1. billion dollar club
J
i
Blackstone tops
lean and clean
fund of funds
rankings
Manager selection beyond the brand
names with atwist of macro view is the
winning cocktail for the future
I
he fund of funds industry, as represented by est fund of fund s in the world, with assets of $28.51 bil-
{
the largest players with more than $1 billion lion and a growth rate in the first six months of2.29%.
in assets, is still a force to be reckoned with Blackstone's fund of funds business, which is run by
despite the hostile asset raising environ- Tom Hill in New York, has been the largest discretionary
ment and the challenging markets of 2010. independent fund of funds for at least a year, but HSBC
The once titanic trillion dollar fund of funds Alternative Investments and UBS Global Asset Manage-
industry has emerged as a leaner and clean- ment A&Qmix both advisory and discretionary, which in
er group of savvier investors with $595 bil- the past have given larger overall totals. Yet, despite this,
lion divided among 106 of the largest players. Blackstone has proven that pure fund management, rath-
Reflecting the new maturity of the fund of funds indus- er than distribution, is the key to winning assets in 2010.
try, where true performance is now rewarded with assets, In the fund of funds industry at least, successful mana-
By J
Viki discretionary managers, particularly independent firms, gers are those, like Blackstone, that are focusing on per-
JVatarajan are enjoying a renaissance. As a statement of this trend, formance rather than asset gathering. For example, En-
Blackstone Alternative Asset Management is now the larg- Trust Capital Diversified Fund, which is run by New
28 September 2010 ©Invest Hedge

2. billion dollar club
28.51
26.83
2411
22.95
20.82
~~ ll~~t~ntMan~e~
~~n~t__________~1~
9.0~0~
M o ~~stm IL-
~ __________________~~ 3 -1
17.5~
GAM Multi-Man •er ''' 17.00
BlatkRockAltemaoye"MI=iso,_,rs
.
" 16 0--1 _ -==---i---==-1- -""-'=--
"'---- ---------"==.8"'
PaclficAitemative~."'=rli"'-Co,_.____ _ _, 0---i ----"= --i--'= -+ --""-='--
e 16,.6"-
Unlon Bancalre Prlvee 16.10
12ior 1sset M 15.03
= == =-""--------------------'-4"" 0 -1
1 .2"- 17.10
MI!SlrowAdvanced Strategies 12.40
Amundl Altematlve I nvestments 11.54
CrerlitSulsse 11.00
Aurora lnvestmEI!t ~'lilnagement 9.65
K2 Advisors 8.71
FinancialR Mana ement
isk 8.63
P &Oe
ictet 8.12
ArdEIIAsSeiM~ement ' 7.94
Gottex Fund M~ - ement 7.64
The capital Holdings Funds/Edmond de Rothschildlirou 7,50
ElM 7.40
7.40
EII1EIIt 7.30
7.20
FaucllierPartners 7.03
SilverCreek Capital Mana&e~nt 6.70
==="--------------------" .Sc:_-1
3"-' 3 3.49
= == = ==---- -- - - -- -----= 0--1
3.5"' 4.30
="""-'==~---------------=3,38----j
" 3.25
3.30
3.20
3.08
3.00 3.00 0.00% Pine liroveM5ociates
3.00 2.70 liJl% Total 595.18
(1) Total alternative assets including custody $33.211bn (2) Excluding GLG FOHF assets (3) The merged Citigroup and SkyBridge Assets (4) EACM Advisor and MGAI Assets under BNY brand (5) Now part of F&C Asset Management
Footnotes: • =Estimated numbers "= From latest SEC Listing "' =31 March 2010 B = entrants in 2010
old New
Source: lnvestHedge
© lnvestHedge September 2010 29

3. billion dollar club
York-based EnTrust Capital, was up 3.6% in ly, while Ireland's Abbey Capital, a managed
June, 33.77% for the past 12 months and 5.94% futures specialist, whose flagship was Jn-
for the year to the end of June, the period over vestHedge Fund of Fund of the Year in 2008,
which it also grew assets by 2.17%. Magnitude saw its assets grow by 42.9%.
Capital, which has added 5% to its assets in six Looking at the Super League of funds of
months, is another good example of this (see funds with $10 billion or more under manage-
Profile, page 42). ment, independent discretionary funds such
Following the mass destruction of wealth in as Blackstone, Grosvenor Capital Manage-
the past few years, the savvier fund of funds ment, BlackRocl< Alternative Advisors, Pacific
managers are looking for opportunities in the Alternative Asset Management Company and
rubble, such as the credit and distressed space Mesirow Advanced Strategies have all grown
and in the structures they offer, including cus- in the first six months of 2010. That said,
tomised accounts and co-investments, as well Grosvenor, Goldman Sachs Asset Management
as harnessing the power of the managers in and Permal Investment Management have
which they invest. each stayed at the same rank of fourth, fifth
A powerful example of this is the gold share and sixth, respectively. Union Bancaire Privee,
class introduced by the Capital Holdings Group, Lyxor Investment Management and Man In-
which has seen its assets under management vestments, however, have fallen from the top
grow by $1.3 billion, equivalent to 21%. The 10 to 11th, 12th, and 13th, respectively.
Leveraged Capital Holdings G share class was The Super League, which is made up of just
up 1% in June, 40% for the past 12 months and 16 funds of funds, houses half of the In-
13.16% for the year to the end of June. vestHedge Billion Dollar FOHF Club's assets,
The InvestHedge Billion Dollar funds of while the top five largest firms with $20 bil-
funds rankings may now only have 106 mem- lion or more in assets control $123 billion,
bers, a third less in number and half of the equivalent to more than 20% of the In-
assets than it had in our June 2008 survey, but vestHedge Billion Dollar FOHF Club.
50 firms had positive growth in assets in the This Super League group, which has $290
first six months of the year. The 50 firms, billion under management, has lost $5.3 bil-
equivalent to 47% of the universe with $334.3 lion in assets, equivalent to a loss of 1. 79% in
billion under management, added $24.7 bil- the first half of the year. The majority of the
lion, or 7.97%. Taking into account the 11 asset outflows can be attributed to bank
firms that had flat growth, 61 funds of funds backed funds of funds including UBS Global
added $25.7 billion, equivalent to a growth focus on discretionary portfolio management Asset Management, which is now in third
rate of 7.56%. for our existing clients but also now focuses place after dominating the rankings since the
Of this universe, 17%, or 18 fund manage- on customised solutions for clients who are survey started in 2002, and UBP, down from
ment groups, posted asset growth of 10% or already invested in hedge funds or with new 7th place.
more, while 10 funds of funds, equivalent to capital to deploy." In April, Tarchon an- Despite UBP's efforts at overhauling the asset
just less than 10% of the universe of billion nounced the launch of the Tarchon Asia Fund management business the Madoff legacy is
dollar firms, recorded asset growth of 20% or and then the Tarchon Resources Fund, reflect- still taking its toll, which may explain a loss of
more. The one striking feature of the June ing the firm's view that both markets were $3.2 billion, equivalent to 16.6% of its assets.
2010 survey is that there is only one new en- growth areas over the long term. Other bank-backed funds of funds that have
trant, and a re-entrant at that. Tarchon Capital A few other firms showed a stellar growth in seen asset outflows include Lyxor, Amundi Al-
Management is not only the only new entrant assets, although BNY Mellon Asset Manage- ternative Investments and Credit Suisse.
in the survey with total assets now at $1.41 ment's asset growth of 41.9% can be attribut- The top five largest fund of hedge funds
billion, but also the fastest grower with an as- ed to the merger ofEACM Advisors and Mellon firms, however, grew by 1.33% adding $1.62
set growth rate of 84.3%. Global Alternative Investments. The new total billion in the first six months of 2010. HSBC
"Our growth through the first half of 2010 of $3.7 billion does not include the now al- Alternative Investments has grown at the fast-
has been very pleasing given the hostile fund most defunct Amaranth and Madoff-hit busi- est rate of 15.32% and added $3.56 billion, ac-
raising environment, particularly in Europe," ness of Ivy Asset Management, which is in the counting for the largest growth, in dollar
said Alberto Marolda, chief executive and process of being unwound. Derek Stewart and terms, of any other firm in the entire universe
chief investment officer ofTarchon. "We have Scott MacDonald, who joined BNY Mellon in of billion dollar funds.
made significant improvements to our due 2001 and ran MGAI, are understood to have The boost to HSBC's business has taken it to
diligence, portfolio and risk management left and formed their third fund of funds the second slot in terms of fund of hedge funds
processes over the past two years. The new in- thought to be called Carduus Capital. assets, although it has $33.21 billion in total
stitutional mandates we have been awarded Advanced Portfolio Management in New alternative assets including those it has in cus-
strongly support and validate the changes im- York and Chicago-based HFR Asset Manage- tody. HSBC is followed by Morgan Stanley,
plemented. Our business model continues to ment have grown by 40% and 41%, respective- which added $3.42 billion, an asset growth rate
of 24.2% that has propelled it from 13th posi-
tion to 7th in the rankings in just six months.
•• The new inslilufionalnwndales 1ve have been mvarded Overall, the global billion dollar fund of
hedge funds industry lost just $3.58 billion in
slrong(v support and validale the changes implemented-'-' assets in the first six months of 2010, reflect-
Alberto Moralda, Tarchon ing a drop of just 0.6%, roughly equivalent to
the performance for the funds of funds indus-
30 September 2010 © lnvestHedge

4. billion dollar club
- - -- - - - - - -- - - -- -- -·- ...
Asset growth: The Billion Dollar Club since December 2001
200
•
2000
AUM ($bn}
Number of firms
1500 150
z
c
"2
.0
3
CJ"
~ 'Q
:::;: !::;,
~
~
<(
1000 100
500 50
,IIIII& <e>"' <0~ ~ <Cl'o <Cl'o s- s- <0'¢ <0'¢ <00, <00, -;-..<0
>S- <0', <0', <e>"> <0..,
0
~~~~~~~~~~~~~~~~~~
Source: lnvestHedge
try for the year to date. The asset outflows can Despite the ripe environmenL.fbr consolidation, mergers
be attributed to 45 firms. Only six of these,
equivalent to 5. 7% of the industry, saw asset and acquisitions in the.fimds ojfunds in the year to date
outflows of 20% plus, which includes Olym- hm•e beenfeH' andj(zr between
pia Capital Management, Kenmar Group, Sig-
net Capital Management, and Lyster Watson.
Twenty four firms, equivalent to 22.6% of the ternative Investment Division are the funds of SkyBridge Capital, and GLG has merged with
billion dollar fund of funds universe saw out- funds that have fallen below the $1 billion Man Investments taking with it a small funds
flows of 10% or more. Among the firms that dollar market but are still very much active of funds business, which once boasted more
saw the largest outflows in percentage terms members of the fund of funds community. than $1 billion in assets.
are Pioneer Alternative Investments, which Pamplona Capital Management and Weston Because of the continuing asset outflow pic-
has seen its chief investment officer Paolo Bar- Capital Management are among the former $1 ture and choppy performance since May,
bieri leave, and Gems Advisors, each losing billion funds engaged in business develop- many believe that the fund of funds industry
29.2% and 24.7%, respectively, of their assets. ment to re-enter the rankings. is locked in a vicious downward circle. But on
The first six months of 2010 saw nine firms Given the tough asset raising environment closer inspection of the trend, all that is hap-
removed from the rankings. Promark Invest- there are many opportunists waiting in the pening is a re-alignment in favour of perform-
ment Advisors, the asset management arm of wings ready to buy distressed funds of funds ance over asset gathering - a trend that is
General Motors, is now classified under the in- that are struggling to raise assets or lift out gaining momentum in what is slowly becom-
stitutional investor rankings, as the New York- teams to boost asset management capabilities. ing a virtuous circle.
based pension fund is not managing external Despite the ripe environment for consolida- The funds of funds of the future, those that
money and is therefore not considered a third- tion, mergers and acquisitions in the funds of survive the increased competition from the
party fund of funds. funds in the year to date have been few and far traditional consultants and direct allocators,
Aletti Gestille Alternative, which suffered between. will be those that marry the top-down global
Madoff-related losses, GLG Partners (now part So far only two UK asset managers with no macro overlay with bottom-up manager se-
of Man Investments, although the GLG fund of fund of hedge fund capabilities have bought lection, particularly in younger, less well-
funds assets are not included in these rank- up businesses: Aberdeen Asset Management known and smaller managers (see Profile on
ings) and Guggenheim Partners have not par- bought RBS Asset Management and the old Larch Lane, page 40).
ticipated in the survey for a while and have Coutts fund of funds business; and more re- Done well, this becomes an alpha double-
therefore been removed to l<eep the integrity cently F&C Asset Management bought Thames whammy. As one manager put it: "It is not
of the findings. River Capital. In the US, Citigroup's fund of about timing investments, it is about knowing
Treesdale Partners, Lombard Odier Darier funds business has done what looks like a re- the cycles of all the different asset classes and
Hentsch, Duemme Hedge, and Rothschild Al- verse takeover of emerging manager specialist then knowing the best managers to put in the
©lnvestHedge September 2010 31

5. billion dollar club
Customisation: the future of hedge fund portfolio management
The more sophisticated investors CTAs or global macro, which are rather than investment products. Only 11.3% of the
no longer want plain vanilla going to be more active during a 106 funds in the Invest Hedge Billion Dollar Club
global multi-strategy products, given period of time. stated that they have no active plans in this space.
but there is strong evidence that In fact, according to the Deepak Gurnani, chief investment officer and
end investors still need hedge lnvestHedge Billion Dollar Club head of hedge funds at lnvestcorp notes that 48%
fund expertise. They just want it survey for the first half of 2010, of the firm's $5 billion allocated to hedge funds is
delivered in a different way and 49% of the funds of funds in the held in customised accounts, while 18% is in pure
charged for in a different way. survey offer or plan to offer funds of funds. In total between customised
The jury is still out as to either customised portfolios or accounts and funds of funds the firm has only $3.3
whether or not the traditional portfolio completion services billion in fund-of-fund assets, with the rest in five
consulting community can deliver and a number of groups such as single managers.lnvestcorp, which has been
anything more than access to the Permal report that it is a growing managing funds of funds since 1996, launched its
brands, but what many funds of part of their business. Mesirow first customised portfolio for a US institutional
funds have seen is increasing has some 43% of its assets in investor in 2006 and now has $2.3 billion in them.
demand for a service called customised accounts, while "One of the key global trends we have seen in
portfolio completion, as well as a Crestline Investors has $2.3 recent years (that has been accelerated in this
continued growth in customised billion in customised accounts. post-crisis period) has been the preference of
hedge fund portfolios. Customised portfolios are a more sophisticated large institutions to invest in hedge funds
Portfolio completion is when a funds of funds· version of funds of funds, which involves creating through customised accounts. These investors
takes a look at either the whole investment portfo- bespoke ·portfolios of hedge funds according to the typically have specific requirements in terms of
lio of just the hedge fund portfolio and allocates to needs of clients, which often includes asset risk level, liquidity, strategy exposures and
hedge fund managers to fill either strategy or allocation and giving a macro perspective. The benchmarks. Furthermore, these institutions
quantity gaps. Often this involves topping up pioneers of customised portfolios were ElM and demand a high level of transparency and
funds of funds allocation with additional single PAAMCO and the idea is to allow investors to use operational control. These objectives are best
manager investments in strategies, for example hedge funds more as portfolio management tools met through customised accounts," says Gurnani.
Managed accounts: safety or sense - they are here to stay
Determined to make sure that all the T's are Lighthouse Partners was an early stress, when some commingled
crossed and l's dotted, funds of funds too are adopter of managed accounts and hedge funds might restrict or even
embracing the managed account movement, with currently has 90 of these with its suspend redemptions."
40.6% of the Invest Hedge Billion Dollar FOHF Club underlying managers, which makes "Managed accounts will become
using or planning to used managed accounts for it a large part of its business. Only the preferred way for institutional
either all or part of their businesses. In addition to 19.8% actively replied stating they investors to allocate to hedge
the groups that are seen as managed account had no plans to adopt managed funds," says Allstate Investment's
managers, such as Lyxor Asset Management and accounts in their investment portfolio manager for hedge funds
Amundi Alternative Investments, groups such as management process. Christopher Vogt, who estimates
LGT Capital Partners and Kenmar Group, which lnvestcorp and Allstate that the majority of Allstate's
have big commodity allocations, have also had Investments recently took the hedge fund portfolio (roughly75%)
their own internal proprietary platforms. managed account debate one step is in separate account structures.
Permal has some $4.3 billion invested via further discussing the merits of Last year, the UK's Universities
managed accounts, including two new fund of separate accounts over commin- Superannuation Scheme hit the
funds this year. The first is the Permal MMF (Lux) gled funds and showing that they headlines for hiring the Man/
Advantage Multi Strategy Fund. The Luxembourg can add value over benchmarks Credit Suisse managed account
domiciled open ended investment vehicle has (see lnvestHedge July/August platform, while this summer
managed accounts with more than 30 managers. 2010).1nvestcorp's Gurnani says that during periods PGGM in The Netherlands is in a $2 billion hunt for a
The second is the more recent Active Trading Fund, of stress, like 2008, this difference can reach 10% platform for its direct hedge fund plans.
which is a UCITS Ill fund of managed accounts. per year. "Our use of managed accounts for hedge The trouble is that not all platforms were born
Meanwhile, ElM has hired Deutsche Bank to help it fund investments improves returns through asset equal, and many are winning business simply by
build LumX, which it has just launched for its hedge protection and better risk management made cutting fees. Running managed account platforms
fund investment business. ElM is responsible for the possible by the transparency and liquidity of is a costly business and cutting corners could lead to
creation of the platform and Deutsche Bank for managed accounts." problems further down the road, especially if clients
handling the servicing. Sciens Capital Management In addition to reducing volatility, risk manage- believe there is a fiduciary element to the platform.
recently bought the Partners Group platform to ment for managed accounts improves returns by Two institutions that decided to build their own
grow its managed account business, while Harcourt reducing severe drawdowns, says Gurnani, whose in-house managed account platforms after intense
Investment Consulting has teamed up with WR firm has set up some 80 managed accounts since research and due diligence of the existing providers
Group Holdings to offer managed account and due 1998. "Managed accounts enables investors to are the California Public Employees Superannuation
diligence services for hedge fund investors. rebalance their portfolios even during times of Scheme and Ontario Teachers' Pension Plan.
32 September 2010 © lnvestHedge

6. billion dollar club
UCITS: the new face for long-only and absolute return investing ' ' It is not about timing
im•cslments. it is about
UCITS Ill is the latest fashion to split the industry funds of funds, equivalent to 57% of those that
into lovers and haters. Joy Dunbar, editor of replied to the question. But, 65% of those that
ltnowing the cycles ofall the
Absolute UCITS, the new Hedge Fund Intelligence actively replied they had no plans were US-based dijfcrent asset classes and
UCITS service, believes that, unlike previous fads, fund of hedge funds. Many US firms have said
hedge fund UCITS are here to stay because that they either see no advantage to the structure then knmving the best
investors like the regulatory framework and its or believe it is a wrapper only of relevance to managers to put in the
transparent structure. "They will only increase in European investors.
popularity because institutional and retail Understanding the impact of upcoming portfolio ) )
investors want access to alpha in a regulated European regulations on UCITS Ill and ability to
environment. They also want liquidity, transpar- market funds of funds in European is going to be
ency, legal oversight and hedge fund type hotly discussed at the Invest Hedge Forum, which portfolio, as well as how to play their idiosyn-
strategies wrapped in UCITS offer investors peace will be held at The British Museum on 21 and 22 crasies to the different cycles."
of mind. Also traditional and hedge fund September. Whether or not managed accounts become the
managers have converged as a result of the Mattia Gemma at Eurizon in Milan says: "The norm and UClTS funds take off, in-depth under-
changing regulation and the growth of the growth of UCITS funds has been exponential, standing of complex strategies, second nature
offshore sector," Dunbar says. even if we are at the dawn of this new phenom- manager selection and an eye for the next op-
lnvestHedge took a poll of the lnvestHedge enon. Easiness, transparency, asset protection, portunity will be the skills that well-established,
Billion Dollar Club members to see what their adequate risk management processes and successful funds of funds will be able to offer.
UCITS views and UCITS offering plans were (see standardi~ation are the key success points for Now that access to hedge funds is being com-
summary table below). Of those that replied to Newcits and these characteristics are very moditised as hedge funds themselves become
the question, 43% have either launched or plan appealing for investors." He explains that UCITS institutional with in-house marketing teams,
to launch UCITS Ill funds of funds, which, if give access to modified hedge fund strategies to and managed accounts rise in popularity,
taken as a percentage of the entire Billion Dollar investors that are not only institutional clients or funds of funds will no longer be paid to access
Club universe of 106, is 26.4% (see UCITS high-net-worth individuals, but potentially to the brand names. They will, however, be paid
Special Section, pages 34-36 ). retail clients. Eurizon is the advisor for the Eurizon for in-depth due diligence and to invest in the
Nearly 35% of the entire survey actively replied Total Return Alpha Strategy, a fund of UCITS hidden talent of the emerging managers,
that they did not have any plans for UCITS Ill funds that has been launched in October 2009. emerging markets and emerging strategies.
Indeed, the market meltdowns of the past
few years, which have caused a number of
UCITS FOHF launches hedge funds to close, and the cessation of pro-
prietary trading at banks has led to a renewed
Fund of hedJe funds UCITS plans
pool of investment talent looking for backers
- (see pwfile, page 40) and the renaissance of the
Permat Investment Management Launcherl Perna! MMF (lux) AdvanmBe Multi5tra~ Fund (March 2010)
seeding and incubation business model.
Union Bancalre Privee Plans for lJCITS FOHF Ql2QTI
Experience and track record will count and
Lyxor Asset ManaRement Has anumbe£ of UCITS vehicles new untested funds of funds without a seed
Amundi Alternative Investments Laund12d Amundl Muttlmanagersl olll'JShort ;gull}: (Feb 2010) backer or captive assets (behind groups like
Gottex Fund Management Launched UOTS Ill FOHF {Jut~ 2010) (see reli!ted article, ClaRE! 36) Pamplona and Prisma Capital Partners) will
ElM New lilunches glanned struggle to gain critical mass. Even award-win-
Notz, Stucki &Cie LaunchedUClTSFOHF [Feb201Q) ning performance without assets will result in
Aberdeen Asset Management Launched ElOOm UCIT5 the unsustainability of smaller funds of funds,
Banca del Ceresio Groug Has had UCITS since 1999 like Eddington Capital Management, closing as
Axa Investment Mana~rs Setto launch new fund (see related article. g~ 36) assets fell from close to $300 million to less
Harcourt Investment Consultins! lauochedVonda UCJTS Fund (June 2010) than half that amount (see page 30).
LGT Caoital Partners LGTCrown ~d FuturesUCITSFund (AQ!n2010)
Hedge fund investing has not stopped, it has
just changed. The first-time investors of 2000
BlueCrest CaPital ManilJ!fment Have two UCITSFOHFs
now have 10 years of experience and some are
NewFinance Capital Has aUCJTS glattorm and gtus Ol)!!s Tradl!l!i
starting to go directly. Indeed, according to Dam-
Gems Mvlsors Plans for UCITS Inthe~~~ ien Loveday, global head of hedge fund manager
lnternatlonal Asset Manill!!!ment Plans for UCITS in the gl~lfne research at Towers Watson, of the $20 billion in
Kalros Partners Launched Kairos Trend, aCTA &global macro UClTS (Ma~2010) client assets invested in hedge funds, some 65%
PloneeJ Allelnative Investments Plans for UCITS In the gl~eline is invested directly (see profile, page 18).
~Dffinanoe Has a number of lJCITS vehictes Funds of funds need to embrace the change
01ymgla G!Jlltal Management
..
Rnalismg details lor UCITS FOHFs (see related amde, page 35) and work with it. The future of funds of
Kenrnar Group Set to launch commodites fund {see related article page 35)
I
funds, once described as finely tuned cricket
Kev Asset Management Setto li!unch newfundwlt:ll SEB (see related artie~ Qage 35) bats, will be those that take their skills and
Tarchon caoJtal Mani!Rement Plans for UClTS lnthe l!iQellne track records to their clients and work with
S'tgn€1 CapRa! Mani!Rement Se! to launch new fund (si!E related artlcle.llaR!!35)
them. The need for hedge fund selection and
allocation expertise will not go away even if
Thames Rlw caoital Launch€d UCITS FOHF(Jan 2010)
the customised, managed account UCITS
Eurizon Capital Laundled EIJ!Izon Total-Return Aloha Stra.te!1'l (Oct 2009)
wrapping means that the sport of hedge fund
Source: Invest Hedge
investing has changed.
©lnvestHedge September 2010 33