Institutional Investor's Alpha Magazine - November 2008 - (Page 50)

Chicago Funds of Funds sets, and despite having been steeped in the University of Chicago notion that markets make everyone equal. His attitude has obviously stood the test of time. Hedge fund managers are still around, and so is Elden, whose beginnings as a fund-of-funds manager go back to 1971, when he struck out on his own after a stint as an equity analyst with Chicago-based investment bank A.G. Becker & Co. to launch Grosvenor Capital Management. His goal was to ﬁnd managers who added alpha year in and year out, to package portfolios around those managers and then to sell the portfolios to individual investors. It was a model that took off like gangbusters, ensuring Chicago a special place in fund-of-funds history, a position on which it continues to build. By 1973, when the Sears Tower surpassed the World Trade Center as the tallest structure in the world, Elden was getting enough work to bring on a partner, Frank Meyer, who had been a colleague at A.G. Becker. Eleven years later the trinity that ultimately shaped Grosvenor was completed with the hiring of Roxanne Martino, a former fund auditor. Elden, Meyer and Martino, working roughly as co-equals, researched managers, huddled with clients and grew their fund of funds from a nifty local business into a key player in a global movement. Elden’s diversification infatuation is still paying off across the fund-of-funds industry, and it seems especially prescient from the vantage point of this year’s messy markets (see “What Stampede?”, page 55). Through the end of October, the HFRI fund weighted composite index, which tracks about 2,700 funds of funds, was down 16.05 percent, compared with Hedge Fund Research’s multistrategy index, which tracks hedge funds and was down almost 18 percent — meaning simply that funds of funds have outperformed their underlying hedge funds, which speaks to the value of a diversiﬁed fund of funds when markets struggle. earn its fees, which typically follow a 1-and-10 model — 1 percent for administrative costs plus 10 percent of proﬁts. Gold says that for an investor to go it alone in determining which hedge funds will succeed requires “a level of common sense” that may be more easily described than achieved, a selling point that seems to have served the fund-of-funds industry well. Funds of funds have long been so ubiquitous — and so widely accepted — that it’s hard to imagine a world without them. Why they emerged from Chicago is a study in time, place and psychology; it was perhaps the ideal petri dish for such an industry. “It started in Chicago because Dick Elden and I started it there,” says Meyer with a shrug. Meyer is semiretired today and lives in Florida — he won’t say how old he is, but he and Elden are of the same generation. (Meyer still advises some well-known ﬁrms, including SkyBridge Capital, a major New York– based hedge fund seeder.) From their base in the Midwest, Elden, Meyer and Martino managed to keep what was probably a valuable distance from stock traders in New York and short-sellers in California, maintaining a certain objectivity. Chicago had other advantages too. The city’s derivatives exchanges created an army of investors who understood risk and sought returns on holdings that were uncorrelated with their day jobs. And the concept did not exactly emerge out of left ﬁeld: By the time Grosvenor was founded, Chicago already had an established group of funds with holdings scattered among the city’s many commodities trading advisors — in essence a small commodities fund-of-funds industry. Martino says that when she first joined Grosvenor, she would attend CTA conferences because their professional forums best addressed what she was doing. Eventually, those conferences evolved into funds-of-hedge-funds seminars: “There are thousands of conferences and all these publications now,” she points out. “Twenty years ago there was nothing.” “I’ve often thought of Chicago as the Second City, but at the forefront of ﬁnding niches that weren’t part of the markets in New York,” notes Brian Ziv, a co-founder and managing partner of Chicago-based Guidance Capital, a $570 million fund-of-funds ﬁrm started in 2001. Whether in options, futures or funds of funds, he says, Chicago investment professionals have traditionally sought opportunities overlooked in bigger ﬁnancial centers like New York and London. “There’s a hotbed of investment expertise here and easy access to hedge funds on both coasts,” he explains. San Francisco is ﬁve hours away by air; New York is two and a half. The Second City also has scores of money management and consulting ﬁrms and is the place where Arthur Andersen & Co., the once mighty accounting ﬁrm, came “Part of the culture that Frank [Meyer] created is that the opportunities are in early investing.” — JOHN ROWSELL, CEO, GLENWOOD CAPITAL INVESTMENTS But even fund-of-funds supporters qualify their endorsement given that such funds levy fees on top of those charged by hedge funds. “The layer of fees, in certain instances, can be justiﬁed,” says David Gold, a New York–based consultant for WatsonWyatt Worldwide, an adviser to corporate pension sponsors and other institutional investors. The case usually made is that if a fund of funds provides solid due diligence and adds value to portfolio construction, it can 50 • INSTITUTIONAL INVESTOR’S ALPHA • NOVEMBER 2008

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

Institutional Investor's Alpha Magazine - November 2008 Contents Letter from the Editor Longs & Shorts Pension Corner: Risk Rewarded The Good Guys: In the Here and Now Interview: Minister of Finance Cover Story: The Agony of Dan Zwirn Strategies: The Early Birds Are Awake Strategies: The Call of Shari’a Profile: Sweet Home Chicago Research Center: What Stampede? Alpha Bytes: Centralize the Data Unhedged: Commentary: Learning from the Wreckage

Institutional Investor's Alpha Magazine - November 2008

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