Institutional Investor's Alpha Magazine - October 2008 - (Page 78)

Permal Asset Management trimmed its commodities allocation to 13 percent from 20 percent over concerns about short-term headwinds. Within that allocation, Permal increased its position in precious metals and lowered its exposure to energy. The long-short equity manager allocation was rebalanced to reduce the net long bias. In addition, Permal’s long-biased strategies were refocused into higher-growth regions like the Middle East, where liquidity has been rising. More drastic changes had occurred earlier. At an investment committee meeting in late 2006, Souede argued forcefully for a radical restructuring of the ﬁ rm’s portfolios. “The world was becoming a lot less liquid in general,” he recounts, “so we decided to purge any manager in the structured-credit or asset-backed space, particularly if they were highly levered.” Peloton Partners, the $4 billion London-based hedge fund investing primarily in asset-backed securities, was one of several hedge fund ﬁ rms that were let go — to the disappointment of its executives, who called Omar Kodmani, the London-based Permal director who monitors distribution and oversees international investment activity, a year later to ask Permal to reconsider. “They told me that they had just won a hedge fund industry award and that we must feel silly for not getting back in because their performance had been so good,” Kodmani recounts, conceding that Permal missed out on Peloton’s astonishing return — almost 87 percent tween two niches: natural resources and relative value. In volatile markets like these, the emphasis shifts even further to human intervention in the funds and away from quantitative measures, which are notoriously unreliable when economic cycles are at tipping points. So to make sure funds meet Permal standards, the ﬁrm has begun to “scrub” each of its manager ﬁles quarterly. Analysts are asked to review funds they have not examined before, looking at performance, style drift, organizational changes, personnel turnover, assets under management and changes in liquidity terms, fees and governance. The goal is to demonstrate a consistency that helps persuade institutional investors that this is a ﬁ rm to be trusted, even if short-term performance is occasionally off. To some extent, Permal is pinning its hopes for continued expansion on Kodmani, who arrived from Scudder Investments in 2000, and Lawrence Salameno, who also joined the ﬁrm in 2000, from Merrill Lynch & Co. Before 2000, Permal’s sales were made almost entirely through the global-distribution platform run by Merrill Lynch (which is being bought by Bank of America Corp.). This meant it was competing for shelf space alongside dozens of other money managers and funds. Kodmani, who had previously developed Scudder’s international mutual fund business, set about building a direct-sales capability in Europe for Permal. His approach was simple: He made a list of 20 banks, then knocked on their doors. Prudential Securities signed on quickly, and other banks followed. Recognizing the potential for direct sales, Permal gave Kodmani a free hand. The plan was spectacularly successful. In 2000, 90 percent of Permal’s sales came through Merrill Lynch; now just 30 percent do. Future markets include the U.S., where Permal has little direct distribution. In January the firm hired Joshua Levine, former head of BlackRock’s Latin American institutional unit, to jump-start that effort, and in September, Huey Richardson from Merrill Lynch’s equities securities lending desk joined the push. Permal will also focus more on the Middle East and Asia, which it sees as the greatest growth regions. But rivals are circling the same markets. Sophia Brickell, an investment director at London-based, $25 billion fund of funds GAM, says volatility is helping her ﬁrm raise assets in Asia: “In Hong Kong and Singapore, there is a feeling that hedge funds are risky products, so funds of hedge funds — with their risk diversiﬁcation and access to a spread of the best managers — are more attractive than single-manager investments.” For the moment, though, even the largest funds of hedge funds are focused on surviving the turmoil. The hope at Permal is that its chief executive’s knack for ﬁnding high-performance hedge fund managers will stay intact and that the ﬁrm can maintain its sense of when to get out of something, as it did more than a decade ago with a certain big name. “We saw a marked degradation of risk-adjusted returns from Soros in 1995–1996,” Souede says. “We had no hesitation in exiting.” “The whole industry says it can do manager selection and combine it with asset allocation. But very few actually can.” — JEREMY ROWLANDS, CEO, CALIBURN CAPITAL PARTNERS — on its asset-backed-securities fund in 2007. But early this year, Peloton collapsed and Permal avoided one of the largest hedge fund failures ever. The decision to bail out early — and to stay out — was in keeping with the importance Souede puts on liquidity. In practice this means that Permal’s portfolios typically invest roughly two thirds of their assets in longshort and macro funds, about one ﬁfth in ﬁ xed-income strategies and some 15 percent in event-driven strategies. Permal rarely invests in funds with leverage of more than 100 percent. And discretionary investments are preferred over quantitative strategies. Of the $10 billion Permal manages in its macro funds, for instance, 42 percent is discretionary — run by hedge fund managers themselves — and 36 percent is systematic, run on quant strategies modeled by computers. The balance is split be78 • 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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