Institutional Investor's Alpha Magazine - December 2007/January 2008 - (Page 44)

Próxima Alfa based bank is Spain’s second-largest banking conglomerate after Banco Santander Central Hispano, which seeded Vega’s original fund in 1996. Próxima CEO and general director Dídac Artés says the competition for a seat with his ﬁrm is ﬁerce. “We had 37 strategies that we seriously considered in this last vetting round [during the ﬁrst half of 2007],” he notes. “Of those, three made it to the ﬁnals, and two accepted our offer.” Besides evaluating candidates’ performance and stress-testing their models, Artés’s six-member selection committee aims to craft a broad portfolio that offers investors a wide variety of strategies. “It’s like building an athletic team,” Mann explains. By providing both operational support and seed capital, — MAARTEN NEDERLOF, Próxima is following in the footCO-HEAD, DEUTSCHE BANK’S steps of firms like Greenwich, HEDGE FUND CAPITAL GROUP Connecticut–based FrontPoint Partners and New York’s Tiedemann Investment Group. These hedge fund seeding platforms appeal to institutional investors because they combine superior due diligence with access to some of the world’s best emerging managers. “The biggest institutions obviously have access to the Richard Perrys of the world,” says Jeffrey Tarrant, co-founder of Protégé Partners, referring to the former Goldman, Sachs & Co. merger arbitrageur who runs $11 billion-in-assets Perry Capital. “But they still want to invest in the most cutting-edge strategies available.” New York–based Protégé manages $1.8 billion in funds of hedge funds and has an additional $1.2 billion invested in 60 seeded managers. Tarrant says institutional investors make up 80 percent of his ﬁrm’s clientele. Protégé has 28 people monitoring its seeded offerings, a commitment few of its investors could make. “The other factor is that most new hedge funds that fail will do so in the ﬁrst nine months of operation,” Tarrant notes. “We’re willing to take on that risk, manage it, specialize in it, basically become experts in this ﬁeld so an institution doesn’t have to go it alone.” Hedge fund platforms tantalize commercial and investment banks with the promise of new revenues and products to feed their distribution networks. In October 2006, Morgan Stanley paid a reported $400 million to acquire FrontPoint, which at the time had $5.5 billion in assets. The New York–based investment bank has assimilated most of FrontPoint’s management into its Morgan Stanley Investment Management group, adding expertise that has repeatedly demonstrated the ability to identify hedge fund managers poised to deliver above-average returns. Platforms like FrontPoint and Próxima are an increasingly popular alternative for aspiring hedge fund managers. With risk-conscious investors favoring big ﬁrms, it’s harder than ever for a new manager to launch a stand-alone hedge fund, according to Maarten Nederlof, managing director and co-head of Deutsche Bank’s Hedge Fund Capital Group in New York. “A good seeding platform can do well by leveraging the hedge fund experience of the people who run it,” Nederlof says. “These platforms provide diversiﬁcation across emerging portfolio managers and enable larger allocations for investors who don’t have time to seed individual managers directly.” For Próxima and its fellow seeders, though, there’s always the chance that the managers they nurture will move on. FrontPoint learned this lesson with long-short equity manager Curtis Macnguyen, who founded Ivory Investment Management in November 1998 with $10 million from outside investors. Macnguyen enjoyed three years of 18 percent net annualized returns, growing Ivory’s assets to $1.1 billion by the start of 2002. But following a small loss that year and Macnguyen’s decision to move the ﬁrm from New York to California without informing investors, Ivory’s assets fell by more than 70 percent. In July 2003, Macnguyen joined FrontPoint. He left in early 2006, by which time Ivory’s assets had grown from $300 million to about $2 billion, representing almost 30 percent of FrontPoint’s total. Próxima ﬁnds itself in a similar situation with Barrowcliffe. His group accounts for nearly one third of the platform’s assets. But the difference is that Barrowcliffe, whose Anglian Commodities Fund was up a net 37.15 percent through November since inception, has never gone out on his own and shows little interest in doing so. Besides snagging managers like Barrowcliffe who are likely to stay put, Próxima needs to deliver beneﬁts to them that outweigh the cost of sharing the proﬁts. “It’s the same challenge faced at funds of funds, whose responsibility it is to keep their best managers happy,” says Terry Marsh, president and CEO of Quantal International, a Berkeley, California–based investment consulting ﬁrm whose clients include hedge funds and funds of hedge funds. “At any asset management ﬁrm, when one portfolio manager continues to generate great returns, there are always incentives to keep him from walking out the door.” PRÓXIMA ALFA TAKES ITS NAME from Proxima Centauri, the closest star to the Sun; Vega Asset Management is named after Vega, one of the brightest stars in the night sky. From 1998 to 2004, Vega Asset Management burned brilliantly — but in hindsight, the ﬁrm’s trajectory resembles that of a supernova imploding into a black hole. Vega’s story begins in 1990, when founder Ravinder Mehra joined the treasury department at Banco Santander and quickly took over all of the bank’s regional investmentbanking treasury operations. In 1996 Santander seeded Mehra’s first hedge fund, the global macro Vega Global Fund. Vega went independent in 1998. In need of a sales chief, Mehra recruited his old friend Mann, a colleague from the capital markets wing of Buffalo, New York–based Marine Midland Bank in the 1980s. “Ravi’s the kind of guy who when he calls and says he needs you, there are no more questions,” says Mann, 60. “A good seeding platform can do well by leveraging the hedge fund experience of the people who run it.” 44 • INSTITUTIONAL INVESTOR’S ALPHA • DECEMBER 2007/JANUARY 2008

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - December 2007/January 2008

Institutional Investor's Alpha Magazine - December 2007/January 2008 Contents Letter from the Editor Longs & Shorts Pension Corner: Liberal Returns The Good Guy: Inner-city MVP Cover Story: Marathon Men Interview: Rizk Management Profile: Living on Hostile Ground Profile: Buy and Hold In Theory: The Fallacy of Portable Alpha Strategies: Changing Course Alpha Bytes: Behind the Scenes Unhedged: Commentary: An Activist Alternative

Institutional Investor's Alpha Magazine - December 2007/January 2008

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