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A huge presence: Face to face with Blackstone’s J. Tomilson Hill

Blackstone Alternative CEO's four decades of experience serve him well as leader of institutional hedge funds of funds

J. Tomilson Hill — president and CEO of Blackstone Alternative Asset Management, vice chairman of The Blackstone Group, and a member of the board of directors of the general partner Blackstone Group Management LLC — marshals a force of 150 people, including 61 investment professionals. Mr. Hill draws on nearly 40 years of experience, about half of that spent as a mergers and acquisitions investment banking specialist.

Prior to moving into money management, Mr. Hill built a highly successful career in investment banking, holding senior positions at First Boston Corp. and Smith Barney, Harris Upham & Co. Mr. Hill joined Lehman Brothers Kuhn Loeb Inc. as a partner in the mergers and acquisitions group in 1982 and eventually became head of investment banking. Mr. Hill ultimately served as co-CEO of Lehman Brothers and co-president and co-chief operating officer of Shearson Lehman Brothers Holding Co.

Mr. Hill joined The Blackstone Group in 1993 as co-head of Blackstone's corporate and mergers and acquisitions advisory group. He also had a “part-time” job, as he called it, managing some of the firm's corporate cash and partner money in a hedge fund-of-funds portfolio throughout the 1990s. In 2000, Blackstone executives decided to turn the internal hedge fund-of-funds effort into a profit-generating investment business catering to institutional investors, led by Mr. Hill. A decade later, Mr. Hill and his team now manage one of the industry's largest fund-of-funds businesses, with $33.1 billion as of Dec. 1 managed in customized portfolios for an exclusively institutional clientele.

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J. Tomilson Hill

  • Current position: Vice chairman of The Blackstone Group, president and CEO of Blackstone Alternative Asset Management
  • Age: 62
  • Assets under management in hedge funds of funds and customized portfolios: $33.1 billion as of Dec. 1
  • Size of staff: 150, including 61 investment professionals
  • Education: AB in history, literature and Japanese studies from Harvard College; MBA from Harvard Business School
  • Personal interests: Arts and education philanthropic and policy organizations; youth mentoring
  • Board service: Council on Foreign Relations member, chair of the investment committee and member of the board of directors; Lincoln Center, chairman of the board of directors; Smithsonian Institution, member of the investment committee and chairman of the board of the Hirshhorn Museum and Sculpture Garden; Christie's, member of the advisory board; and a board member of the Telluride Foundation, Our Lady Queen of Angels School, OpenPeak Inc., The Advantage Testing Foundation and Advantage Testing Inc.

One competitor who insisted on anonymity described BAAM as “the heavyweight in the hedge fund-of-funds industry. There are very, very few searches for large allocations these days that do not include Blackstone among the finalists.”

Why did Blackstone create a hedge fund of funds?

In 1990, two things were going on at the firm.

First, Blackstone had sold a minority interest in its advisory business to The Nikko Securities Co. Ltd. and had $100 million as proceeds from that sale. Pete (Peter G.) Peterson and Steve (Stephen A.) Schwarzman were wondering, “What do we do with this $100 million?” Under certain circumstances, the firm had to contemplate a potential repayment of that $100 million.

They were looking for investment strategies that would preserve capital and achieve attractive returns. They decided to invest the $100 million in a series of hedge funds in order to achieve downside protection and the returns they were looking for.

Second, Blackstone partners, who had invested a lot of their own personal money in (Blackstone's) first private equity fund, were starting to get realizations on their investments.

So they needed a place to stash those profits?

Yes, they needed a vehicle. Steve and Pete didn't want their partners worried about investing with some long-only equity manager outside the firm ... so they decided to have an in-house solution for managing Blackstone partners' money.

Did Pete and Steve bring you in to manage the hedge fund-of-funds unit?

No. When I joined Blackstone, the arrangement that I had with Pete and Steve was that I was going to serve on the management committee, the private equity investment committee and be helpful over an array of Blackstone's businesses. Also, because I had familiarity with hedge funds through my personal investments, they wanted me to play a role there. I was a utility infielder.

When did you start to focus more attention on hedge funds of funds?

In the first quarter of 1994, after the Fed decided to raise interest rates, there was a massive sell-off in the bond market and a lot of red ink. Until that quarter, the hedge fund of funds had not experienced a loss. Being the utility infielder, I got a call from Steve who asked me to do top-down analysis of the fund to find out what went wrong.

We had 10 hedge fund managers and we thought it was a diversified portfolio. But after analyzing the underlying positions of the 10 hedge funds we had invested in, many had the same position on the bond market.

One of the key goals of investing in alternative marketable securities is diversification and non-correlation and we didn't have that in the portfolio.

So after doing such a good job with the internal self-examination, were you tagged to head BAAM?

Yes. I said I'd do it, but only part-time, since I had a day job of sitting on the Blackstone management committee and other duties. I had to have support and went out and recruited a team.

The business grew throughout the '90s, we didn't have any hiccups and it became a viable, though small, stand-alone business.

When did you give up the day job to focus exclusively on BAAM?

In 2000, Blackstone conducted a strategic review of all of the businesses. The management committee had a view that unless a business had the ability to be material — materiality back then was measured by revenues, profitability, stature and value to the firm — we really weren't that interested.

BAAM then managed about $1 billion, roughly half of that was internal money, the total professional staff numbered eight, and three strategies. But it was a profitable business.

I did a study of where the institutional marketplace was headed in terms of appetite for hedge funds. The study convinced me that there would be significant appetite for an institutional-quality product investing in hedge funds.

During the '90s, there was some ERISA money invested in hedge funds, but there was virtually no state pension plan money and virtually no institutional money from outside the United States invested in hedge funds.

I convinced the management committee that BAAM could be a material business based on the institutional investor study.

How will hedge funds of funds remain relevant, with so many institutional investors moving to direct investment?

We only will exist if we can add value.

The first way we do that is by identifying new hedge fund managers coming along or being able to create capacity in existing managers.

Second, we will exist only to the extent that we can offer a service that the institutions can't create internally. It's one thing for an institutional investor wanting to go direct to say that they're comfortable analyzing a long/short equity manager or a multistrategy manager, but it's another thing to admit, “I'm not really that comfortable analyzing this mortgage manager.”

We welcome institutional investors going direct. We don't fight that at all. We work with these institutions if they want to have a direct program, especially in areas where they may not have expertise, for instance, the Asia-Pacific region or commodities, where we manage $3.5 billion.

Face to Face, Hedge funds, Private equity, Investing/portfolio strategies, Alternatives, Money management,