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Browse by CategoryHome » Category List » Business Strategy
Gartmore: Fish or Fowl?6 July 2008
As this recent FT piece illustrates, Gartmore, the UK-based traditional money manager, is also responding to the squeeze by slowly becoming a hedge fund firm as it faced pressures that lopped off half its assets earlier in the decade (FT chart, below). Reports the FT:
Comments »Silos, flesh wounds, the “disintermediation” of poultry, and a call to action4 June 2008More from London (see yesterday’s posting for background)… A pension plan as a financial services firm
It turns out that this view of the hedge fund portfolio as a sort of arm’s length asset manager with only one client can also be applied to the pension fund as a whole. That’s how one major private pension fund described it to a gathering here in London today – as a “financial firm that produces pensions.” This view also has implications for “liability-driven investing” (LDI). Some said that the process of liability-matching and return-enhancing should be kept separate within this financial services firm. For example, one major pension fund here created a team focused on removing interest rate and inflation risk (via a “matching portfolio” designed to match the plan’s future liabilities to pensioners) and a separate team focused solely on trying to squeeze additional returns out of those assets. In true arm’s length fashion, the “return portfolio” is required to literally borrow assets from the matching portfolio – creating a real economic incentive to beat the short-term rates charged on this internal loan.
Comments »Day one from the un-named event in London2 June 2008We report today from a three-day London gathering of some of the world’s largest institutional investors and the hedge funds that serve them (see postings from sister event in Boston last fall). The event focuses not on hedge funds per se, but on how institutional investors use them (portable alpha, fees, alpha/beta separation, 130/30, alternative beta, analytics etc…all the good stuff). In order to create an open atmosphere for candid discussion, organizers have us on a tight leash (there are otherwise no media present here and we can’t even tell you the name of the event). And while we can’t really tell you who said what today, we can pass along some of the major themes from the conference floor. Here’s some of what we heard… Hedge Funds: Innovation from the garage?
Most here held the opinion that “hedge funds” was no longer a useful definition of an asset class. One panellist put it in terms of innovation. He described hedge fund companies as a “platform for innovation”. In an allusion to innovation in the technology sector, he said that “innovation usually happens in garages”, not in large corporations (a clear reference to the oft-cited garage where tech behemoth Hewlett Packard was born - pictured above). In other words, it may be difficult for a large traditional manager to deliver on the major promise of the hedge fund sector - innovation. Issues such as profit- (and risk-) sharing, for example, can often confound the efforts of long-only managers (e.g. banks – see related WSJ piece from last week) to maintain hedge fund programs over the long term.
Comments »Weekly Newsreel: Madrid, Stockholm, Maple Syrup and 130/3025 May 2008
Nervous alternatives managers could be leaving alpha on the table: P&I reports from ”AlphaMax” in Madrid that “Fees became a point of contention between pension fund executives and hedge fund managers…with the pension executives arguing that the typical hedge fund management fee of 2% and performance fee of 20% can be a deterrent…” 8 out of 10 managers fail to add value: Meanwhile in Stockholm, Watson Wyatt’s Roger Urwin tells another conference why pensions have an allergy to “2 and 20″.
Comments »Study examines “mulligans” in hedge fund performance data17 March 2008
According to the US Golf Association:
There has been considerable debate over the years about whether hedge fund managers have been giving themselves mulligans when they occasionally shank their new funds into the drink. Since hedge fund managers voluntarily report their performance to the major databases (which form the foundation for most academic studies), it is felt that only their best funds eventually make it on the list - and when they do, the performance since inception is “back-filled” into the database to create what is often referred to as an “instant track record”. The result is that the returns reported by so-called “emerging managers” are not really a true representation of all attempts to launch new funds.
Comments »Alpha-centric Newsreel14 March 2008
Morgan Stanley says Alpha/Beta Separation “the way of the future”. The AllAboutAlpha site partner lays out its alpha-centric philosophy telling IPE that the pension industry is about to experience a “second wave” of LDI strategies based on the separation of alpha and beta. Dutch Insurer Aegon splits portfolio into alpha and beta segments are farms each one out to a different manager. According to the firm’s press release, “By managing the parts separately from one another, better risk-return ratios are possible. This way, more sources of value added will be available and a greater focus can be created in the portfolio. Separating the US share portfolio has created an increase of a yearly average of the total return of 2.5% without any risk increase.”
Comments »130/30 has “opened up serious questions” for brokers and custodians: report13 February 2008A survey from consultancy Vodia Group backs up previous surveys from Merrill Lynch and AllAboutAlpha.com by finding that roughly 15% of institutional investors currently invest in 130/30 funds. As a result of expected growth, Vodia anticipates major changes in the prime brokerage and custodian businesses. According to the firm’s press release:
Apparently life won’t be all that bad for prime brokers though. According to a chart released by the firm, prime brokerage financing revenues will increase dramatically over the next 4 years - even as financing spreads come under pressure…
Comments »“Appetite for alpha to rise” according to institutional survey12 February 2008
Perhaps strangely then, survey respondents have ranked hedge funds, funds of funds, large consultants (Watson Wyatt?) and buy-out firms as “industry losers” in terms of revenue growth. Multi-strategy funds, fiduciary management, niche consultants and investment banks were judged to be likely “industry winners” according to the survey. (Hedge fund blogs, in case you were wondering, were not included in this particular survey). Specifically, 73% of nearly 500 respondents (mostly European) agreed or “strongly agreed” with the statement, “Appetite for alpha will grow significantly due to the need for higher returns”. Conversely, only 12% agreed or strongly agreed that “Appetite for alpha will be modest, reflecting doubts about its sustainability and likely impact.”
Comments »Hedge fund seeding so “last month”?12 February 2008
As a result of such pressures, says the article, MFS Investment Management recently “killed its hedge fund seeding program”. However, we submit that the prospects for the hedge fund seeding model are based on two factors: investor demand and (start-up) manager supply. As we suggested in January, boom times for the hedge fund industry meant that start-up funds often felt they didn’t need to give up part of their equity to gain access to capital. As the capital spigots were turned down in 2007 many high quality start-ups probably had a good hard look at their prospects - balancing their marketing efforts against their need to focus on investing. As a result, many hold-outs are now likely reconsidering - making the lives of seeders just a little easier (example). Of course, the very pressures that would have made some hold-outs blink are also making life difficult for the seeding operations themselves, as the Wall Street Journal points out. The question, then, is how difficult an environment we’ll see for smaller managers. Too easy and the managers won’t want to give up anything; too hard and the seeder can’t raise funds for the whole enterprise to work. These competing forces are what we believe will make 2008 a year of change for the industry.
Comments »Top Institutional Hedge Funds4 February 2008Long gone are the days when hedge funds were for just for university foundations and rich guys. As this new ranking from Pensions & Investments shows, 72% of the assets of the largest 10 US hedge fund managers are institutional. None of the names will surprise you. But what’s interesting about the list is that it contains the proportion of institutional assets managed by each firm (all are north of 60%). The analysis accompanying the ranking is also worth a read. It describes what amounts to four archetypes of how an institutional hedge fund managers is created: high performance (e.g. Paulson), alpha/beta separation (e.g. Bridgewater), high net-worth (e.g. Citadel), and quant strategies (e.g. D.E. Shaw).
Comments »130/30 Experts: pick your compensation… “attractive”, “competitive”, or “outstanding”22 January 2008
According to a survey released on Monday, asset management staff turnover in the UK has reached new heights. Thomson Investment News comments:
On the other side of the Atlantic, this seems to translate into an apparent need for 130/30 experts. Do you pay “extreme attention to detail” and looking for “attractive” compensation? Then a leading NY-based quant manager wants you. The firm is one of three that has recently posted 130/30 jobs at a popular financial career site. According the posting:
Comments »BlackRock an example of the “vise-like squeeze”?20 January 2008
BlackRock’s press release alludes to this trend:
Comments »Warning to Accountants & Consultants: Prime brokerages are trying to eat your lunch15 January 2008
Rather than sitting around and waiting for the day when there is a fully transparent market for short-selling, it seems many of the world’s prime brokerages are expanding into new revenue streams now. This isn’t entirely new, of course. Prime brokerages have long nurtured start-up hedge funds in an effort to bring into being their future clients (see related postings). But this time, things are different. According to the FT,
The hedge fund industry has a pretty simple structure really. Devoid of the distribution and marketing trappings of its mutual fund cousin, the hedge fund industry boils down to an artist (the fund manager), his business manager (the ops head), his agent (the marketer) and a small cadre of service providers (an accountant, a lawyer, a landlord, an administrator, a prime broker, and a data provider). Occasionally, a hedge fund might engage the services of an outside consultant (a head-hunter, a business consultant etc.). So it appears that the prime brokers are fashioning themselves as a sort of turn-key hedge fund industry - able to provide everything but the fund management itself. This puts them in direct competition, as the FT points out, with such apparently disparate firms as PwC and McKinsey. Says the FT,
The big question will be how scalable are these ancillary services? The prime brokerage business is relatively concentrated since it’s highly scalable (see related posting). But can the world’s largest players translate this dominance into businesses requiring largely customized services?
Comments »Asset Alliance becomes a SPAC snack. Reminds us of similar tack from way back.9 January 2008
We were intrigued by a news item this morning about the reverse take-over of a publicly-traded company by Asset Alliance, an asset management firm holding minority positions in several small hedge fund firms. Asset Alliance’s business model (not dissimilar to RAB Capital, Front Point or Affiliated Managers Group) reminds us of the old Internet incubators of the late 1990s. This is not to suggest that manager incubators will suffer he same fate as their e-business cousins, since e-business incubators relied on “exit events” to make money. By contrast, these manager incubators receive ongoing cash flows from the management and performance fees of their managers (split roughly 50/50 in this case). It seems that manager incubators are in the game to build diversified asset management firms more quickly than if they were to hire their own portfolio managers, not just to cash out (although AMG’s near-IPO of AQR suggests top-of-the-market exits are always in vogue).
Comments »What’s behind Trusco’s partial acquisition of 130/30 manager Alpha Equity?6 January 2008
That is, assuming they have the luxury of time. Some markets evolve so quickly and are so scalable, that there is simply no time to build a new business from scratch. So larger players begin falling over themselves to buy their way to a first mover advantage. Witness many of Google’s acquisitions. Sure, the Googleheads could have built any business they wanted by just going out and hiring the right people and throwing money at them. But they obviously felt that establishing a beach head in, say, video sharing, couldn’t wait. Ergo, the YouTube deal. It’s in times like these when the small fry can hold a major trump card - they’re already established and they have proven experience with these new technologies. And that’s pure gold for the established players. Sun Trust, the $175 billion US bank, may not be a Google. But like Google, it knows when to pounce quickly on a new idea. Via its asset management subsidiary, Trusco Capital Management, the firm wasted little time last week as it bought a minority stake in Hartford-based Alpha Equity Management, a relatively small firm that had one thing SunTrust couldn’t possibly build in the next year or two: six years of experience running 130/30 funds.
Comments »Putnam Lovell’s “Belle Epoque” for Money Management13 December 2007
In this comprehensive report (free with registration) on the future of global money management, Putnam Lovell refers to the past 25 years as a “Belle Epoque”, when the industry was “blessed with a childhood built on government subsidies” (pension legislation etc.). Now, says the firm, the industry is set to experience “turbulent markets, onerous client demands, fierce competition and shifting sources of revenue.” Furthermore, they say, ”Demographic trends and relentless innovation have combined to create powerful forces that are revolutionizing the marketplace.” But contrary to the report’s contention that the Belle Epoque is over, we say it has just begun. Student of history will know that “Belle Epoque” (“Beautiful Era”) refers to a period in Western Europe beginning in the mid to late 19th century and ending with World War I. While it’s true that the Belle Epoque was marked by advancements in standards of living and wealth, it was first and foremost an era of rapid technological, political, artistic and scientific advancement (witness Pasteur, Freud, Nietzsche, Faraday, Darwin). In fact, it is often called “The Second Industrial Revolution”.
Comments »Suddenly, everyone is in “cap intro”21 November 2007
So many cards, such a haze of memories. But there is one thing that a lot of these business cards seem to have in common: the words “capital introduction team”. It seems that pretty much everyone I met this fall from a prime brokerage (”PB”) wasn’t actually in sales, but was part of the “capital introduction team”. It’s as if all PB salespeople changed jobs all of a sudden. Or maybe the PBs have simply become third party marketers - compensated not by a percent of assets as a third party marketer would, but by traditional prime brokerage fees such as spreads on security lending and short rebates. Financial News published an interesting story today about the new dominance of cap intro in the value propositions of many prime brokerages. Says Financial News:
Comments »The investment consulting industry’s “giant sucking sound”14 November 2007
So it seems the investment consulting industry now may have its own giant sucking problem. As this article from Thomson illustrates, many institutional investors, and even consultants themselves, are concerned about consulting personnel being sucked up by the talent-vacuum that is the investment management industry. Last November we lamented the state of the investment consulting business when we wrote:
Now Thomson reports that some major European investment consultants told a recent conference audience that pension consulting was actually “in crisis”. Apparently the head of one European consulting firm told the audience,
Why? For one thing, reports Thomson, client requirements are evolving so quickly that consultants are simply having trouble keeping up with the changes. Reflecting the resulting need for specialization, one major pension manager told the audience that he expects investors to maintain multiple consulting relationships going forward.
Comments »“The more we get together, together, the happier we’ll be…”30 October 2007
However, “convergence” between different quarters of the asset management industry hasn’t always come as naturally. Now a report released this week by KPMG and UK-based consultancy CREATE says that although convergence is a new subject, it is already a key part of the curriculum. Regular readers may remember the last report from this prolific partnership titled “Hedge funds: a catalyst reshaping global investment” (see related posting). Well, apparently the “catalyst” is catalyzing nicely. The newest edition, “Convergence and divergence: New forces shaping the investment universe” shows that hedge funds have stirred the asset management pot. The report basically makes the case that the asset management industry is re-inventing itself through a process of creative destruction. Here are a few of the report’s 12 key themes:
Comments »Perms are back in (Euro)Hedgistan16 October 2007
So “permanent capital” was on our minds when we received this article from a loyal AllAboutAlpha.com reader about new ways that hedge funds are financing themselves. It’s a summer 2007 piece in a Merrill Lynch publication billed as being “for the hedge fund C-suite”. Here’s the headline chart showing Euro-dominance in hedge fund IPOs.
Comments »McKinsey: Traditional asset managers trapped in a “vise-like” squeeze16 September 2007
This year’s survey (conducted jointly with Institutional Investor’s “U.S. Institute“) reveals that traditional asset managers are responding to these threats - particularly those resulting from the separation of alpha and beta. Says the recently released 2007 edition:
The report says the growth of traditional investment products is stalling since these funds are “trapped in a vise-like squeeze” between higher-growth true-alpha and cheap-beta products.
Comments »Surprising & counter-intuitive findings from recent hedge fund survey10 September 2007
We also see anecdotal evidence of hedge fund resilience in August returns. In fact, this Reuters story on Friday seemed to corroborate the survey’s findings. Reports Reuters’ Svea Herbst-Bayliss:
The survey released on Friday was sponsored by accounting firm Rothstein Kass. It also contained a number of other findings that shed new light on some of the dynamics of the world’s hedge fund industry.
Comments »The arms merchants of 130/3014 June 2007
Lending money is an ancient business. But what’s not so old is the business of facilitating short-sales (short-selling began in the 18th century). And the business of short-selling is about to change dramatically with the entry of what seems to be a flood of traditional managers into the 130/30 space. This will inevitably put new pressures on the prime brokerages and force them to address a common concern: fee transparency. Some have wondered if there would be enough stock to short and whether the end was nigh. Last fall Goldman Sachs hypothesized that the end wasn’t imminently nigh, but might not be far off (we were less sold on their concerns - see posting). Goldman’s numbers and those cited in the Hedgworld story are quite similar. Both say there is about $4.5 to 5 trillion of stock available to short in the world (about 10% of the world’s lendable stock and 3% of the world’s total equity supply).
Comments »Alpha-centric Investing on Main Street25 April 2007
So to determine how these ideas are playing on “Main Street”, we look to Columbus, Ohio and Matthew Brandeburg a planner with John E. Sestina and Company, a fee-only planning firm. He writes in Financial Advisor that financial advisors can’t just look to the mutual funds they recommend to produce all the alpha. They too must produce the good stuff:
Comments »Roman deity ups stake in quant manager6 April 2007
Two billion is an impressive number. But what’s even more amazing are the reports indicating Janus paid with 37,000 satchels of bronze coins adorned with its head(s) - and declared vociferously, “Intech, you will join me in the Pantheon where you will reveal your mysterious ways!”
Comments »ABN AMRO’s Asset Management Business: A moment of truth for Barclays21 March 2007
While it’s nice to manage more assets than the GDP of the UK itself, some analysts are suggesting that Barclays isn’t actually that interested in ABN AMRO’s asset management business at all. One banker who asked not to be identified told Pensions & Investments yesterday:
As regular readers know, we’re not equity analysts. And we have no inside information to share with you on this. But we don’t think Barclays should be so quick to dump ABN AMRO’s asset management business just because it’s “active”.
Comments »Northwater Capital: Asset Manager 2.0?19 March 2007Northwater’s alpha-centric, open-architecture, solution-oriented business model: a harbinger of things to come?
They have since opted for a more disarming view of the sunset over water (perhaps the fabled “north” water). But the alpha-centric heritage is alive and well according to a recent interview with Northwater president Paul Robson in a full-page P&I “Face to Face” interview. When asked by P&I’s Christine Williamson what the “next incarnation of portable alpha” will be, Robson shows how alpha-centric portfolio construction is essentially turning product manufacturers into de facto investment consultants:
Comments »Citigroup: Hedge funds a better structure for alpha generation than long-only funds18 February 2007Hedge Funds and The Active Management Industry By: Neil Brown and Rui de Figueiredo, Citigroup Alternative Investments Citigroup’s Neil Brown and Rui de Figueiredo see hedge funds not as a distinct asset class, but as a distinct governance structure - one that is ideally designed to generate alpha. As a result, they view the competition between hedge funds and traditional long-only funds as a “competition between governance structures”. And they are clear that hedge funds have an inherent structural advantage when it comes to creating alpha. In a recent article for the Citigroup Alternative Investments Journal (via FT, via Opalesque), the two pose an interesting question:
We here at AllAboutAlpha agree. We believe a loosening of the requirement to track a benchmark shifts control from the investor to the manager. Naturally, this requires re-writing the manager-investor compact. This new governance framework that results has many warts (including, for example, a lack of transparency, potential “style-drift”, and less frequent reporting). But it also enables manager skill (a.k.a. alpha) to freely bubbled to the surface.
Comments »Engineering an Alpha Engine7 November 2006
It seems the money management industry is coming around to understanding something venture capitalists figured out many years ago: that it’s better to make a large number of bets on separate businesses than it is to put your eggs in one basket – even if you believe your ability to identify winners is without compare. Lee Thomas proposes what amounts to a “technology incubator” as the ideal model for the asset management business. Remember the incubators? Part VC, part landlord, part mini-conglomerate. Thomas calls his investment management incarnation an “alpha engine”. Firstly, he explains why alpha “matters again”:
Comments »Alpha Shop5 October 2006By: Max Darnell, First Quadrant First Quadrant was a pioneer in Alpha/Beta bifurcation and were even advocating portable alpha back in the late 90’s (when, to its chagrin, beta was producing double digit returns and no one cared about alpha). So they’ve developed a very acute “sense of alpha” over the years. This article, written by the firm’s CIO, Max Darnell, summarizes their unique alpha-centric view on investing (even if it is a little self-congratulatory). Darnell starts by highlighting a common misunderstanding about alpha - that it is simply out-perforance of a benchmark.
He points out the arguments made my many of the papers and articles at AllAboutAlpha: that alpha is often just “exotic beta”, that numerous systematic risk factors exist beside the market, and that any one of them can produce “market-beating” returns.
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As some pension funds begin to shift from funds of funds to single-manager hedge funds, they usually create what amounts to their own internal fund of funds. The only difference between this fund of funds and a “real” fund of funds is that the pension has only one client: its own pension plan. 
After years of steady growth, it’s no surprise that traditional long-only money managers have been licking their chops over the potential to offer hedge funds. Meanwhile, hedge funds have been strangely attracted to the gazillions of dollars under management by the long-only managers. Today in London, managers and investors debated the relative merits, not of hedge funds and long-only funds, but of hedge fund management companies and long-only management companies. While many people can tell you the difference between a hedge fund and a traditional long-only fund, few seem to agree on the unique characteristics of each type of company.
Golfers are familiar with the term “mulligan” - the practice of re-doing a tee shot if the golfer duffs the ball into the woods, onto the next fairway or over the fence into someone’s backyard. God knows, we are quite familiar with mulligans at AllAboutAlpha.com. 
Here is a sample of the news stories we didn’t get a chance to explore in detail this week. As usual, all of them can be found on the Alpha-ticker above or in the news items section of AllAboutAlpha.com (free registration may be required for a few of these).
According to 
In January, it appeared hedge fund seeding was on the come back (
BlackRock’s Q4 earnings announcement last Thursday showed why alternative investments are so popular amongst asset managers (see Bloomberg piece, “
The Financial Times had an 
Thank you to those who emailed us questions for best-selling author Richard Bookstaber. We had a wide-ranging discussion with him Tuesday evening and will tell you more about his latest views tomorrow.
It can be notoriously difficult to maintain a competitive advantage in industries requiring a high degree of intellectual and human capital. After all, ideas (and people) are free to seek the highest possible return - where ever that may be. This usually means that the behemoths with the deepest pockets and greatest career opportunities can, given enough time, build their own businesses to compete in new and burgeoning markets.
“Core business lines will feature products with less performance risk, such as ETFs, lifecycle funds, and product structures…Conversely, higher-alpha products with incentive fees will be more lucrative, but risky, given their reliance on key talent and sustainable performance—lightning in the proverbial bottle. Fund managers will experiment with several business models to retain the necessary talent, including partial ownership and multiaffiliate structures.”
As I write, I’m sorting through the hundreds of business cards collected during 9 consecutive weeks of hedge fund conferences in 6 cities on 3 continents. Anyone who has spent time on the conference circuit (in any industry) knows what I’m going though. Who was this guy? What exactly does “director of strategic development” mean anyway? Did this card go through the laundry in my shirt pocket?
In 1992, American entrepreneur and erstwhile politician Ross Perot referred to jobs migrating from the US to Mexico as a “giant sucking sound”. And as 
From an early age, kids are taught to cooperate, to share toys, to take turns, and to celebrate their differences by converging into a circle each morning. 
In its annual survey of the asset management industry 
Think hedge funds are freaked out by recent market turmoil? Think again. According to a new industry survey (
Managing a hedge fund requires a veritable arsenal of trading tools. Among them are the trusty duo of leverage and short-selling. The arms merchants in these pitched financial battles are the prime brokerages - the bank divisions that cater to the needs of nearly all hedge funds. Apparently, it’s good work if you can find it. 
While we argue that alpha/beta separation will have a broad-ranging impact on the world of asset management, we are often hard-pressed to find articles or papers written by or for financial advisors. However, 
As a follow-up to the 
Looks like 
Northwater Capital Management is so into alpha-centric investing, that until last year, its 
By: Lee Thomas, Allianz Dresdner Asset Management