Institutional Investor's Alpha Magazine - February 2009 - (Page 23)

now is the number of ﬁrms that are signiﬁcantly below their high-water marks and that are shrinking in assets under management. Speaking of leverage, will it be massively curtailed? Is it at all plausible that you might have invested money with Madoff? It is not plausible, because of numerous violations of BofA standards. None of the funds advised by Bank of America Alternative Investment Services had exposure to Madoff. Your November paper ends with the statement: “Stay the course.” How hedge funds are ﬁnanced is going to change somewhat — the amount of available leverage to hedge funds has been curtailed. Wall Street is still supporting robust, reputable funds. Do you still recommend hedge funds as part of a wellbalanced portfolio? Yes. Global macro will be strong. Most long-short strategies will be strong. Merger arbitrage will be strong. Eventdriven and credit-related and distressed-assets strategies will be strong. Every time an industry goes through a difﬁcult period, it comes out stronger — if it’s a good business. How surprised were hedge fund investors at the meltdown in equity markets, the credit crisis, the Madoff scandal and the deepening recession? As with every type of investing, you don’t want to be selling at the very bottom, and you want to have a strong portfolio. And so you look ahead. What is the industry going to look like in, say, 2010? You’re going to have battletested fund managers who have lived through the most difﬁcult markets of a lifetime. You’re going to have more resolution about where things are really headed. There is a need now for more fundamental analysis in every sector of the market than there has ever been before. Today the funds have less competition from Wall Street, too little capital and an extraordinary set of investment opportunities. Can you envision investing in a start-up fund? Some didn’t realize their holdings could lose so much, even in these difﬁcult markets. So you had a mismatch between expectations and the fact that the hedge fund industry is a risk-taking enterprise. Absolute-return strategies get no forgiveness; the term implies a positive return under all market conditions. Investors were surprised by the conﬂuence of events and that this conﬂuence so deeply affected alternative investments. The fact is that the withdrawal of leverage and the absence of liquidity in the ﬁxed-income markets represented profound and rapid changes in market conditions. Combined with tremendous volatility, a rapid decline in global economic conditions and a virtual investor panic to gain liquidity at any cost, hedge funds saw a wave of redemptions. BofA recently restated its standards for picking fund managers. The requirements are daunting. Under very speciﬁc circumstances. There are opportuni- “How much does it take for us to not accept a manager? The answer is, very little. It doesn’t take much for us to say no.” — DA VID BAILIN, BANK OF AMERICA How much does it take for us to not accept a manager on our platform? The answer is, very little. It doesn’t take much for us to say no. You even require managers to detail mistakes they’ve made and talk about what they’ve learned from them. ties in the marketplace where you would need a stable pool of capital and an excellent manager, and where it would be best to start from scratch. That would be in asset-backed securities, in commercialmortgage-backed securities and in bank debt. Is big regulatory change coming? You want to hear what the thought process was before a mistake was made and after, so you can get to know how that manager thinks and deals with negative information. Among the red flags you raise is “undue growth in assets.” I thought bigger was better? A manager who grows prudently over time and then demonstrates an ability to manage an increased amount of assets we would consider a normal thing. A manager who grows hugely and doesn’t have the experience managing assets at that level would be, in our mind, a warning sign. We’ll see a different regulatory scheme, and it will change somewhat the nature of how funds conduct themselves. What we want is a framework where, when someone looks at it and looks at the industry, they have a high degree of conﬁdence that what’s happening in our industry is efﬁcacious and appropriate and that it is being monitored accurately. The hedge fund industry will want it, just as the investor will want it. We don’t have that now? No, we don’t. FEBRUARY 2009 • INSTITUTIONAL INVESTOR’S ALPHA • 23

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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