Institutional Investor's Alpha Magazine - February 2009 - (Page 22)

David Bailin oversight of about $7 billion, traces his own knack for business to his youth in Paramus, New Jersey, where he started selling holiday cards door to door when he was 12. Later, he was a bar mitzvah photographer, and before he was 20 he learned the dark art of ticket scalping, lurking outside nearby Giants Stadium to partake in the aftermarket trade in football and concert tickets. After earning an MBA from Harvard Business School in 1985, Bailin did turns as an executive vice president at two hedge funds, Ellington Management Group and John W. Henry & Co., and in 2006 became head of investments at U.S. Trust Co., the wealth management ﬁrm acquired by BofA the following year. His newest employer seems in no great danger of going anywhere. BofA weathered the 2008 rout of the ﬁ nancial sector far better than most rivals. It is the biggest bank in the U.S. in terms of total assets and is second only to JPMorgan Chase & Co. in market capitalization and deposits. On January 1, BofA completed its purchase of Merrill Lynch & Co., sharply expanding its piece of the consumer ﬁnance pie (though the deal required a fresh infusion of government capital on top of the $25 billion it had already received). BofA employs about 200,000 people, a number that will decrease as 35,000 announced job cuts are phased in through 2011, and it controls a huge segment of retail banking, counting half of all U.S. households as customers. The bank is based in Charlotte, North Carolina, but its presence in New York is hard to miss. BofA opened its 54-story Bank of America Tower in midtown last summer, centralizing operations that had been scattered across a half dozen locations in Manhattan. The building is replete with a vast lobby that ties into New York’s subway system and is outﬁtted with environmentally stylish features such as a system that recycles rainwater for use in toilets. Bailin has a 19th-floor corner office, where he met with Alpha Senior Editor Karl Cates a few days before Christmas to discuss the state of investor conﬁdence. Alpha: You just put out a report that estimated the total value of assets run by hedge funds at about $1.7 trillion, down from $2 trillion. Does that number still hold? Bailin: No, if we’re talking a December 31 number, we would estimate it to be about $1.5 trillion. And holding? I would say $1.2 trillion to $1.3 trillion by spring. Are funds prepared to meet redemption requests? Most but not all. The ones that aren’t are in one of two circumstances: Either they have created gates or limitations on liquidity or are in the process of going out of business and selling assets. Among the managers we deal with, very few are in the liquidation category. Are investors rethinking their belief in hedge funds? A BIG BANK’S SMELL TEST I n early November, Bank of America Corp. hosted a seminar in New York for rich clients and hedge fund managers, reiterating in acute detail the many hoops that managers must jump through before the bank will invest with them. “We have to be satisfied with the answers we get to all the questions,” explains David Bailin, the bank’s president of alternative investments. “We have to be able to verify all the facts that we can. We have all of these processes, and they are only getting more intense.” BofA’s review consists of a sevenstep drill that begins with choosing managers who are “qualified by pedigree, experience and talent.” Next comes an on-site visit, which entails a review of fund personnel and philosophy and is meant to make sure the staff is right-minded and the execution is not wrongheaded. The real fun begins with the third step: a quantitative review aimed at gaining “an intimate understanding of where profits and losses were generated.” Among the many questions raised at this stage is whether a fund’s strong performance can be attributed mostly to the stars above — “a fortunate portfolio structure or an especially favorable market cycle” — and dismissed as “an unusually big or lucky bet.” Steps four and five are a further qualitative review (“Investment mistakes: lessons learned?”) and an operational and legal evaluation, which includes background checks and a look at disaster-recovery plans. T he las t t wo par t s: deciding whether to invest — a yes vote requires a nod from BofA’s investment committee — and then determining when to jump, how much to invest and how long to stay in. Two of the many things that can trigger BofA to dump a hedge fund stake are an “unwillingness to share portfolio information” and “arrogance or hubris.” — K.C. Investors clearly have a higher level of concern about their hedge fund holdings and are asking for more information. They wisely want to know more about what it is that their hedge fund portfolio does. They’re much more conscious about trade-offs in risk and reward and are seeking more advice today than they were a year ago. The most sophisticated investors will reallocate to hedge funds when assets-under-management levels are at their trough. Back in April you said, “The level of blowups will continue.” But while most funds have had serious losses, it’s not like the industry has been wiped out just yet. The hedge fund assets actually lost because of exposure to both private and quasipublic ﬁnancial institutions were relatively minor. The amount of money hedge funds lost in counterparty exposures to failed ﬁnancial institutions was also minor because they were very vigilant about counterparty risk. Through August the money that hedge funds had lost in general was not that substantial. Then, in September, October and November, hedge funds lost money the old-fashioned way. Every market, from plain-vanilla equity to derivatives and certainly across the credit space, lost money. Leverage and illiquidity made it worse. Anyone who had any leverage in that environment had their losses multiplied. So when you look back on the year and ask, “How many ﬁrms actually closed during the year due to ‘blowups,’” the answer is, not that many. The difference 22 • INSTITUTIONAL INVESTOR’S ALPHA • FEBRUARY 2009

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - February 2009

Institutional Investor's Alpha Magazine - February 2009 Contents Letter From the Editor Longs & Shorts Digging Out A Call to Mentor Dicey Detroit The Constant Skeptic Cover Story: The Undaunted What Were They Thinking? Dark Days in Greenwich True Stories from the Commodities Files Return of the Native The Quest for Cover Moving On from Madoff

Institutional Investor's Alpha Magazine - February 2009

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