With over 200 employees and a disciplined approach to delivering client service, Blackstone's customized solution might include running narrower sleeves of an existing investment strategy; providingintense client education; using the firm's size to persuade hedge fund managers to create investment strategies to capitalize on unique investment opportunities; or providing top-down macroeconomic views to assist investors with managing their overall portfolios.
Prisma Capital Partners , New York, has offered customized hedge funds of funds and separate accounts since it opened in 2004, said Girish V. Reddy, co-founder and CEO. “Customized portfolios have become `normal' but they always have been normal for Prisma,” Mr. Reddy said, noting 65% of the firm's assets under management are in these kinds of arrangements.
Other factors that Mr. Reddy said have helped Prisma grow its institutional client base include investment in “smaller, specialist hedge fund managers instead of larger managers that most of our clients could invest in directly.”
Rock Creek Group, Washington, also has managed customized hedge funds-of-funds portfolios for institutional investors since its launch in 2003, with 70% of assets now invested in special arrangement vehicles, said Afsaneh Beschloss, CEO and chief investment officer.
Ms. Beschloss and a number of her staff started managing hedge fund portfolios for the World Bank's investment pools, including the $14.9 billion defined benefit plan, in the 1980s and “that long history of investment has proven attractive to many new clients, especially since we use the same centralized process we did at the World Bank.”
Outside the small faction of hedge funds-of-funds companies that have maintained growth over time, the “big institutional mandates, $50 million or $100 million or larger that might once have been invested in some of the former `brand name, premium label' funds-of-funds firms, now are being directed to those managers willing to offer separate accounts and other custom services,” Callan's Mr. McKee said.
Mr. Hill said Blackstone Alternatives Asset Management intended to attract institutional investors from inception, but observed that many other hedge funds-of-funds companies “started as high-net-worth shops that catered to friends and family but gradually began to target institutions. This worked for a time, but a lot of these firms' executive teams got very complacent. They had AUM, their business was a cash cow (and) was not predicated on innovation, so they didn't build up their investment teams, add infrastructure or adapt to new conditions.”
Firms in this situation are among those that already have gone out of business or are looking for a buyer, sources said. In the year ended June 30, PerTrac, a specialist hedge fund software provider, found that 3.81% fewer hedge funds of funds reported their performance and assets to various industry databases than the previous year, a sign of the ill health of the industry.
EIM Group, which managed $13 billion as of June 30, 2008, and $5 billion as of June 30 this year reportedly has sought a buyer for more than a year without any luck. EIM had significant exposure to the Madoff Ponzi scheme, which sources said caused many clients to redeem investments.
Union Bancaire Privee Asset Management LLC experienced decimating asset declines after its investments in Madoff funds were revealed. UBP was the largest manager in P&I's annual ranking for the year ended June 30, 2008, with $57 billion under management in hedge funds of funds. As of June 30, 2012, UBP-Nexar, as it now is known after acquiring Nexar Capital LLC earlier this year, managed $12.2 billion, which includes about $3 billion of Nexar hedge funds of funds.
In 2009, quite soon after the financial crisis, Crestline Capital LLC, for example, acquired $2.2 billion of hedge funds-of-funds assets from Northwater Capital Management Inc. As of June 30, 2008, Northwater's assets totaled $4.5 billion.
In March of this year, Crestline also acquired investment contacts totaling $300 million from Lyster Watson & Co. (P&I, March 26). Neither Northwater nor Lyster Watson remained in the hedge funds-of-funds business.