Like many money management chief executives, Martin B. Kaplan was interested in stocks, bonds and markets at a very early age. He grew up in a family of entrepreneurs who knew the value of investing, and his father and grandfather were his first advisers, helping him research and evaluate companies and facilitating his modest first stock purchases.
Mr. Kaplan left college interested in finance and real estate investment, but became a lawyer as backup in case his finance plans didn't pan out. But practicing corporate law and working on private equity and venture capital merger and acquisition deals stoked Mr. Kaplan's long-standing interest in stocks and bonds. His personal long-short equity investments made while practicing law did so well that he considered starting a hedge fund, but his father counseled him to get advice from someone who actually knew something about hedge funds. Mesirow Advanced Strategies Inc. founders Jai Luster and Howard Rossman persuaded the 26-year-old attorney that he might not have all the tools yet to succeed in what was in 1995 a very small hedge fund market. Instead of starting a hedge fund, he joined Mesirow Advanced Strategies and now runs one of the world's largest and most institutional hedge fund-of-funds managers.
What attracted you to the hedge fund-of-funds business? The whole idea of a hedge fund of funds sounded pretty interesting to me. I could use a lot of the background I had in finance and real estate and the due diligence I was using to evaluate companies could be applied to investment companies. Ultimately, Howard and Jai offered me a very glamorous title the director of research which was at that time (consisted of) a two-person research group, Howard and I. I figured the worst that could happen was that I would fall on my face and go back and practice law. I've been here ever since.
Did being an attorney help or hamper your progress as a hedge fund-of-funds manager? The law background helped from a couple of perspectives. One, it probably gave me more credibility among hedge fund managers. I was very young. The hedge fund business was much smaller back when I started in 1995, but the people who were managing hedge funds were a pretty impressive group of people. People would ask about my background and being an attorney hopefully at least let them know that I knew what I was talking about. My background also helped a lot because I was very used to going in and doing due diligence. Whether it was a securities offering or an M&A transaction, I was very accustomed to the (research) process of uncovering information and so that lent itself very well to evaluating really what (were) at that time very small investment management businesses. I wasn't that intimidated by the process. In those days I had to justify to Howard, who had a lot of experience in looking at managers, why I thought a (hedge fund) manager was attractive or unattractive. And he usually set a pretty high bar for me to get over.
What was the hedge fund universe like back in 1995 compared to the 10,000 funds that are around today? There were only a couple of hundred credible managers back then. It was small enough back then that there was a point when I felt like I could probably take every manager out there and at least identify what strategy they were in. Not that we'd done the due diligence on them, but of the entire universe (of hedge fund) managers out there, I at least knew of them even if I hadn't contacted all of them.
We thought of the business back then more like a cottage industry that we were a part of trying to help grow. I don't think anybody back then dreamed of how large this industry would ultimately become.
Has Mesirow Advanced Strategies always focused on institutional investors? The reason we targeted institutions is ... just that we wanted like-minded investors who were very long-term and strategic in their investments, not chasing the latest and greatest (performance). Howard's view was that institutions on average tended to take a much more strategic view toward asset allocation and that led us first to insurance companies, then to endowments and foundations, family offices and ultimately to public and private pension and Taft-Hartley clients. We really wanted to have long-term investors who cared about generating strong risk-adjusted returns and were not worried about beating the S&P 500 over a short period of time.
How did you foster Mesirow's growth back in the 1990s when you joined the firm? Back then, insurance companies were among the most sophisticated investors and along with endowments, foundations and family offices were the earlier adopters of hedge funds. Consultants were involved in hedge fund investing on a limited basis. In the early years, we would spend huge amounts of time educating investors about hedge funds, hedge fund of funds and the asset class. It could take two to three years before someone would decide to invest in hedge funds. We spent the vast majority of our time explaining why someone should invest in hedge funds and then why to invest with a fund of funds. The 'why Mesirow?' was actually pretty simple (to explain) once we'd gotten through the first two explanations.
Now, by the time an investor comes to us, they're very well briefed on why they want to invest in hedge funds and a hedge fund of funds and we spend the vast majority of our time explaining the 'why Mesirow?' part.
Mesirow offers a highly customized approach to hedge fund of funds. Has this helped you work with institutions moving toward direct hedge fund investment? We do have a lot of institutional clients that are investing directly in hedge funds while remaining investing in hedge fund of funds. We are trying to be creative in working on ways that those two approaches can coexist.
The majority of our business still is invested in our flagship multistrategy funds, but between 30% and 35% of our overall assets are in truly customized single-client advisory accounts or single-client partnership or LLCs. We also have a number of clients who have gone from multistrategy funds to an additional investment into some of our multimanager niche strategies, like hedged equity or distressed. They may move those allocations around to take advantage of different market opportunities.
What new demands are you hearing from institutional investors? In this kind of market environment, every client is very interested in getting our insights in terms of the different things we're hearing and seeing and how we're positioning our portfolio in light of what's going on in the broader macro environment. One thing that I've found interesting is that our clients are increasingly interested in our broader investment opinions relative to traditional investment managers. Because we're looking at debt and equity markets all over the world and our mandate is to generate absolute returns, we're agnostic in terms of whether we want to be long or short any of them. I think our institutional clients trust the information we're giving them as being unbiased because we're not trying to justify being long or short a particular market segment or geography. We try to take a fresh look at all markets, all sectors, all styles and with a blank sheet of paper, (see) how should we be positioned in light of that. That certainly doesn't guarantee that we're going to be right all the time, but at least we're gong to be able to look at things totally objectively rather than justifying why a client should be in a particular asset class or invested in a particular manager.
How we can help our clients frame their overall portfolios is taking on more and more importance as we work with institutional investors. We're doing more and more customization as a result. I was talking to our CIO, Steve Vogt, this morning and he said there has never been a period where he has had more requests for customized products than we have right now. We definitely think that's a trend that's likely to continue.
Contact Christine Williamson at [email protected]