Institutional Investor's Alpha Magazine - November 2008 - (Page 52)

Chicago Funds of Funds managers to discover and support more hedge funds, and Grosvenor became a champion of new managers, though identifying them was usually easier said than done. “You had to ﬁnd talented people and encourage them to start a hedge fund,” says Martino. “That was a lot of work.” But the effort often paid off in spades. The rewards of ﬁnding an exceptional manager before everyone else did could be enormous, something Grosvenor executives learned by being early investors in Chicago-based Citadel Investment Group and Stamford, Connecticut–based SAC Capital Advisors, two giants of the industry today. Grosvenor didn’t have the field to itself for long. Others saw what the ﬁrm was doing and started their own fund-of-funds operations, in Chicago and elsewhere. Along the way the Grosvenor partners split up. Meyer went across town to start one of those new ﬁrms, Glenwood Capital Investments, in 1987. It was Meyer, in fact, who gave Citadel founder Kenneth Grifﬁn his start in 1990, helping the then–22-year-old manager raise $4.6 million to invest using convertible arbitrage strategies he had developed as an undergraduate at Harvard University. In 1994, Glenwood entered into a joint venture with London-based Man Financial to reach investors outside the U.S. In 2000, Man acquired the ﬁrm outright, and today Glenwood, which manages $7 billion and has 42 employees, keeps its overhead low by relying on Man staff for marketing, compliance and systems expertise. Chicago-based Harris Alternatives, another fund of funds, hired Martino as a portfolio manager in 1990; in 2001 she was named president. Martino, 51, today initial doubts and fears — chasing demand from institutional investors. “For many, many years we would spend a lot of time explaining the concept,” Martino says. “Once consultants accepted it, the whole thing expanded.” Today the customer base at Harris Alternatives, typical of funds of funds, is about 85 percent institutional. As their business has grown, some funds of funds have gotten more complex, having adopted practices that make them more nimble than the traditional model allows them to be. Harris sometimes taps stopgap leverage, for instance, to take prompt advantage of hedge fund investment opportunities while waiting for cash ﬂow from investors, preferring to borrow money rather than risk being shut out of an exceptionally promising fund. It also hedges — with derivatives and carefully weighted portfolios — to protect against short-term risk from managers with better long-term than near-term prospects. Glenwood isn’t as aggressive as some competitors in using additional hedging or leverage, according to John Rowsell, who joined Glenwood in 2001 and took over as chief executive when Meyer left in 2004. But, he asserts, having such tactics at hand gives Glenwood more dexterity than it might otherwise have and adds value for investors. And Glenwood, like many funds of funds, has a track record of helping new managers launch by encouraging them to go out on their own and investing with them on day one. “Part of the culture that Frank created is that the opportunities are in early investing,” Rowsell says. Because most start-up managers Glenwood supports come from established hedge funds, he says, they usually have track records and an understanding of what a good back-ofﬁce operation should look like. Like Glenwood, Harris supports promising new managers, though Martino says the ﬁrm’s preference is to leave the light on for visitors rather than beat the bushes for them: “Because we’ve been around for such a long time, hedge fund managers come to us.” Still, if Harris ﬁnds a manager it likes, staff members will go on the road to do on-site research. Every Chicago fund-of-funds player says it is far more difﬁcult now than it was even a decade ago to cultivate much of a personal relationship with fund managers. Perhaps no more than 50 hedge funds existed when Elden opened Grosvenor, and during the ﬁrm’s heyday the three partners were able to meet virtually every manager of signiﬁcance. Such intimacy is impossible now — there are an estimated 7,500 single-manager hedge funds worldwide today. And although the Internet helps hedge funds and funds of funds ﬁnd each other, sussing out a manager’s psychological makeup, daunting as it can be, remains an important way to gauge the potential for alpha. “Data can tell you some things, but you have to be careful,” Rowsell says. “Data in a distorted fashion can tell you the wrong things.” He credits Glenwood’s acquisition by Man with im- “What does an asset allocator do at this stage? I would argue that you raise cash and trade up to better funds.” — RICHARD ELDEN, FOUNDER, GROSVENOR CAPITAL MANAGEMENT oversees $14 billion in assets and 65 employees. Elden left Grosvenor in 2006 to start Lakeview Investment Manager, which runs an activist fund of hedge funds. Grosvenor remains a private, Chicago-based partnership, listing $27.4 billion in assets under management as of June 30. In 2007 the ﬁrm sold a minority stake to Hellman & Friedman, the San Francisco–based private equity ﬁrm. Successful and inﬂuential, Elden, Meyer and Martino had many imitators — slow to catch on but eventually clamoring for a piece of the action, having overcome their 52 • 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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