Institutional Investor's Alpha Magazine - November 2008 - (Page 51)

to global prominence before its entanglement with Enron Corp. The presence of so many well-staffed service providers hasn’t hurt the local growth of funds of funds. “A number of people here started in consulting and then moved into the hedge fund business,” Ziv points out. In the beginning nobody knew what made a good fund-of-funds manager. “There was no industry,” says Meyer. But because it was possible then to know most every hedge fund manager, and because hedge funds had not yet grown gigantic and unfathomable, the industry held few secrets. It was relatively easy to uncover which ﬁrms had good performance and which ﬁrms were blufﬁng, who was being hired and who was being ﬁred, what strategies were working and which ones weren’t. Grosvenor would follow a fund’s progress for some time before jumping in, and money was put in only as fast as it could be put to work. The ﬁrm collected its own data because there were no commercial databases as there are today (nor were there any hedge fund investor relations departments). Most funds consisted of one or two managers, one or two analysts and a secretary. Meyer says he learned early on to take a manager’s past success and compare it with more recent performance. Had the initial returns been a stroke of luck? Had the manager been able to generate a huge return on a small amount of capital on a bet that might not be repeatable? Or had the manager discovered a system to generate alpha in most market conditions, and was his performance truly uncorrelated? Grosvenor was geared from the beginning toward high-net-worth individuals, not the pension funds and endowments that now fuel much of the hedge fund industry’s growth. “In the early ’70s an institution had a real problem investing in a hedge fund,” Meyer says, noting how old-school institutional investment law — the “prudent man” rule — required evaluation of individual holdings rather than lumping them in with overall returns. The Employee Retirement Income Security Act of 1974 changed that practice, but it still took time for institutions to fully embrace alternatives. Nevertheless, funds of funds had instant advantages. “At the very beginning a lot of hedge fund managers were worried about having more than 14 investors,” for fear that they would run afoul of Securities and Exchange Commission limits, Meyer recalls. By law they would have had to register with the SEC as advisers if they took on 15 or more clients, so hedge fund managers welcomed the sizable capital that typically came with a single investment from a fund of funds. Eventually, investor demand drove fund-of-funds Chicago fund-offunds managers John Rowsell, left, CEO of Glenwood Capital Investments, and Roxanne Martino, president of Harris Alternatives. NOVEMBER 2008 • INSTITUTIONAL INVESTOR’S ALPHA • 51

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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