Lucent’s search is shrinking

MURRAY HILL, N.J. — After inviting more than a dozen hedge fund-of-funds managers to bid on a $1 billion portable alpha portfolio in early spring, executives at Lucent Asset Management Corp. abruptly changed their mind.

Sources with knowledge about the situation, who insisted on anonymity, said the "invitation-only" search was put on hold midyear. LAMCO slashed the asset amount and asked for dramatically different parameters when it reactivated the search this autumn.

The sources said Lucent invited 10 to 12 of the original invitees to update their earlier bids, this time bidding on a $100 million mandate, with new requirements: a lot more transparency regarding underlying hedge fund managers; far more education; more meetings between hedge fund-of-funds staffers and LAMCO investment staff; and the provision that LAMCO investment staff would be able to tag along on due diligence meetings.

LAMCO manages $34 billion in retirement plan assets for its parent company, Lucent Technologies Inc. Both are in Murray Hill, N.J.

One source said it seemed clear from the revised RFP that LAMCO seeks "knowledge transfer," when hedge fund-of-funds managers train an institution's investment staff in constructing and managing a portfolio of direct hedge fund investments.

Another source said firms invited to update their original responses understood that LAMCO's ultimate aim is to set up an internal hedge fund capability.

Sources said LAMCO invited three to five semifinalists to make presentations to its investment committee. They said the invited firms were those most willing to support an explicit knowledge-transfer process. LAMCO is believed to be performing due diligence now on two finalists, according to sources.

But two sources said Lucent typically requires a heavy dose of education from managers responding to RFPs regardless of asset class, and the hedge fund-of-funds RFP requirements do not necessarily indicate that LAMCO plans to create an internal hedge fund investment unit.

None of the sources interviewed for this story identified any of the firms involved in any stage of the search.

Joan Campion, a LAMCO spokeswoman, declined to confirm that LAMCO was conducting the search or to provide any information on hedge fund investing by the firm.

Jean Grisi, whom sources said co-heads the hedge fund effort at LAMCO, did not return three calls seeking comment. Brad Wakeman, also hedge fund co-head, according to sources, declined to comment.

LAMCO is temporarily without a chief investment officer since Collette D. Chilton left in September to become the first CIO of the $1.5 billion endowment of Williams College, Williamstown, Mass. Ms. Chilton couldn't be reached for comment.

LAMCO would not be the first large pension asset management unit to attempt to create an internal hedge fund capability. Staff at pension plans of similar size — the C$41 billion (US$46.6 billion) Ontario Municipal Employees' Retirement System, Toronto, and the $48.6 billion Virginia Retirement System, Richmond — have already taken this approach.

OMERS staff invested in hedge fund-of-funds managers with the explicit understanding that staff would learn the ropes of manager selection, monitoring, risk management, performance measurement, due diligence and portfolio construction from the managers (P&I, Feb. 23, 2004). The Virginia plan hired two hedge fund-of-funds managers and, rather than letting them manage any money, paid them consultant-level fees to help with manager selection for direct hedge fund investments.

Several sources maintained tha few large institutional hedge fund-of-funds managers would be willing to exchange so much information and so much time for just $100 million, considered by many funds of funds to be a small allocation.

One source said: "$100 million is a day's interest for a $34 billion fund. It would be cheap education even at $500 million. I don't think they will find many good (hedge) fund-of-funds firms willing to pick up a deal like this."

Kevin P. Quirk agrees. Mr. Quirk was the lead author of a white paper issued Oct. 10 on institutional hedge fund investment based on a survey of 50 institutional investors and a total of 51 hedge funds, fund of funds and consultants, prepared for Bank of New York, New York, by Casey, Quirk & Associates LLC, Darien, Conn.

Mr. Quirk, partner and managing director of CQA, said CQA's analysis of survey data for the white paper showed that by 2010, 80% of institutional hedge fund investment still will be directed by fund-of-funds managers.

"What will this mean to hedge fund of funds?" Mr. Quirk asked. "Some will say ‘Great! I get my foot in the door and establish a good relationship with this client even if they never increase their investment beyond $100 million.' But the managers were adamant that they will get paid for that advice" by receiving enough money to run and through some kind of consultant's fee.

Mr. Quirk said even today, some very large hedge fund-of-funds managers are willing to act as an adviser on a client's entire hedge fund portfolio, including advising on direct hedge fund investments, provided they retain management of mandates of $500 million or more with an average fee of 65 to 70 basis points.

Mr. Quirk said most institutional investors choose not to manage hedge fund portfolios internally. That's because they recognize the difficulty of dealing with the sheer number of hedge funds, the number of strategies, the difficulty of finding open hedge funds and the expense of seeking and investing in them, he said.