajan

28 September 2010

he fund of funds industry, as represented bythe largest players with more than $1 billionin assets, is still a force to be reckoned withdespite the hostile asset raising environment and the challenging markets of 2010.The once titanic trillion dollar fund of fundsindustry has emerged as a leaner and clean-er group of savvier investors with $595 billion divided among 106 of the largest players.Reflecting the new maturity of the fund of funds industry, where true performance is now rewarded with assets,discretionary managers, particularly independent firms,are enjoying a renaissance. As a statement of this trend,Blackstone Alternative Asset Management is now the larg-

est fund of funds in the world, with assets of $28.51 billion and a growth rate in the first six months of2.29%.Blackstone's fund of funds business, which is run byTom Hill in New York, has been the largest discretionaryindependent fund of funds for at least a year, but HSBCAlternative Investments and UBS Global Asset Management A&Qmix both advisory and discretionary, whi ch inthe past have given larger overall totals. Yet, despite this,Blackstone has proven that pure fund management, rather than distribution, is the key to winning assets in 2010.In the fund of funds industry at least, successful managers are those, like Blackstone, that are focusing on performance rather than asset gathering. For example, En-Trust Capital Diversified Fund, which is run by New

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Pine liroveM5ociatesTotal 595.18

(1)Totalalternative assets includng custody $33.211bn (2)Excluding GLG FOHF assets (3) The merged Citigroup and SkyBrdge Assets (4)EACM Advisor and MGAI Assets under BNY brand (5) Now part of F&C Asset ManagementFootnotes: = stimated numbers "= From latest SEC Listing "' =1 March 2010 Bod = ew entrants in 2010 Source: lnvestHedge

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billion dollar club

York-based EnTrust Capital, was up 3.6% inJune, 33.77% for the past 12 months and 5.94%for the year to the end of June, the period overwhich it also grew assets by 2.17%. MagnitudeCapital, which has added 5% to its assets in sixmonths, is another good example of this (seeProfile, page 42).Following the mass destruction of wealth inthe past few years, the savvier fund of fundsmanagers are looking for opportunities in therubble, such as the credit and distressed spaceand in the structures they offer, including customised accounts and co-investments, as wellas harnessing the power of the managers inwhich they invest.A powerful example of this is the gold shareclass introduced by the Capital Holdings Group,which has seen its assets under managementgrow by $1.3 billion, equivalent to 21%. TheLeveraged Capital Holdings G share class wasup 1% in June, 40% for the past 12 months and13.16% for the year to the end ofJune.The InvestHedge Billion Dollar funds offunds rankings may now only have 106 members, a third less in number and half of theassets than it had in our June 2008 survey, but50 firms had positive growth in assets in thefirst six months of the year. The 50 firms,equivalent to 47% of the universe with $334.3billion under management, added $24.7 billion, or 7.97%. Taking into account the 11firms that had flat growth, 61 funds of fundsadded $25.7 billion, equivalent to a growthrate of 7.56%.

Of this universe, 17%, or 18 fund management groups, posted asset growth of 10% ormore, while 10 funds of funds, equivalent tojust less than 10% of the universe of billiondollar firms, recorded asset growth of 20% ormore. The one striking feature of the June2010 survey is that there is only one new entrant, and a re-entrant at that. Tarchon CapitalManagement is not only the only new entrantin the survey with total assets now at $1.41billion, bu t also the fastest grower with an as-set growth rate of 84.3%."Our growth through the first half of 2010has been very pleasing given the hostile fundraising environment, particularly in Europe ,"said Alberto Marolda, chief executive andchief investment officer ofTarchon. "We havemade significant improvements to our duediligence, portfolio and risk managementprocesses over the past two years. The new institutional mandates we have been awardedstrongly support and validate the changes implemented. Our business model continues to

focus on discretionary portfolio managementfor our existing clients bu t also now focuseson customised solutions for clients who arealready invested in hedge funds or with newcapital to deploy." In April, Tarchon announced the launch of the Tarchon Asia Fundand then the Tarchon Resources Fund, reflecting the firm's view that both markets weregrowth areas over the long term.A few other firms showed a stellar growth inassets, although BNY Mellon Asset Management's asset growth of 41.9% can be attributed to the merger ofEACM Advisors and MellonGlobal Alternative Investments. The new totalof $3.7 billion does not include the now al-most defunct Amaranth and Madoff-hit business of Ivy Asset Management, which is in theprocess of being unwound. Derek Stewart andScott MacDonald, who joined BNY Mellon in2001 and ran MGAI, are understood to haveleft and formed their third fund of fundsthought to be called Carduus Capital.Advanced Portfolio Management in NewYork and Chicago-based HFR Asset Management have grown by 40% and 41%, respective-

The new inslilufionalnwndales 1ve have been mvardedslrong(v support and validale the changes implemented-'- 'Alberto Moralda, Tarchon

30 September 2010

ly, while Ireland's Abbey Capital, a managedfutures specialist, whose flagship was Jn-vestHedge Fund of Fund of the Year in 2008,saw its assets grow by 42.9%.Looking at the Super League of funds offunds with $10 billion or more under management, independent discretionary funds suchas Blackstone, Grosvenor Capital Management, BlackRocl< Alternative Advisors, PacificAlternative Asset Management Company andMesirow Advanced Strategies have all grownin the first six months of 2010. That said,Grosvenor, Goldman Sachs Asset Managementand Permal Investment Management haveeach stayed at the same rank of fourth, fifthand sixth, respectively. Union Bancaire Privee,Lyxor Investment Management and Man In-vestments, however, have fallen from the top10 to 11th, 12th, and 13th, respectively.The Super League, which is made up of just16 funds of funds, houses half of the InvestHedge Billion Dollar FOHF Club's assets,while the top five largest firms with $20 billion or more in assets control $123 billion,equivalent to more than 20% of the InvestHedge Billion Dollar FOHF Club.This Super League group, which has $290billion under management, has lost $5.3 billion in assets, equivalent to a loss of 1. 79% inthe first half of the year. The majority of theasset outflows can be attributed to bankbacked funds of funds including UBS GlobalAsset Management, which is now in thirdplace after dominating the rankings since thesurvey started in 2002, and UBP, down from7th place.Despite UBP's efforts at overhauling the assetmanagement business the Madoff legacy isstill taking its toll, which may explain a loss of$3.2 billion, equivalent to 16.6% of its assets.Other bank-backed funds of funds that haveseen asset outflows include Lyxor, Amundi Al-ternative Investments and Credit Suisse.The top five largest fund of hedge fundsfirms, however, grew by 1.33% adding $1.62billion in the first six months of 2010. HSBCAlternative Investments has grown at the fastest rate of 15.32% and added $3.56 billion, ac-counting for the largest growth, in dollarterms, of any other firm in the entire universeof billion dollar funds.The boost to HSBC's business has taken it tothe second slot in terms of fund of hedge fundsassets, although it has $33.21 billion in totalalternative assets including those it has in custody. HSBC is followed by Morgan Stanley,which added $3.42 billion, an asset growth rateof 24.2% that has propelled it from 13th position to 7th in the rankings in just six months.Overall, the global billion dollar fund ofhedge funds industry lost just $3.58 billion inassets in the first six months of 2010, reflecting a drop of just 0.6%, roughly equivalen t tothe performance for the funds of funds indus-

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try for the year to date. The asset outflows canbe attributed to 45 firms. Only six of these,equivalent to 5. 7% of the industry, saw assetoutflows of 20% plus, which includes Olympia Capital Management, Kenmar Group, Signet Capital Management, and Lyster Watson.Twenty four firms, equivalent to 22.6% of thebillion dollar fund of funds universe saw outflows of 10% or more. Among the firms thatsaw the largest outflows in percentage termsare Pioneer Alternative Investments, whichhas seen its chief investment officer Paolo Barbieri leave, and Gems Advisors, each losing29.2% and 24.7%, respectively, of thei r assets.The first six months of 2010 saw nine firmsremoved from the rankings. Promark Investment Advisors, the asset management arm ofGeneral Motors, is now classified under the institutional investor rankings, as the New Yorkbased pension fund is no t managing externalmoney and is therefore not considered a thirdparty fund of funds.Aletti Gestille Alternative, which sufferedMadoff-related losses, GLG Partners (now partof Man Investments, although the GLG fund offunds assets are no t included in these rankings) and Guggenheim Partners have no t participated in the survey for a while and havetherefore been removed to l


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billion dollar club

Customisation: the future of hedge fund portfolio managementThe more sophisticated investorsno longer want plain vanillaglobal multi-strategy products,but there is strong evidence thatend investors still need hedgefund expertise. They just want itdelivered in a different way andcharged for in a different way.The jury is still out as towhether or not the traditionalconsulting community can deliveranything more than access to thebrands, but what many funds offunds have seen is increasingdemand for aservice calledportfolio completion, as well as acontinued growth in customisedhedge fund portfolios.

Portfolio completion is when a unds of fundstakes a ook at either the whole investmentportfolio of just the hedge fund portfolio and allocates tohedge fund managers to fill either strategy orquantity gaps. Often this involves topping upfunds of funds allocation with additional singlemanager investments in strategies, for example

CTAs or global macro, which aregoing to be more active during agiven period of time.In fact, according to thelnvestHedge Billion Dollar Clubsurvey for the first half of 2010,49% of the funds of funds in thesurvey offer or plan to offereither customised portfolios orportfolio completion servicesand anumber of groups such asPermal report that it s agrowingpart of their business. Mesirowhas some 43% of its assets incustomised accounts, whileCrestline Investors has $2.3billion in customised accounts.Customised portfolios are amore sophisticated

version of funds of funds, which involves creatingbespoke portfolios of hedge funds according to theneeds ofclients, which often includes assetallocation and giving amacro perspective. Thepioneers of customised portfolios were ElM andPAAMCO and the idea is to allow investors to usehedge funds more as portfolio management tools

Managed accounts: safety or sense - they are here to stayDetermined to make sure that all the T's arecrossed and l's dotted, funds of funds too areembracing the managed account movement, with40.6% of the InvestHedge Billion Dollar FOHF Clubusing or planning to used managed accounts foreither allor part of their businesses. In addition tothe groups that are seen as managed accountmanagers, such as Lyxor Asset Management andAmundi Alternative Investments,groups such asLGT Capital Partners and Kenmar Group, whichhave big commodity allocations, have also hadtheir own internal proprietary platforms.Permal has some $4.3 billion invested viamanaged accounts, including two new fund offunds this year. The first is the Permal MMF (Lux)Advantage Multi Strategy Fund. The Luxembourgdomiciled open ended investment vehicle hasmanaged accounts with more than 30 managers.The second is the more recent Active Trading Fund,which is aUCITS Ill fund of managed accounts.Meanwhile, ElM has hired Deutsche Bank to help itbuild LumX, which it has just launched for its hedgefund investment business. ElM is responsible for thecreation of he platform and Deutsche Bank forhandling the servicing.Sciens Capital Managementrecently bought the Partners Group platform togrow its managed account business, while HarcourtInvestment Consulting has teamed up with WRGroup Holdings to offer managed account and duediligence services for hedge fund investors.

32 September 2010

Lighthouse Partners was an earlyadopter ofmanaged accounts andcurrently has 90 of these with itsunderlying managers, which makesit a arge part of its business. Only19.8% actively replied stating theyhad no plans to adopt managedaccounts in their investmentmanagement process.lnvestcorp and AllstateInvestments recently took themanaged account debate one stepfurther discussing the merits ofseparate accounts over commingled funds and showing that theycan add value over benchmarks(see lnvestHedge July/August2010).1nvestcorp's Gurnani says that during periodsofstress, like 2008, this difference can reach 10%per year. "Our use of managed accounts for hedgefund investments improves returns through assetprotection and better risk management madepossible by the transparency and liquidity ofmanaged accounts."In addition to reducing volatility, risk management for managed accounts improves returns byreducing severe drawdowns, says Gurnani, whosefirm has set up some 80 managed accounts since1998. "Managed accounts enables investors torebalance their portfolios even during times of

rather than investment products. Only 11.3% of the106 funds in the InvestHedge Billion Dollar Clubstated that they have no active plans in this space.Deepak Gurnani, chief investment officer andhead of hedge funds at lnvestcorp notes that 48%of the firm's $5 billion allocated to hedge funds isheld in customised accounts, while 18% is in purefunds of funds. In total between customisedaccounts and funds of funds the firm has only $3.3billion in fund-of-fund assets, with the rest in fivesingle managers.lnvestcorp, which has beenmanaging funds of funds since 1996, launched itsfirst customised portfolio for aUS institutionalinvestor in 2006 and now has $2.3 billion in them."One of the key global trends we have seen inrecent years (that has been accelerated in thispost-crisis period) has been the preference oflarge institutions to invest in hedge funds

through customised accounts. These investorstypically have specific requirements in terms ofrisk level, liquidity, strategy exposures andbenchmarks. Furthermore, these institutionsdemand ahigh level of transparency andoperational control. These objectives are bestmet through customised accounts," says Gurnani.

stress, when some commingledhedge funds might restrict or evensuspend redemptions.""Managed accounts will becomethe preferred way for institutionalinvestors to allocate to hedgefunds," says Allstate Investment'sportfolio manager for hedge fundsChristopher Vogt, who estimatesthat the majorityofAllstate'shedge fund portfolio (roughly75%)is in separate account structures.Last year, the UK's UniversitiesSuperannuation Scheme hit theheadlines for hiring the Man/Credit Suisse managed accountplatform, while this summerPGGM in The Netherlands is in a$2 billion hunt for aplatform for its direct hedge fund plans.The trouble is that not all platforms were bornequal, and many are winning business simply bycutting fees. Running managed account platformsisacostly business and cutting corners could lead toproblems further down the road, especially if clientsbelieve there isa iduciary element to the platform.Two institutions that decided to build their ownin-house managed account platforms after ntenseresearch and due diligence of the existing providersare the California Public Employees SuperannuationScheme and Ontario Teachers' Pension Plan.

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UCITS: the new face for long-only and absolute return investingUCITS Ill is the latest fashion to split the industryinto lovers and haters. Joy Dunbar, editor ofAbsolute UCITS, the new Hedge Fund IntelligenceUCITS service, believes that, unlike previous fads,hedge fund UCITS are here to stay becauseinvestors like the regulatory framework and itstransparent structure. "They will only increase inpopularity because institutional and retailinvestors want access to alpha in a regulatedenvironment. They also want liquidity, transparency, legal oversight and hedge fund typestrategies wrapped in UCITS offer investors peaceof mind. Also traditional and hedge fundmanagers have converged as a result of thechanging regulation and the growth of theoffshore sector," Dunbar says.lnvestHedge took a poll of the lnvestHedgeBillion Dollar Club members to see what theirUCITS views and UCITS offering plans were (seesummary table below). Of those that replied tothe question, 43% have either launched or planto launch UCITS Ill funds of funds, which, iftaken as apercentage of the entire Billion DollarClub universe of 106, is 26.4% (see UCITSSpecial Section, pages 34-36 ).Nearly 35% of the entire survey actively repliedthat they did nothave any plans for UCITS Ill

UCITS FOHF launchesFundof hedJe funds UCITS plans-

funds of funds, equivalent to 57% of those thatreplied to the question. But, 65% of those thatactively replied they had no plans were US-basedfund of hedge funds. Many US firms have saidthat they either see no advantage to the structureor believe it s awrapper only of relevance toEuropean investors.Understanding the impact of upcomingEuropean regulations on UCITS Ill and ability tomarket funds of funds in European is going to behotly discussed at the InvestHedge Forum, whichwill be held at The British Museum on 21 and 22September.Mattia Gemma at Eurizon in Milan says: "Thegrowth of UCITS funds has been exponential,even if we are at the dawn of this new phenomenon. Easiness, transparency, asset protection,adequate risk management processesands t a n d a r d i ~ a t i o n are the key success points forNewcits and these characteristics are veryappealing for investors." He explains that UCITSgive access to modified hedge fund strategies toinvestors that are notonly institutionalclients orhigh-net-worth individuals, but potentially toretail clients. Eurizon is the advisor for the EurizonTotal Return Alpha Strategy, a und of UCITSfunds that has been launched in October 2009.

Permat Investment Management Launcherl Perna!MMF (lux) AdvanmBe M u l t i 5 t r a ~ Fund (March 2010)Union Bancalre Privee Plans for lJCITS FOHF Ql2QTILyxor Asset ManaRement Has a umbe of UCITSvehiclesAmundi AlternativeInvestments Laund12d Amundl Muttlmanagersl olll'JShort ;gull}: (Feb 2010)Gottex Fund Management Launched UOTS Ill FOHF 2010) (see reli!tedarticle, ClaRE! 36)ElM New lilunches glannedNotz, Stucki &Cie LaunchedUClTSFOHF [Feb201Q)Aberdeen Asset Management Launched ElOOm UCIT5Banca del Ceresio Groug Has had UCITS since 1999Axa Investment M a n a ~ r s Setto aunch new fund (see relatedarticle. 36)Harcourt Investment Consul ins! lauochedVonda UCJTSFund (June 2010)LGT Caoital Partners LGTCrown FuturesUCITSFund (AQ!n2010)BlueCrest CaPital ManilJ!fment Have twoUCITSFOHFsNewFinance Capital Has aUCJTS gattorm and gtus Ol)!!s Tradl!l!iGems Mvlsors Plans forUCITS Int h e ~ ~ ~ lnternatlonalAsset Manill!!!ment Plans forUCITS in the g l ~ l f n e Kalros Partners Launched Kairos Trend, aCTA &global macro UClTS ( M a ~ 2 0 1 0 ) PloneeJ Allelnative Investments Plans forUCITS In the g l ~ e l i n e ~ D f f i n a n o e Has anumber of JCITS vehictes01ymgla G!JlltalManagement ..Rnalismgdetails lor UCITS FOHFs (see related amde, page 35)Kenrnar Group Set to launch commodites fund {see related article page 35)Kev Asset Management Setto i!unch newfundwlt:ll SEB (see related a r t i e ~ Qage 35)Tarchon caoJtal Mani!Rement Plans for UClTS lnthe !iQellneS'tgn1 CapRa! Mani!Rement Se! to launch new fund (si!E related artlcle.llaR!!35)Thames Rlw caoital Launchd UCITS FOHF(Jan 2010)Eurizon Capital Laundled EIJ!IzonTotal-Return Aloha Stra.te!1'l (Oct 2009)

Source: InvestHedge

nvestHedge

billion dollar club' ' It is not about timing

imcslments. it is aboutltnowing the cycles ofall thedijfcrent asset classes andthen knmving the bestmanagers to put in theportfolio ) )

portfolio, as well as how to play their idiosyncrasies to the different cycles."Whether or not managed accounts become thenorm and UClTS funds take off, in-depth understanding of complex strategies, second naturemanager selection and an eye for the next opportunity will be the skills that well-established,successful funds of funds will be able to offer.

Now that access to hedge funds is being commoditised as hedge funds themselves becomeinstitutional with in-house marketing teams,and managed accounts rise in popularity,funds of funds will no longer be paid to accessthe brand names. They will, however, be paidfor in-depth due diligence and to invest in thehidden talent of the emerging managers,emerging markets and emerging strategies.Indeed, the market meltdowns of the pastfew years, which have caused a number ofhedge funds to close, and the cessation of proprietary trading at banks has led to a renewedpool of investment talent looking for backers(see pwfile, page 40) and the renaissance of theseeding and incubation business model.Experience and track record will count andnew untested funds of funds without a seedbacker or captive assets (behind groups likePamplona and Prisma Capital Partners) willstruggle to gain critical mass. Even award-winning performance without assets will result inthe unsustainability of smaller funds of funds,like Eddington Capital Management, closing asassets fell from close to $300 million to lessthan half that amount (see page 30).Hedge fund investing has not stopped, it hasjust changed. The first-time investors of 2000now have 10 years of experience and some arestarting to go directly. Indeed, according to Damien Loveday, global head of hedge fund managerresearch at Towers Watson, of the $20 billion inclient assets invested in hedge funds, some 65%is invested directly (see profile, page 18).Funds of funds need to embrace the changeand work with it. The future of funds offunds, once described as finely tuned cricketbats, will be those that take their skills andtrack records to their clients and work withthem . The need for hedge fund selection andallocation expertise will not go away even ifthe customised, managed account UCITSwrapping means that the sport of hedge fundinvesting has changed.

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invest hedge september 2010 - billion dollar club

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