Even after witnessing the carnage among quantitative hedge funds at the end of last summer, $204 billion-in-assets MFS Investment Management decided to proceed with an effort to seed hedge fund managers — including those trading in distressed debt — under the umbrella of an independent subsidiary called Four Pillars Capital.
MFS launched Four Pillars in September, then called it quits last month. MFS had hoped it could provide badly needed infrastructure, such as compliance, risk management and operational systems, to talented investors who wanted to manage money but avoid the pesky details of running a hedge fund business. MFS’s institutional clients — one of its fastest-growing segments (up 64 percent in two years), were clamoring for alternative strategies. The firm reasoned that institutions would find it appealing to invest in hedge funds with an MFS imprimatur. Robert Manning, president and CEO of MFS, said at the time, “We’ll be able to combat some of the problems that have occurred because of a lack of transparency in the alternatives market by overlaying our technology, operations, risk tools and trading platform.”
Alas, institutional investors might be clamoring for hedge funds, but not from MFS. John Reilly, an MFS spokesman, says the firm abandoned the effort because it quickly became clear that there wasn’t enough interest to make it profitable.
“In general, seeding is a bull market strategy. Clients aren’t willing to fund innovation in a bear market,” notes Ben Phillips, managing director and head of strategic analysis at New York–based Putnam Lovell, a division of Jefferies Group. “In a bear market investors want solid absolute returns and they won’t fund farm teams.” He declined to comment on MFS’s strategy in particular.
MFS is now exploring other avenues to offer clients alternative strategies. To be sure, it isn't the only firm to pull back from hedge fund seeding. After losing $6 million in one of its funds, Jefferies has cut its $391 million hedge fund platform by 20% since the end of 2007.
Seeding hedge funds may be difficult now, but big asset managers continue to plow money into acquiring alternative firms with proven track records. In February, Natixis Global Asset Management bought Gateway Investment Advisers, a $7.9 billion hedged equity manager in Cincinnati, Ohio, for an undisclosed sum Affiliated Managers Group recently purchased minority stakes in $4.8 billion-in-assets BlueMountain Capital Management, a credit alternatives firm in New York and London, and ValueAct Capital, a $6 billion-in-assets alternatives firm in San Francisco. There's good reason for this. According to Putnam Lovell, traditional active management — long-only stock and bond portfolios — will contribute less than half of asset management industry revenues by 2012, down from 69 percent in 2006.