Institutional Investor's Alpha Magazine - November 2008 - (Page 56)

Fund of Funds 50 management at the end of June, say institutional investors have been particularly faithful in recent weeks. Roman Igolnikov, the New York–based chief investment ofﬁcer at UBP Asset Management, concedes that the industry is “obviously challenged” but says inﬂows have outpaced redemptions. “We’ve had inﬂows,” says Jane Buchan, CEO of Irvine, California–based Pacific Alternative Asset Management Co., which is ranked No. 17, with $18.9 billion in assets as of the end of June. Institutional investors have decided “they can’t just take it off the table and put it under the mattress,” she adds. Jim Vos, CEO of New York–based Aksia — a ﬁrm that advises institutional investors on funds of funds and whose clients include the Indiana Public Employees’ Retirement Fund, the New York State Common Retirement Fund and the Ohio School Employment Retirement System — said in an October 21 letter to clients that funds of funds “with more of their assets from ‘distributed products’ are facing 20 percent to 35 percent redemptions.” By contrast, Vos predicted that those that rely on institutional investors could see a 10 to 15 percent drawdown. The fund-of-funds industry was launched in Europe 40 years ago, then established independently in Chicago in 1971 (see “Sweet Home, Chicago,” page 48) as a way for wealthy individuals to get a diversiﬁed piece of the burgeoning hedge fund market. The industry has long since gone global, and the explosive growth of funds of funds, especially in the past decade, has mirrored the boom in underlying assets — namely, the hedge funds themselves. petence to make the right choices and create portfolios and do ongoing risk management and monitoring,” says Blackstone’s Hill. That’s where a fund of funds earns its keep and where Hill says investors — once they have made the leap to alternative investments — have to keep in mind what they’re getting. It seems most fund-of-funds players — investors and managers alike — are holding their breath, waiting to see whether the middle holds. However, recent events have muddied any assessment of current and future data, as markets have crashed and some investors have bolted — or taken out options to bolt. Since August a large number of investors have reportedly ﬁled formal notices to redeem, guaranteeing them the right to pull their money after 30, 60 or 90 days, depending on the fund in question. Part of whatever is happening may be a kind of blufﬁng. “It’s hard to get hold of numbers,” says Phil Irvine, co-founder and CEO of PiRho Investment Consulting, a London-based ﬁrm that specializes in advising institutional investors on funds of funds. “But if everyone thinks there’s a redemption run, it forces some of these hedge funds to actually gate,” a move that curbs withdrawals. “There’s maybe a game being played here,” Irvine adds. Still, the size of the fund-of-funds industry is probably not what it was a few months ago. As of June 30 assets under management totaled $877 billion for the Fund of Funds 50, up from $742 billion in 2007, which was up drastically from $550 billion in 2006. Some pockets may suffer more than others, however. Those familiar with big Europe-based funds of funds note that they tap two markets, one less reliable than the other. Firms like UBP can typically count on the almost exclusively institutional investor market in the U.S., which is in it for the long haul. Not always as loyal are retail investors, individuals with less staying power than the typical university endowment or foundation. Few dispute that some basic reshaping is under way. “The truth is, we don’t know how investors are going to react in a given situation,” says Richard Leibovitch, a Boston-based senior investment partner at Lausanne, Switzerland–based Gottex Fund Management, No. 20. Gottex, one of the few funds of funds that publicly reports quarterly numbers, had $13.5 billion in assets under management at the end of September, a 13.5 percent decline from June 30, and in mid-November gated some funds. Leibovitch says this has not swayed him from his long-term confidence in the industry: “It’s shifted from leveraged high-net-worth individuals to conservative institutional investors, whose patience is greater.” What’s worrisome is that Leibovitch and others see a hedge fund shakeout coming. “The impacts are just beginning to be felt,” says Sophia Brickell, an investment spe- “If everyone thinks there’s a redemption run, it forces some of these hedge funds to actually gate.” — PHIL IRVINE, PIRHO INVESTMENT CONSULTING Although funds of funds are perennially criticized for the layer of fees they add, supporters say their value — in day-to-day management, due diligence and trend-spotting — is now more apparent than ever. Chief among the beneﬁts a fund of funds is said to bring is the avoidance of what institutional investment managers call headline risk: the ever-present danger of putting money into a hedge fund that blows up, through fraud, bad luck, incompetence or some spectacular combination of all three. “Most large institutions do not feel they have the com- ON THE WEB Visit our Web site, www.alphamagazine.com, to ﬁnd the Fund of Funds 50, as well as more features, including the 2008 Hedge Fund 100, Alpha’s annual list of the biggest single-manager hedge fund ﬁrms in the world. 56 • INSTITUTIONAL INVESTOR’S ALPHA • NOVEMBER 2008 http://www.alphamagazine.com

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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