Institutions were a life raft for fund-of-funds managers

Overall assets of top firms plummet 37% over 18 months

Aggregate assets managed by the 25 largest hedge fund-of-funds managers dropped more than one-third in the rocky 18 months ended Dec. 31, with institutionally oriented firms doing significantly better than managers with a private client bias.

Assets of the top 25 hedge fund-of-funds companies declined 37% to $319 billion from June 30, 2008, the last time Pensions & Investments surveyed hedge fund-of-funds managers.

The average asset decline of the 25-manager universe was 30%.

But hedge fund-of-funds managers running at least three-quarters of assets for institutions had an average decline of 23%. Those running less than three-quarters of their assets for institutions experienced an average 41% drop.

And while aggregate institutional assets managed by the largest hedge fund-of-funds managers collectively dropped 45% to $179 billion during the 18-month period, sources noted that most of the overall decline resulted from institutional redemptions from a relatively small handful of firms like Union Bancaire Privee and Man Group that had exposure to the Bernard L. Madoff Ponzi scheme. Firms that experienced liquidity mismatches and closed their funds to redemptions, like Silver Creek Capital Management LLC, also endured much higher institutional redemptions than firms that did not lock-up client assets. (A ranking of all managers surveyed is here.)

Only three managers among the top 25 showed growth in total hedge fund-of-funds assets in the 18 months ended Dec. 31.

J.P. Morgan Asset Management (JPM)'s hedge fund-of-funds assets increased 11% to $11.9 billion.

Rock Creek Group rose 10% to $5.5 billion.

K2 Advisors saw assets grow 8% to $8 billion.

Industry consultants attributed the growth by Rock Creek and K2 Advisors to their strong institutional focus. Rock Creek manages only institutional assets, and 93% of K2's assets came from institutional investors as of Dec. 31. J.P. Morgan declined to break out institutional assets.

Of the remaining 22 managers, the three biggest losers were:

• Union Bancaire Privee, whose assets dropped 67% to $18.8 billion;

• Man Group, with a drop of 62% to $17.1 billion; and

Bank of New York Mellon (BK), which saw a 55% decline, to $8.1 billion.

Sources said most of the losses experienced by UBP stemmed from investments in feeder funds exposed to Mr. Madoff. Losses experienced by Man Group's hedge funds of funds resulted from deleveraging; currency movements; redemptions from cash-strapped clients seeking liquidity; and a small (1.5%) Madoff exposure in funds managed by its RMF unit, said Mary Beth Grover, a spokeswoman. BNY Mellon's Ivy Asset Management, now closed, had long-standing organizational problems and its parent company last week closed the operation and is moving client assets to another hedge fund-of-funds subsidiary (see accompanying story).

“The data clearly show that institutional investors are increasingly focused on using the largest of the institutionally oriented hedge funds of funds, those firms with stable asset bases, strong businesses and a fair degree of independence,” said Brooke Paster, head of funds-of-funds research at hedge fund investment consultant Aksia LLC, New York.

“It's clear that the large firms stayed large during the troubled 18-month period and likely will stay large, but it's interesting to note that they have not, for the most part, shown any growth,” she added.

Blackstone on top

The clear winner in P&I's ranking by both total assets and institutional assets was Blackstone Alternative Asset Management, New York. The firm had $27.1 billion in total assets, of which $25.2 billion was managed for institutions as of Dec. 31.

Blackstone's total assets declined 12% from the $30.8 billion managed as of June 30. But institutional assets were nearly double the $14 billion of nearest rival BlackRock (BLK) Inc. (BLK), which managed $13.9 billion as of Dec. 31.

J. Tomilson Hill, president and CEO of Blackstone Alternative Asset Management, said the hedge funds-of-funds industry was caught off-balance by the credit crunch in the early part of the 18-month period, which left some managers with an asset-liability mismatch.

Those firms were left with insufficient cash to meet redemption requests from clients desperate for liquidity, Mr. Hill said. Many funds froze redemptions, but Blackstone was not among them.

“Blackstone had redemptions during this period precisely because we didn't gate our funds. Institutional clients needed cash to make benefit payments or to meet private equity capital calls and as they took their money from us, they promised to come back with the cash when they had it again. We've seen much of that money return to us and, in fact, much of our growth continues to be from increased allocations from existing clients,” Mr. Hill said.

Mr. Hill also credited Blackstone's relatively small asset drop to the firm's “very good due diligence on our client base. We've been careful to partner with institutional investors who share our long-term investment horizon for hedge funds of funds.”

Blackstone rose to first place in total assets from fifth in the prior ranking, displacing UBP, which dropped to sixth. UBS Alternative & Quantitative Investment remained in second with $23.4 billion, a 21% decline from the prior ranking.

Grosvenor Capital Management LP was the third largest manager, with $22.6 billion, up from sixth, according to data from its Securities and Exchange Commission Form ADV filings for both years.

Based on SEC data, Grosvenor's assets declined 11%. Grosvenor did not respond to requests for information about its assets for P&I's 2008 and 2009 rankings.

Permal Group and Goldman Sachs Hedge Fund Strategies occupied fourth and fifth, respectively.

Permal's ranking was unchanged from the previous survey, although its $19.4 billion in assets as of Dec. 31 represented a 45% decline from the previous survey. Goldman Sachs managed $19.1 billion as of Dec. 31, a 24% decline from June 30, 2008.

Both firms experienced slight increases in institutional assets, with Permal going to 33% from 26% and Goldman Sachs to 46% from 38%.

Winners and losers

“You clearly see the winners and losers in asset retention in this data,” said James McKee, director of hedge fund research at consultant Callan Associates Inc., San Francisco. “Firms which had a retail or short-term oriented client base or suffered Madoff exposure or organizational issues experienced the highest losses.”

Mr. McKee said during the 18-month period, hedge fund-of-funds firms were subject to two waves of redemption requests from retail and institutional investors.

“If investors couldn't get their assets redeemed from some hedge funds of funds by the end of 2008, they got it out as soon as they possibly could in 2009. People will look between the data points here to gauge who will continue to lose more assets in 2010 and those who will make gains,” Mr. McKee said.