Anita M. Nagler had every intention of pursuing a law career that would serve the social good. With a bachelor's degree in social work, Ms. Nagler entered Chicago-Kent College of Law to gain skills to aid the needy, but found herself drawn to financial classes. After graduation, she applied to the Legal Aid Society in Chicago and the Securities and Exchange Commission, among others; she went to work for the SEC. She spent 13 years at the agency, the last five as associate regional administrator overseeing the enforcement program in the Chicago office. Ms. Nagler left the SEC in 1993. Executives at Harris Associates LP (the former parent company to Harris Alternatives LLC) read about Ms. Nagler's departure in a local business weekly. The firm's partners actively pursued Ms. Nagler, eventually persuading her to join them. Under her watch, Harris Alternatives LLC has grown to $5.6 billion under management in hedge funds of funds from $350 million. Ms. Nagler hasn't lost her interest in social causes and education. She is a trustee of the Illinois Institute of Technology and Sacred Heart Schools, and is particularly interested in innovative mathematics education. From the perspective of an ex-regulator, Ms. Nagler spoke about the hedge fund industry with Christine Williamson, senior reporter.
Q What challenges face a rapidly growing hedge funds of funds manager?
A We, like everyone, are facing capacity challenges. (What concerns me) are the capacity limitations for accepting pension fund assets by the underlying (hedge fund) managers. (Under qualified professional asset manager regulations, the manager must limit investments from employee benefit plans to less than 25% of a fund's assets).
For us, it is all about the pace of asset flow but ultimately, there will be a number when our funds will close to new investors. We launched a new fund a couple of months ago that's only hedged equity managers, for example, and we have a very large investment coming into that and we've asked the client to stagger it rather than give all of it to us on Oct. 1.
Q You mentioned "the number." What is it?
A I really hate doing that. It's really about the investment opportunities. It really depends.
One of the things we have tried to do is maintain our manager count. We do not want to include 150 hedge funds in our various portfolios. We want to keep the number of managers we use across all our products in line with what it's been historically — in the high 70s. The Aurora Fund, for example, has about 50 managers. There's a number of reasons for that. One is coverage: If we have a manager in our portfolio, we really want to know what's going on there. Also, we want to use only the top 1% (of hedge fund managers). We don't want to have to step down in quality and that unwillingness to step down to the next group has driven a lot of business strategies for us.
Q What about investors' desire for more hedge fund transparency and liquidity?
A We haven't bought into the concepts of full position level transparency and frequent liquidity because we really feel … doing so would require us to invest with managers we don't necessarily want to be invested with, because the top 1% typically don't provide it.
Q How do you monitor existing hedge fund managers and find new ones?
A We have a very good relationship with the hedge funds we're invested with. We spend a lot of time with them and do our job, while being respectful of their issues. It used to be that you did due diligence on them. Now they do due diligence on you because they aren't taking all the capital they're being offered.
If you're running a hedge fund, like any money manager, you don't want hot money. You don't want money that's going to trigger in a market crisis because that's the worst time to have to have forced selling. We have a reputation in this business, which we've been in for 16 years, of being a very good investor, of being a long-term partner, of not selling in market crises.
In terms of staying on top of new managers, we get a lot of those calls. They call us. We also have a completely open door policy — we meet them all.
Q What do you think about the SEC's proposed changes to hedge fund regulations?
A The cynical side of all of this is "Who cares?" So all these people register? Big deal.
The SEC has always had the duty to detect fraud. These regs don't change that at all. Being a registered IA is not a hard thing. You fill out a form ADV and you have some books and records obligations, but it's not like being a broker/dealer. ... The bigger issue for the SEC is that once they do that, then if they have big problems, they will be big problems in something they're supposed to be the watch dog for. That's their problem.
And from our standpoint, it might have some positive impacts in the sense that if all these hedge funds become registered advisers, they may continue down this road and become QPAMs and the whole framework of being able to place pension assets (with hedge funds) may change.
Q Will the SEC be able to recruit enough staff to implement and enforce new regulations?
A They've just had a big expansion of resources. But I don't know where that gets you. They were only hiring people to deal with the mutual fund crisis — I don't think there is a mutual fund crisis, by the way — to do more examination work. These people are extremely good, extremely professional. But you might have someone who is two years out of accounting school and they're asking you what an FX transaction is. That's a very good question, that's not a criticism of the examiner. But that's in a long-only portfolio, that's actually kind of plain-vanilla stuff.
If you send an examination team into a relative value arbitrage (hedge fund) shop and they're doing a lot of much more complex things and they're doing it very rapidly … unless they can hire quants out of (the University of Chicago's) MBA program, I don't know how they can possibly sense or know what was really out of line.
Q Are you feeling downward fee pressure?
A No, we aren't feeling it. We're turning money away. In fact, I think it's going the other way. I mean, people used to ask us for fee discounts. People don't even ask us any more. I've seen that in a capacity-constrained asset class, there is very little fee pressure.
Q Do you agree with critics who call the current popularity of hedge funds a bubble?
A If you look at other bubbles — real estate, the domestic equity markets before they moved into this highly volatile roller-coaster they've been in for the last four years, or the tulip bubble, the original bubble — those were all directional markets. The premise of the bubble argument is that real estate, for example, can't continue to go up, unless salaries are there to support it, etc.
The difference about this asset class (hedge funds) is that people are making money up, down, sideways. They make a lot of money on volatility. One of the bubble arguments is that there are so many people coming into hedge funds, that it must be creating a bubble.
But in fact, all those players are creating volatility. They expand the universe of opportunities by expanding the players, by potentially expanding the volatility, by adding liquidity and creating more stocks to short. It's a different thing. When you look at it against those other bubbles, they all were directional.
The flip side of that is that with all of the transparency and liquidity demands, the structured notes, people generating all these products with principal guarantees, the question I have is: Are there too many fingers on triggers so that in a drawdown, it would generate a domino? It wouldn't create a permanent erosion of capital, but it would create disruption. I don't know the answer to that question.