BlackRock powers up a hedge fund unit

BlackRock Inc., the world's largest money manager, is creating a hedge fund boutique within its vast investment management empire.

It is Carl Eifler's mission to push BlackRock from being almost an accidental hedge fund manager — albeit a really big one — with an eclectic array of funds to a powerhouse that spans the full spectrum of hedge fund strategies.

Mr. Eifler, managing director, said he has been working to “offer a small-firm atmosphere wherever the hedge fund (portfolio manager) is located within BlackRock.” He was named head of the hedge fund direct strategies group within the BlackRock alternative investments unit in March 2013.

“We are literally trying to reproduce a hedge fund boutique” without having to “rely on a prime broker to set up (the) infrastructure,” Mr. Eifler said.

He said one of the advantages to a large money manager like BlackRock offering an internal hedge fund boutique is the robust infrastructure and risk management systems institutional investors demand, and “you don't have to worry about distribution (and marketing) because BlackRock does that, too.”

Part of the process requires creating core hedge fund strategies. Another part is shifting how portfolio managers of the firm's multistrategy hedge funds tap into the alpha-generating capabilities of its existing single-strategy hedge funds.

Better known as a multiasset-class titan, with more than $4.6 trillion under management worldwide, New York-based BlackRock has been in the hedge fund management business since 1996. The firm managed $34.3 billion in 30 single and multistrategy funds as of June 30.

Although hedge funds account for a minuscule 0.7% of the firm's overall assets, BlackRock ranked sixth worldwide on Pensions & Investments' most recent listing of hedge fund managers, based on June 30, 2013, data (P&I, Sept. 16, 2013).

BlackRock has built through acquisitions a separate hedge funds-of-funds business that totaled $18.4 billion as of June 30.

BlackRock's path to the world of long/short strategies was somewhat haphazard. Thus, linking the firms' widely scattered existing hedge fund portfolio managers and the managers of new, more mainstream hedge funds that are on the drawing board was Mr. Eifler's first challenge.

Unlike other multiasset-class managers that run hedge funds, BlackRock never set up a separate unit in which to house its hedge fund managers. Instead, hedge fund portfolio managers at the firm always have been a part of the investment team their strategy best fits with or grew out of.

That was the result of organic growth, Mr. Eifler said, as over the years some BlackRock long-only managers expressed interest in managing long/short versions of their strategies and were given the go-ahead.

“As a result, our lineup of funds is skewed to niche or specific sector- and geographic-focused strategies (and) the lineup has a concentration of ... smaller funds that seek to generate alpha from more specific and/or systematic opportunities,” Mr. Eifler said.

Those single-strategy portfolios include systematic and discretionary long/short equity and corporate fixed-income, as well as multistrategy global macro and fixed-income approaches. Broader multistrategy funds also are in the fund stable.

BlackRock also acquired a family of quantitatively managed hedge funds with assets of $17 billion when it bought Barclays Global Investors in December 2009. BlackRock's organically grown hedge fund assets totaled $12.2 billion as of June 30, 2009.

Still, the existing pool of hedge funds Mr. Eifler found when he assumed oversight of single-strategy and multistrategy funds just wasn't big enough.

“We manage money for a wide array of clients — retail, wealth management, hedge funds of funds and institutional — and we need to fill out the spectrum so investors can move tactically between our funds, depending on the market cycle,” he said.

The plan is to expand the company's hedge fund capabilities to include credit and equity event-driven, global long/short equity and broader global macro strategies and to centralize those portfolio managers within the hedge fund direct strategies group, under Mr. Eifler's oversight. These funds are designed to be more scalable than the more capacity-constrained, legacy BlackRock funds.

The new strategies will be managed by “internal talent where possible and, if necessary, external hires,” Mr. Eifler said.

Mr. Eifler declined to comment about BlackRock's new hedge fund offerings.

However, Managing Director James Keenan — BlackRock's long-tenured, star high-yield manager — is managing the first of the new core funds, the BlackRock Credit Alpha Fund, Bloomberg reported. The fund was launched last October.

The second will be an event-driven equity fund, managed by Mark McKenna, who joined BlackRock in June from Harvard Management Co. as managing director and global head of event-driven equity strategies (P&I, June 11). The equity fund likely will launch in the fourth quarter.

“We are going for scale and fund persistence,” said Mr. Eifler. “The trick is going to be having the ability to take in new assets while preserving performance.”

In addition to the new core funds, Mr. Eifler said some of the older hedge funds might be combined to create new multistrategy funds.

Also, a new, more systematic information system now links the longer-tenured hedge portfolio managers, who will continue to be part of their existing investment teams, with the freshman core fund managers.

Since April, that system is being used more frequently by the firm's multistrategy managers to ask single-strategy hedge fund managers to manage a narrower, customized “sleeve” of a particular source of alpha, rather than the full strategy.

“What we're doing is disaggregating the alpha source from the underlying fund,” Mr. Eifler said, so the multistrategy manager can more precisely calibrate the sources of outperformance within his or her portfolio.

“We're trying to create and collate as many alpha-generating sources as possible,” Mr. Eifler said.