For Paulson & Co., it was spectacular returns helped by a big, dead-on bet on subprime mortgages in 2007 that ballooned total assets in the second half of the year by a whopping 132% to $29 billion, fueled largely by institutional investors.
James Wong, managing director and head of investor relations, said John Paulson, founder and president, started the firm with institutions in his sights but knew that theres a logical time when institutional investors can invest with you. They dont want (their allocation) to be more than 10% of your portfolio, so hedge funds have to be of a certain size before institutions will look at you for a significant allocation.
Paulsons assets totaled just $600 million when Mr. Wong joined five years ago. Mr. Paulson was focused on being ahead of the curve so weve been ready every time for the next phase of growth like in 2003 when Paulson became one of the first hedge fund firms to hire a chief compliance officer and in 2004 when it registered with the SEC as an investment adviser.
Mr. Wong said because Paulson does not have a huge investment team just 20 people, which is in line with the philosophy of Mr. Paulson to hire quality not quantity its crucial that investment professionals stay focused on managing money.
The (investment team doesnt) have a lot of time to spend with investors, so we have to have very sophisticated, capable investor relations people who straddle client service and marketing and are equipped to answer very complicated investment questions, he said.
Paulsons investor relations staff which includes specialist teams focusing on endowments, foundations and pension fund executives communicates constantly with clients. We dont want clients to be surprised by inevitable down cycles, Mr. Wong said.
The institutional manager
Bridgewater Associates always focused on institutional investors, but has completely transformed in its 32 years, said Bob Prince, co-chief investment officer. In 1975, Mr. Dalio founded the firm to help companies manage global interest rate and currency risks deriving from international financing and operations.
While the rest of the world was focused on managing assets, Bridgewater was focused on managing liabilities through the use of derivatives, Mr. Prince said. A key step in this process was understanding the risk-neutral position in order to know how much risk a company was taking. Bridgewater later applied a similar framework to the separation of alpha and beta, Mr. Prince said.
The firm launched a number of innovative investment strategies in the 1990s, including currency overlay, inflation-indexed bonds, super-long duration bonds for liability management, global bonds and emerging market debt.
Whats more, Bridgewater pioneered the separation of alpha and beta in the early 1990s and created the alpha overlay, what Ray often referred to as the holy grail of investing, Mr. Prince said. It involved investing in 20 uncorrelated return streams that could be leveraged up or down to a risk or return target, then overlaid on cash or any other benchmark. When leveraged to 12% volatility and overlaid onto cash, it offered pension funds a higher return than stocks or bonds with a level of risk between the two.
Acceptance was slow until rocky markets in the early part of the new century convinced pension fund executives to seek a combination of higher returns and lower volatility. With a 10-year track record as proof that portable alpha worked, institutional mandates poured in, with assets under management topping $169 billion in 2006 vs. $33 billion in 2000. The flood prompted Bridgewater to conserve investment capacity by accepting new business only in hedge funds and beta strategies and dropping many clients that insisted on clinging to traditional strategies. Total assets under management stood at $150 billion as of year-end 2007.