Institutional Investor's Alpha Magazine - October 2008 - (Page 76)

Permal Asset Management by what the ﬁ rm calls a “champion” of that particular fund, usually an analyst who has studied it inside-out. The second piece of the Permal process — portfolio construction and asset management — is run by a fourmember investment committee (Souede, Hodge, deputy CIO Robert Kaplan and executive vice president Judy Tchou). Souede believes in top-down analysis — deciding on an investment strategy in advance of selecting a mix of hedge funds. “In the early days the hedge funds themselves took you to the next opportunity,” he says. “Today funds of hedge funds need ﬂair, and they need to add value themselves.” Permal put this concept into motion in 2003, when it predicted a multiyear bull market in natural resources but could ﬁnd few managers to exploit the opportunity. Its solution was to call some of the best managers it knew and ask them to trade natural resources — among them, Hong Kong–based Lloyd George Management, a hedge fund ﬁrm specializing in Asian assets. Permal is pushing the idea even further now, undertaking more of what it calls “product engineering” to ﬁnd high-tech-focused funds, which Souede predicts will outperform in the long term. The third prong of Permal’s investment approach — risk management and monitoring — is run by the ﬁrm’s quant group in London under the supervision of Julian Shaw, a former head of risk management at Barclays Capital. The group makes a particular effort to hunt down cases of autocorrelation — where returns are suspiciously smooth month to month — believing that it is a major predictor of potential drawdowns. Risk is also explored in broader business terms. In 1990, Permal hired chief operating ofﬁcer Thomas DeLitto from defense contractor Condec Corp. at a time when few hedge fund ﬁrms had COOs. DeLitto’s team sets up new vehicles, administers funds, deals with regulation and compliance and runs Permal’s training program, which has seen senior staff turnover reduced to nil over the past couple of years. The development of such an infrastructure — more reminiscent of a traditional asset management company than a hedge fund ﬁrm — has made an impression on the biggest investors: Institutions now represent 25 percent of Permal’s assets, up from 1 percent in 2000. Souede’s process may not seem remarkable, as many fund-of-funds ﬁrms boast similar approaches. But it is one thing to espouse something and another to implement it. “The whole industry says it can do manager selection and combine it with asset allocation,” notes Jeremy Rowlands, chief executive of London-based Caliburn Capital Partners, which manages $1 billion in funds-of-hedgefunds assets. “But very few actually can.” Thomas DeLitto, Permal’s chief operating ofﬁcer, says Permal operates on the premise that past is prologue. changed,” Souede says. “That is the ultimate test — to be good in all markets.” Permal’s best performer by far last year was New York–based Paulson & Co. Permal executives met John Paulson, the ﬁrm’s founder, in the summer of 2006 and liked his proposal to short the subprime mortgage market. In January 2007, Permal invested in three Paulson funds — including a new credit fund set up expressly to proﬁt from the bursting of the credit bubble — which returned from 130 percent to 650 percent last year. The ﬁ rm typically replaces only ten to 25 managers each year out of the 215 on its approved list, yet ﬁ nding the next Mandel or Paulson entails analysis of the entire universe of hedge funds. Many are passed over for being too small or too illiquid; ultimately, the possibilities are narrowed down to about 400 each year. Permal analysts then benchmark each ﬁrm against its peers, visit hedge fund ofﬁces and talk to staff members to get an inside view. Souede says face-to-face interviews are priceless: “Some managers tell us they are bottom-up stock pickers. But when we ask them about certain stocks, we sometimes ﬁnd we know more than them.” Other managers, Souede says, have been so meticulously coached that their presentations can be hard to tell apart. Permal analysts frequently ask such managers to explain their business in simple terms and to clearly state what kind of edge they have and what their strongest convictions are. The ﬁnal-cut debate on each fund is led S uccessful as it has been over the years, Permal’s methodology is under extreme pressure these days. Much of the hedge fund industry is losing money, and Permal is now focused mostly on protecting capital. The ﬁrm made sweeping changes in the composition of its funds at the start of the year, in anticipation of turmoil to come. It Photograph by Chad Batka 76 • 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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