Pension funds skip hedge fund parties

Institutional investors — especially pension fund executives — have been slow to RSVP for the parties and meetings prime brokers are throwing just to introduce them to hedge fund managers.

In fact, Morgan Stanley's conference at the ultra-luxe Breakers resort in Florida in late January was dominated by institutional attendees — insurers, endowments, foundations, investment consultants and fund of funds companies that perform proxy duty for many pension hedge fund investors, said David Barrett, managing director and head of capital introduction at Morgan Stanley, New York. But few pension sponsors attended, and that was not for lack of an invitation.

On one hand, there are just too many players in the capital introduction area.

The practice of putting qualified investors in the same room as hedge fund managers so one side can attract the assets of the other is fairly new. Morgan Stanley — widely considered to share the top spot in hedge fund capital introduction services with Goldman Sachs & Co., New York — has offered the service for only seven years, Mr. Barrett said.

In the ensuing years, prime brokerage units of many financial services companies jumped into the business. The attraction: The broker gets revenue from hedge fund clients directing trades or using the firm's derivative products. As hedge fund clients' assets grow, so do their transaction volumes and the prime brokers' revenues.

On the other hand, with so many capital introduction players and a spike in the number of new hedge funds, institutional investors and their gatekeepers said the overall quality and usefulness of capital introduction events is extremely uneven.

"I've seen managers displayed at capital introduction events whom I wouldn't go to the corner to buy a can of Coke from," said Jon Lukomnik, managing partner of specialist hedge fund consultant Sinclair Capital LLC, New York. Mr. Lukomnik was deputy controller for the City of New York from 1994 to 1998, where he was responsible for the investment of $80 billion of defined benefit plan assets.

Alan Dorsey, head of hedge fund research at consultant CRA RogersCasey LLC, Darien, Conn., said capital introduction events have led to his meeting people from hedge fund firms his clients might be interested in, or to learning more about new products being offered by such firms.

In most cases, though, "capital introduction events tend to be peopled by the kind of hedge funds with short track records that simply need a lot more cash. You tend to see the kind of emerging managers who don't have much use for us (or our clients)

And there are just too many event invitations, some institutional investors say.

"The capital introduction business has simply inundated the institutional community," said Albert Hsu, U.S. investment officer of The Atlantic Philanthropies, New York. About 50% of the foundation's $3.8 billion in assets are invested in hedge funds, higher than most foundations' exposure.

"It's very difficult to navigate through the enormous number of events you are invited to and through the hundreds of new hedge fund managers cropping up each year without any differentiation in name or strategy."

Mr. Hsu said he typically receives two to four capital introduction invitations per week during the first six months of the year, the time when prime brokers think investors are most likely to be making hedge fund allocation decisions. Plus, he fields two or three phone calls and many more e-mails each week year round from capital introduction executives seeking to interest him in their clients.

Mr. Hsu said he goes to fewer events than he once did. Instead, he uses the capital introduction departments for intelligence and gossip about hedge fund managers. He also provides lists of the strategy areas where he currently is looking for managers. That way, Mr. Hsu said, he is introduced to a more focused, higher quality universe of managers.

Some investors have developed their own A-lists of capital introduction groups.

"These group meetings, when they're good, give you a good view from 30,000 feet whether there's a hedge fund manager that's worth starting the due diligence process on," said James P. "Bucky" Canales, managing director at Parker Global Strategies LLC, Stamford, Conn., which manages $400 million in global hedge fund of funds strategies.

Parker Global Strategies has become much more selective about sending research teams to events, accepting perhaps 30% of the invitations received, Mr. Canales said.

"The good capital introduction teams only bring good hedge fund managers to their programs. Others have a combination of good managers and some that are less desirable from our perspective. We tend to focus our time on good programs. This is a small world. Word gets around quickly," said Mr. Canales, who declined to name names. Peter Slattery, a portfolio manager within the $1 billion hedge fund of funds unit of American Express Financial Advisors, Minneapolis, said he also has a "preferred list" (which he declined to share) of the six or seven capital introduction groups that produce events he finds useful.

Those include parties where one-on-one meetings with hedge fund managers are possible and "the little details, like putting all the hedge fund managers at an event on a disk to make getting back in touch with those you're interested in that much easier," said Mr. Slattery. He also finds it useful to work with capital introduction departments that will put together a group of managers who match the list of strategies he is interested in at a given time.

More investment consultants are attending events and conferences and using capital introduction services.

"It took a few years for the capital introduction people and the consultants to figure each other out. I think they were skeptical of our motives at first, thinking we were going to be disintermediaries between them and their clients," said Robert Leonard, director and global head of capital introduction at Credit Suisse First Boston Corp., New York.

"Now, we find that consultants are coming to our events and will often give us a list of their parameters for a particular mandate, so we can develop a list of suitable hedge fund managers," he added.

Roger L. Fenningdorf, partner at Rocaton Investment Advisors LLC, Norwalk, Conn., said he declines most of the invitations. He will, however, attend those capital introduction events that offer a manager or strategy in which his clients have expressed interest.

And some capital introduction firms are making changes in their practices, trying harder to get institutional investors in the audience because hedge fund clients are demanding it.

Said Morgan Stanley's Mr. Barrett: "Our mandate from our hedge fund clients was to invite a more institutional audience this year who have larger mandates to place. They want to attract more institutional investors. We had to have some difficult conversations with some asset allocators this year that we had to turn away because they didn't fit this profile."

Still, pension fund investors remain elusive party dates. In fact, Morgan Stanley's first endowment-only capital introduction conference in 2003 was much better attended than its counterpart pension fund-only conference that year, Mr. Barrett said.

(correction appended)