Ranking the same companies by their hedge fund and fund-of-funds assets produced a different list, headed by UBS Global Asset Management, Chicago, with $29.7 billion managed in hedged strategies, followed by Goldman Sachs Asset Management, New York, with $24.8 billion; followed by JPMorgan Asset, with $16.1 billion; Citigroup Asset Management, New York, with $11.7 billion; and BGI, with $9.5 billion.
Many of the asset managers in P&I's overall ranking are market-share leaders in traditional asset classes, notably BGI and State Street Global Advisors for indexed management. But it's a different story for leadership in hedge funds and funds-of-funds categories. Worldwide hedge fund assets were estimated around $1 trillion as of year-end 2004, according to industry researcher Hedge Fund Research Inc., Chicago. But the market share of the largest managers in P&I's ranking was just 14.5%.
Money manager consultant Kevin Quirk said he was surprised that firms on P&I's list managed even that much of the overall hedge fund market because so many traditional long-only and diversified financial services firms still are deciding what to do about the hedge fund phenomenon. Mr. Quirk is a principal of Casey Quirk & Associates LLC, Darien, Conn.
"The big managers seem to be following two very distinct paths — each holding two very different philosophies — when it comes to hedge funds and how they are evaluating their opportunities," Mr. Quirk said. "Many mutual fund managers, for example, think hedge funds are not an appropriate avenue for their companies to pursue. They have a clear, strong view on this," Mr. Quirk said. He noted by way of example the four mutual fund firms that do not manage hedge fund money from among P&I's top 25 — Fidelity Investments, Boston; Vanguard Group Inc., Malvern, Pa.; Capital Research & Management Co., Los Angeles; and TIAA-CREF, New York.
More diversified managers "know that if you ignore hedge funds, you do so at your own peril. How hedge fund managers think about managing money — the search for alpha — is the future of money management," Mr. Quirk continued. "It's not the hedge fund per se — the legal vehicle of the private partnership — that is so important to these money management companies. It's more about how professional investors, their clients, are thinking about managing money going forward that they are thinking about. It's that search by investors for active management and absolute return that asset managers are now looking for ways to satisfy. Reluctant players may be missing opportunities by not acting soon."
Fellow consultant Paul Schaeffer agreed money managers are trying to address investors' growing interest in "outcomes-based investing, the move away from the benchmark. Money managers are becoming more assured that alternatives of all kinds, not just hedge funds, will become the new face of active money management over time. Everyone is looking at ways to migrate their investment capabilities to meet this new environment." Mr. Schaeffer is the San Francisco-based managing director of strategy and innovation at SEI Investments.
Laurent Dubois, director of the alternative investment group at BGI, said hedge funds were a natural evolution for his quantitatively driven firm. BGI has been managing market-neutral strategies, linked to equity and bond benchmarks, for its largely institutional client base since 1996, primarily as a means to provide enhanced market returns for portable alpha programs.
"Hedge funds were the next logical step for us," said Mr. Dubois. "It's the same concept for us as portable alpha, but the benchmark we use is cash."
While many of BGI's clients remain invested in portable alpha strategies, they have greatly increased their use of hedge funds in the past few years. In fact, BGI's hedge funds attracted $900 million in the first quarter of 2005 — bringing the total to $10.4 billion — mainly from institutional clients, Mr. Dubois said.
BGI manages about 20 hedge fund strategies and, on May 1, started its first multistrategy hedge fund. Mr. Dubois said the allocation for this multistrategy fund is strategic and will allow BGI to use some of its more innovative investment ideas that might be too capacity-constrained to be practical as separate hedge funds. With regard to capacity, Mr. Dubois said for many of the firm's hedge funds, capacity is tightly controlled and the firm is working on some new strategies that will be less constrained. He declined to provide specifics about the new strategies. Overall, Mr. Dubois said with its current offering BGI is likely to reach its limit for hedge funds — about $15 billion — in two to three years.
As SEI's Mr. Schaeffer noted, some traditional firms will not end up managing hedge funds at all regardless of client demand or, like Western Asset Management Co., will try it and not like it.
The Pasadena, Calif., fixed-income manager was persuaded some years ago by institutional clients of its long-only core-plus strategy to offer a vehicle with more alpha generation potential — in other words, a hedge fund, said Ed Taber, executive vice president and head of the institutional business of Western's parent company, Legg Mason Inc., Baltimore. Western's San Gabriel Fund had good performance, Mr. Taber said, and attracted about $850 million in assets as of Dec. 31, 2003, according to data provided to P&I for last year's manager directory.
But last year, Mr. Taber said Western Asset Management and Legg Mason looked long and hard at the capital deployment necessary to keep the hedge fund management process in compliance with changing regulations across the globe as well as internal investment processes.
"It would have required us to set up a company within a company" at Western Asset, Mr. Taber said. "The significant capital outlay was not worth it. It would have moved the focus of Western off its core competency, which is core-plus fixed income." Money was returned to the investors in the San Gabriel Fund and the fund was closed in 2004, Mr. Taber said.
P&I also ranked asset managers by the amount they managed in hedge funds and funds of funds just for U.S. institutional tax-exempt clients as of Dec. 31.
UBS also topped the U.S. institutional hedge fund chart with $18.2 billion managed in hedge funds and funds of funds (3.5% of total assets).