SEATTLE Quellos Group LLC has a skeleton rattling around rather loudly in its closet that isnt scary enough to make existing clients to drop the firm, but might be deterring new business.
Quellos one of the worlds largest hedge fund-of-funds managers, with $20 billion in assets under management hasnt suffered mass terminations, but sources said it hasnt been attracting much new institutional business.
The publicity that Quellos is attracting is coming at a time when most of the money going into hedge fund of funds is coming from public plans. On a checklist of the things that knock out a potential manager, this kind of thing is something they cant get beyond, said Stephen Nesbitt, chief executive officer of alternatives consultant Cliffwater LLC, Marina Del Rey, Calif.
Michael Gross, a spokesman for Seattle-based Quellos, confirmed the firm has been advised by the Internal Revenue Service, the U.S. Senate and two U.S. Attorneys offices of investigations into tax-shelters for wealthy individuals in which Quellos-related entities participated. Since 2002, a number of related civil suits have been filed, most of which have been resolved. QA Advisors LLC and Quellos Custom Strategies LLC, the businesses that offered the services under investigation, ceased operations more than five years ago, said Mr. Gross.
Existing clients are sticking with Quellos because of its comparatively long track record, excellent performance and tight risk controls, said consultants and clients.
Composite performance of the firms flagship Quellos Appreciation Fund for annualized periods ended March 31, obtained by Pensions & Investments from an investor, was 12.5% for one year, 8.2% annualized for five years and 12% annualized since its Aug. 1, 1995, inception, with Sharpe ratios of 3.2, 2.3 and 2.2, respectively. In comparison, the Hedge Fund Research Conservative Fund of Funds index returns were 8.3% for the year ended March 31, 6.9% for five years and 8.2% since Aug. 1, 1995, with Sharpe ratios of 1.2, 1.8 and 1.3, respectively.
Clients sticking around
Those numbers are likely the reason the firms stellar roster of institutional clients has stayed so impressive, sources said. Clients include the $74 billion North Carolina Retirement Systems; the $34 billion United Nations Joint Staff Pension Fund; the $8 billion Louisiana State Employees Retirement System; the $2 billion Seattle City Employees Retirement System; and the $425 million endowment of Creighton University.
We may be dazzled by performance which has been very good but we are very pleased with Quellos and we are staying the course with them, said LeRoy A. Galles, associate vice president – finance and treasurer for Creightons endowment. Mr. Galles said both Quellos and the endowments consultant, Fund Evaluation Group LLC, Cincinnati, have been proactive about communicating with fund officials about the status of the investigations involving Quellos.
Creighton University originally invested in the Quellos flagship hedge fund of funds, but officials felt confident enough in the firm to also invest money in the firms portable alpha strategy, Mr. Galles said. He noted the strategy has been a winner, returning 12% since September. About 15%, or $60 million, of Creightons endowment is invested with Quellos, mostly in portable alpha he said.
A source close to Quellos who asked for anonymity said he is not overly concerned about the outcome of the investigations and lawsuits. This is not a fund with a couple of hundred million dollars thats being sued like crazy and has no defense. Quellos most certainly can afford the best legal counsel and has a robust infrastructure. This is not a distraction to the everyday operations of the firm or the investment management business. Its a blemish on the firm in the public light, for funds that are more sensitive to public criticism, but will not hurt them much, said the source.
Problem for public funds
But negative publicity is a big problem for some potential investors, especially for public fund officials who often find themselves and the affairs of their funds scrutinized in the local press.
Hanging onto existing clients is one thing, but getting hired is a different story. In search situations, funds are looking for reasons to eliminate managers from a list of potential firms, said Michael A. Rosen, principal, Angeles Investment Advisors LP, Santa Monica, Calif.
Bryan White, chief investment officer at Quellos, said historically, the firms growth has been fueled by additional allocations from existing clients. In any given quarter, a majority of new cash flow is from existing investors, he said.
An extensive search of published search activity showed Quellos won just a few small searches last year. Sources said that might stem from the firms public persona: It is considered an extremely private firm that rarely, if ever, has representatives at industry conferences.
Mr. White said the Quellos ethos is to be very upfront and transparent with clients, while maintaining a low profile publicly.
Mr. White said the firms hallmark is investment innovation, pointing to the firms early move into portable alpha in 1998. The firm also has been innovative in establishing six focused, strategy specific niche hedge funds of funds, including a real asset fund, emerging markets and emerging managers funds, he added. Quellos is well-known for being an extremely early seed investor to hedge fund teams, he said. The firm was one of the first investors in New York-based Avenue Capital Groups very successful Asia distressed debt fund, for example.