Alpha - September 2007 - (Page 72)

Fortis Investments started with a bang in 2000, when Bank of New York Co. purchased Jericho, New York–based Ivy Asset Management and London’s Man Group bought Glenwood Capital Investments of Chicago. After a slowdown in deal activity, the past two years have seen a resurgence of such investments. In December 2005, for example, Bank of Ireland bought a majority stake in Guggenheim Alternative Asset Management, a New York–based fund-of-hedge-funds ﬁrm with $2.8 billion in assets under management. And this past June, BlackRock, one of the world’s biggest publicly traded investment managers, with $1.2 trillion in assets, acquired Seattle-based Quellos Group’s $20 billion fund-of-hedgefunds business. The two firms will combine their fundof-funds platforms, which manage more than $25 billion, under the name BlackRock Alternative Advisors. Fortis has its reasons for being a latecomer to the alternative investing party. Wohanka recalls that in early 2002, he and his colleagues chose to focus on equities, bonds, commodities and real estate. “We weren’t particularly interested in hedge funds or funds of hedge funds,” Wohanka says. “We thought the beta play was more interesting than the alpha play.” But things changed as the market outlook grew cloudier and Fortis’s institutional investors showed more interest in hedge funds. In early 2006 management decided to give the firm’s institutional offerings a stronger alpha component. “We felt that hedge funds — in particular, funds of hedge funds — was the way to go,” Wohanka says. Rather than buy a big shop, Fortis chose Cadogan for its talent and its sharp investment focus. But the sheer size of the competition presents Fortis with a challenge and underscores the ﬁrm’s need to act quickly. At the time of the Cadogan deal, 36 funds of hedge funds had at least $5 billion in assets under management; those assets have only grown. “The fund-of-funds business is a scale business,” says Tanya Styblo Beder, former CEO of Citigroup’s Tribeca Global Management hedge fund platform, which the bank recently announced it is shutting down. Beder, who is now chairwoman of SBCC, a New York–based consulting ﬁrm specializing in hedge fund strategy and quantitative finance, adds that funds of funds with less than $2.5 billion in assets have trouble breaking even. Within a year, she predicts, fee pressure and compression could push that threshold to as high as $4.5 billion. With an additional acquisition on the horizon, though, Fortis could soon have a $10 billion fund-offunds business. Fortis Group has joined Royal Bank of Scotland and Spain’s Banco Santander Central Hispano in an attempt to acquire ABN Amro Bank. If the three partners win their bid, Wohanka will get the Dutch bank’s asset management operations, which include International Asset Management, a long-standing London- and New York–based fund-of-funds firm with some $5 billion in assets. He will also have to decide whether his expansion strategy includes integrating IAM and Cadogan. In the meantime, Fortis faces yet another test: preserv72 • INSTITUTIONAL INVESTOR’S ALPHA • SEPTEMBER 2007 ing the qualities that make Cadogan special. Remo Kraenzlin is a managing partner at Primores, a Lausanne, Switzerland–based advisory ﬁrm that allocates to funds of funds, with $600 million in assets under management. He says that acquisitions like Fortis’s purchase of Cadogan bring many changes, among them staff departures. “It might be true that initially a fund-of-hedge-funds unit will keep its independence,” says Kraenzlin, “but that is only the case as long as everything goes ﬁne or the boss is the same at the bank.” In Kraenzlin’s experience, most funds of funds start doing business differently after being acquired because of internal mandates and constraints, such as softening liquidity terms and the introduction of new products. The result, he says, is that the original corporate culture eventually disappears. STUART LEAF LAUNCHED CADOGAN in 1994 with his childhood friend Hugh Forward. The two partners, however, didn’t make their first investment until April 1, 1995. “It’s always good to start on April Fools’ Day,” Leaf says with a laugh. Cadogan began with less than $3 million in assets, after a premarketing phase targeting what Leaf calls the three Fs: “friends, family and fools. And we couldn’t ﬁnd enough of the latter.” Leaf, 46, was born in New York City and grew up in London and Brussels, where his father worked for public relations agency Burson-Marsteller. He met Forward, a fellow U.S. expatriate, in Belgium, and the pair attended Sussex House School in London together. Cadogan is named after the city square where the school is located. Leaf lost touch with Forward after returning to the U.S. to earn BAs in economics and French and an MA in French literature, all from Stanford University. After graduating, he spent two years as an investment banker with New York–based Merrill Lynch Capital Markets before heading back to Stanford for an MBA. Leaf then worked in real estate and private ﬁnance at Goldman, Sachs & Co. There, a mutual friend reacquainted him with Forward, who was working as a branch institutional salesman at Dean Witter & Co. in Washington, D.C., covering hedge funds and small institutions. When Leaf started Cadogan, his most recent job had been managing director of IMI Advisors USA, the asset management division of New York’s Mabon Securities. Forward had worked in private equity, fund management and funds of hedge funds, including a stint at New York–based Bessemer Securities, an early hedge fund investor. Leaf and Forward set out to build a business that would beneﬁt investors over the long haul. Their goal was to generate long-term equity returns with the low volatility of ﬁxed-income and no correlation — while being blunt about the risk involved. “We’ve lost a lot of pitches because we wouldn’t tell people what they wanted to hear,” Leaf says. The ﬁrm’s ﬁrst offering was the equity-focused Cadogan Partners, later combined with the Cadogan Alternative Strategies Fund to form the Cadogan Alternative Strategies Trust, which launched in February 1999. With

Table of Contents Feed for the Digital Edition of Alpha - September 2007

Contents Letter from the Editor Longs & Shorts Pension Corner: Keeping the Faith The Good Guys: Going Public Interview: Barry Bausano - A Delicate Balance Cover Story: Cruel, Cruel Summer Profile: Phil Cooper - Alternative Flight Plan Strategies: Marshall Wace - TOPS in Its Field Profile: Fortis Investments - Banking on Alternatives Research Center: Top Equity Trading Firms Alpha Bytes: Desktop Duel Unhedged: Commentary - The Taxman Cometh

Alpha - September 2007

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