Institutional Investor's Alpha Magazine - October 2008 - (Page 74)

Permal Asset Management of resources and the capacity to maintain an edge and provide adequate risk controls. In this time of great volatility, investors value such comfort more than ever: In the second quarter of this year, all of the $9 billion in new capital allocated to funds of hedge funds went to ﬁ rms with more than $5 billion in assets under management, according to Hedge Fund Research. Those with less than $5 billion suffered net redemptions. Victor Raskin, chief investment ofﬁcer at the $5 billion YMCA Retirement Fund in New York, says size had a bearing on his decision to invest $70 million in Permal in August 2006. “They clearly had a lot of experience and deep staff levels,” he explains. “We liked that they could offer a range of specialized funds in one place.” Souede predicts that a supergroup of fund-of-funds ﬁrms will break out of the pack and attract the vast majority of assets allocated to the industry. He says the depth of experience within Permal, allied with its formal processes and infrastructure, will make it one of the founding members of this supergroup. Souede has set for his ﬁ rm an ambitious target of 20 percent asset growth a year in its quest to continue to pull away from medium-size funds. Performance will contribute half of this anticipated growth, he estimates; net inﬂows will account for the rest. This would make Permal a $94.5 billion ﬁrm in ﬁve years’ time. One way Souede hopes to achieve his bold ambitions is by developing new strategies and themes within Permal’s fund-of-funds offerings. The ﬁrm started investing in Indian hedge funds last year, and in November it plans to launch the Silk Road Fund in Africa and the Middle East. A China fund is in the wings for next year. Permal is also into visibility. Its staff works in some of the most high-proﬁ le buildings in the world. Its new ofﬁces in London are leased for £140 ($245) per square foot. And Permal has improved its branding through Legg Mason, the $923 billion, Baltimore-based mutual fund manager that bought a majority stake in the ﬁ rm in 2005 but allows it to operate mostly independently of the parent company. Still, Permal’s success hinges chiefly on being able to maintain market-beating returns, a sure challenge in the short term, at least, as market uncertainty is testing hedge funds across the spectrum. Many credit-based funds have been savaged. Volatility in the equity markets has hurt long-short funds, and prime brokers have withdrawn support just when hedge funds need it most. If ever there was a time for funds of hedge funds to prove they are worth their extra layer of fees, this is it. But performance across the sector has been disappointing of late: The average fund of hedge funds was down 6.48 percent this year through August 31, according to HFR. Permal did better: Although the value of Permal Investment Holdings fell by 10.9 percent, Permal Fixed Income Holdings was off by just 3.4 percent and Permal Macro Holdings was down 0.2 percent. Permal’s historical growth rate suggests its target is achievable Photograph by Jonathan Worth Omar Kodmani, a Permal director, notes that the ﬁrm missed the Peloton Partners run-up but also avoided the collapse. funds — 2008 is on track to be the worst-performing year since Chicago-based Hedge Fund Research began tracking the industry in 1990 — Permal’s assets expanded during the ﬁrst six months of this year by $2 billion, reaching $39.2 billion, but (like those of most of the industry) have since fallen. Investors seem to have few doubts about what drives the ﬁ rm’s long-term growth. Samuel Rosenberg, New York–based head of equity derivatives sales for French bank Société Générale’s corporate and investment banking group, which invests in Permal funds through its structured products, lauds Souede for “ﬁnding the best managers for over 20 years.” Permal’s returns have handily outperformed the average hedge fund. During the ﬁ ve-year period ended June 30, Permal Investment Holdings, the $7.4 billion ﬂ agship multistrategy fund, returned 9.4 percent annually, besting the benchmark HFRI composite fundsof-funds index by almost 2 percentage points. Permal Macro Holdings ($10.7 billion in assets under management) returned 8.9 percent annually, and Permal Fixed Income Holdings, a $10.2 billion fund, returned 8.1 percent a year. Good investment performance, of course, typically leads to asset growth, as investors ﬂock to funds of funds that outshine the competition. Increasingly, however, size has become paramount to a ﬁ rm’s prospects. Institutional investors seek investment houses with a depth 74 • INSTITUTIONAL INVESTOR’S ALPHA • OCTOBER 2008

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - October 2008

Institutional Investor's Alpha Magazine - October 2008 Contents Letter from the Editor Longs & Shorts Pension Corner: Process of Evolution The Good Guys: Israel's Champion Interview: Fast Lessons for Hard Times Cover Story: Industry Under Siege The New Hedge Fund Economics Good-Bye, Easy Money Caging the Shorts Strategies: Bottom Fishing Profile: Cult of Personalities Research Center: Alpha Awards: Eye of the Storm Alpha Bytes: Funneling the Chatter Unhedged: Commentary: Attention, Hedge Fund Shoppers

Institutional Investor's Alpha Magazine - October 2008

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