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Waves of institutional money are hitting the hedge fund market, and fund-of-hedge-funds managers are avidly shooting through the curls. Count Gottex Fund Management among them.
The Lausanne, Switzerlandbased firm, which launched a fund of hedge funds in 1999, caught the ride of its young life in 2003 -- once it was able to post a three-year performance record. Thanks to strong institutional demand for hedge funds, a more-focused marketing effort and an annualized return since inception of 8.6 percent on the dollar class of the Gottex Market Neutral Fund, Gottex’s multimanager hedge fund assets soared sixfold, to more than $3 billion, at the end of June from a year earlier.
Gottex’s 500 percent increase in assets in the 12 months ended June 30, makes it the fastest-growing member of the 2004 Fund of Funds 50, our third annual ranking of the biggest multimanager hedge fund families by assets under management. (Another firm grew faster, but as a subsidiary it derives its rank from its parent.) Most funds of funds posted impressive growth over the period. Altogether, the firms that make up this year’s Fund of Funds 50 (originally published in Institutional Investor’s Alpha) ran a total of $358 billion at the end of June, up a stunning 70 percent from the $210 billion run by last year’s top 50 managers.
Zurich-based UBS once again earns top honors as the biggest manager of funds of hedge funds, overseeing $38.4 billion in multimanager portfolios, up 107 percent year-on-year and more than twice the $18.6 billion run by Man Investments, which repeats in second place. Union Bancaire Privée of Geneva jumps to third this year from ninth in 2003 on the strength of an 80 percent gain in assets, to $15.9 billion. (Previous year ranks refer to the Fund of Funds 50 as published last year and do not account for any restating of 2003 assets.) Rounding out the top five are Permal Asset Management of New York, with $15.1 billion (up 102 percent from last year), and Ivy Asset Management Corp., the Garden City, New Yorkbased unit of Bank of New York Co., which managed $14.1 billion in funds of hedge funds, 88 percent more than it ran a year earlier.
Assets at many other firms on this year’s Fund of Funds 50 grew at a blistering rate over the 12 months to June 30, 2004. New Yorkbased indexed-fund-of-funds specialist PlusFunds Group experienced a 406 percent increase in assets, to $2.5 billion, placing it at No. 50 on our list; Tacoma, Washingtonbased Russell Investment Group, No. 46 in our ranking, saw assets mushroom by 340 percent, from $675 million in 2003 to just under $3 billion; Fauchier Partners of London (which also runs money for BNP Paribas Fauchier Partners) grew assets by 184 percent, to $3.3 billion, placing it at No. 38; and Ursa Capital of New York, No. 29, expanded its assets by 145 percent (and its Starview Capital Management subsidiary, whose assets rose by 592 percent, grew even faster than Gottex). In all, 12 managers in the Fund of Funds 50 saw their assets more than double.
Institutional money -- particularly, inflows from U.S., European and Japanese pension funds -- continues to drive asset growth. Expect more. In a recent study Connecticut-based investment management consulting firm Casey, Quirk & Associates and the Bank of New York estimated that U.S. institutions had allocated $66 billion to hedge funds at the end of 2003, of which 40 percent came from corporate and public pension funds. They project that institutional allocation will expand to $300 billion by 2008, with pension funds’ share of institutional hedge fund capital growing to 65 percent. Half of that money will flow through funds of funds, they estimate.
A choppy equities market, low bond yields and noncorrelated returns are driving pension fund managers to hedge funds. “With low betas to the equity and fixed-income indexes, Arden is seen as offering attractive diversification benefits,” says Averell Mortimer, president and CEO of New Yorkbased Arden Asset Management, No. 22 on our list, with more than $6 billion in multimanager hedge fund assets, up 115 percent over June 2003.
All this rapid asset growth is making executive recruiters smile. Investment personnel employed by the 2004 Fund of Funds 50 increased by 28 percent, to 1,030 people, over the 12 months ended June 30. That works out to about 2.89 investment specialists per billion dollars of assets. Marketing and client-service personnel increased by 38 percent, to 860 people.
This expertise does not come cheaply. Gottex’s investment officers all come from derivatives or trading backgrounds. That experience gives them firsthand understanding of the strategies employed by hedge funds -- and first-class monetary expectations. “Gone are the days when you could have a $40,000 junior graduate doing due diligence,” says John Godden, managing director of HFR Asset Management Europe in London, an arm of Chicago fund-of-funds firm HFR Asset Management (No. 45). And it takes plenty of assets, and the fees they generate, to pay the staff that a competitive fund-of-funds needs. That first billion dollars can help funds gain the next billion. On pension funds’ requests for proposals from funds of funds, “Question one is, ‘Have you got a billion dollars,’” says Godden. “Anyone with less than that has a really difficult time getting business through the door.”
Eschewing the arduous and expensive process of selecting hedge fund managers, some multimanager firms have pegged their funds to indexes of hedge funds. Five firms among the 50 biggest managers -- Lyxor Asset Management of Paris (No. 11), New Yorkbased CSFB Alternative Capital Division Hedge Fund Investments (No. 16), the Lyra Capital subsidiary of New Yorkbased Ursa Capital, HFR Asset Management, and PlusFunds Group -- ran a total of $10.3 billion in indexed funds of funds as of June 30.
Two years ago there was almost no money run in indexed funds, says Oliver Schupp, president of Credit Suisse First Boston Tremont Index, a joint venture between CSFB and Tremont Capital Management, a Rye, New York, hedge fund information company and fund-of-funds manager (No. 18). “Our money has been raised almost entirely this year,” says Schupp. As of June 30, CSFB managed $2.3 billion in funds linked to the CSFB Tremont investable hedge fund index. The construction of the index is entirely rules-based; it comprises the six biggest funds in each of ten strategies that also match other eligibility criteria -- chiefly, that they accept investments from CSFB and that they satisfy liquidity requirements. Geographically, about 60 percent of the assets invested in the indexed products come from Asia, with almost all the rest sourced from Europe. High-net-worth individuals, who come to CSFB through private banks, account for half of the firm’s indexed assets; pension funds account for one fifth of assets.
In a business where capacity has always been an issue, the rapid inflows of capital to funds of funds can only accentuate fears that too much capital is chasing too few managers -- or worse, funding inexperienced ones. Palm Beach Gardens, Floridabased Lighthouse Partners (No. 32) grew by only 30 percent in the 12 months ended June 30 in part because the firm closed its flagship strategies in 2003 out of concern about capacity constraints in the strategies in which it invests and to avoid having to fund too many managers.
Still, most fund-of-funds managers believe they can find enough good new hedge fund managers to put the new money to work. “Year to date we have had over 1,000 manager meetings, which includes a select number of high-quality prospects that were funded during the year,” says Arden’s Mortimer. At Irvine, Californiabased Pacific Alternative Asset Management Co. (No. 20), where assets expanded by 76 percent, to almost $6.3 billion, managing director Jane Buchan sees a virtuous circle in operation. Buchan believes that good hedge fund managers are not necessarily a scarce group of geniuses; they may just be ordinary investment professionals freed from the stultifying constraints of the traditional, benchmark-bound pension fund management industry. Plan sponsors, she says, “are taking money out of the long-only active process. They’re firing Joe Smith at ABC Asset Management. Then Joe Smith goes and sets up a hedge fund, and then we’re hiring him, but in a totally different setup. And guess what? Joe Smith’s now producing alpha.”
