Updated with correction
Hedge funds-of-funds managers are turning the tables on investment consulting firms that have been poaching their institutional clients.
As asset owners allocated fewer dollars to hedge funds of funds over the past few years, many consultants successfully convinced their clients to invest in the consulting firms' own commingled vehicles, instead of with external funds of funds.
Now, officials at the large institutionally oriented funds-of-funds managers increasingly are pushing back, offering free services — typically found in an investment consulting relationship — to their biggest clients. Those services include:
- performance measurement and monitoring;
- rebalancing customized performance and portfolio attribution analysis;
- initial and ongoing investment strategy/operational due diligence;
- manager sourcing; and
- fee, contract and terms negotiations with managers.
Key to providing the free services is the fund-of-funds manager retaining a substantial discretionary portfolio, generally $200 million or more, industry observers said.
But there are limits. Most funds-of-funds executives stressed they have no intention of offering pure investment consulting such as asset-liability studies, overall portfolio construction and asset allocation calculations.
Texas Permanent School Fund, Austin, established strategic partnerships with two of its three hedge funds-of-funds managers - Blackstone Alternative Asset Management and Grosvenor Capital Management LP - in November 2012, according to records of finance committee meetings of the Texas State Board of Education, which oversees investment of the $30.2 billion educational fund.
PSF's investment department uses many of the high-end consulting services BAAM and GCM make available to them, and the level of customization is at the more extreme end among institutional investors. In-house staffers manage direct hedge fund investment portfolios side-by-side with portfolio managers from each company.
The goal is to eventually move hedge fund portfolios in-house after a protracted period of education, training and knowledge transfer, Holland Timmins, PSF's executive administrator and chief investment officer, has told finance committee members.
Mr. Timmins was out of the office and unavailable for comment.
Such close collaboration is possible because of the size of the portfolios each firm manages or co-manages. As of June 30, BAAM had a total of $1.3 billion and GCM $1.4 billion from the Texas fund.