Skip to main content
MENU
Subscribe
  • Subscribe
  • Account
  • LOGIN
  • Topics
    • Alternatives
    • Consultants
    • Coronavirus
    • Courts
    • Defined Contribution
    • ESG
    • ETFs
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Opinion
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Russia-Ukraine War
    • SECURE Act 2.0
    • Special Reports
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • Climate Change: The Inescapable Opportunity
    • Impact Investing
    • 2022 ESG Investing Conference
    • ESG Rated ETFs
  • Defined Contribution
    • Latest DC News
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • Trends in DC: Focus on Retirement Income
    • 2022 Defined Contribution East Conference
    • 2022 DC Investment Lineup Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Performance Data
    • P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
    • Future of Investments Research Series
    • Charts & Infographics
    • Polls
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
    • 2022 Innovation Investing Conference
    • 2022 Defined Contribution East Conference
    • 2022 ESG Investing Conference
    • 2022 DC Investment Lineup Conference
    • 2022 Alternatives Investing Conference
Breadcrumb
  1. Home
  2. ALTERNATIVES
November 10, 2014 12:00 AM

Hedge funds of funds are competing with consultants

Managers turn the tables by offering big clients some new, free services

Christine Williamson
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print
    Callie Lipkin
    Greg Fedorinchik said competitive pressure is behind the trend of consulting work being done by hedge funds-of-funds managers.

    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.

    Natural evolution

    Hedge funds-of-funds executives say the driver behind sharing the internal expertise, infrastructure and investment culture they have built over the years is a natural evolution of the deepening relationships between managers and investors.

    “I view this phenomenon as positive. Providing our investors with more services and support is part of building strategic, collaborative partnerships,” said J. Scott Perkins, executive managing director, Lighthouse Partners LLC, Palm Beach Gardens, Fla. Lighthouse Partners managed $8.2 billion in hedge funds-of-funds strategies as of Oct. 31.

    “Now that hedge funds-of-funds (managers) are feeling competitive pressure from investment consultants, they are performing more and more of the duties of a consultant,” said Greg T. Fedorinchik, senior managing director and head of the global client relationship team at Mesirow Advanced Strategies, Chicago, which managed $13.8 billion as of Oct. 31 in hedge funds-of-funds strategies.

    Consultants agreed with Mr. Fedorinchik, and view the motivation behind the expansion of hedge funds-of-funds services as business survival.

    “I think these arrangements are a great example of how hedge funds-of-funds managers are doing everything they can to preserve their most-favored-nation status and their asset bases,” said James C. McKee, senior vice president and director of the hedge fund research group at consultant Callan Associates Inc., San Francisco.

    “I do think it's all about competition,” agreed Susan N. McDermott, Chicago-based partner and CIO-institutional advisory at investment consultant Pavilion Advisory Group Inc. “Everyone is literally getting into each other's business by way of expansion.”

    Industry heavyweights

    Industry heavyweights Blackstone, A&Q Hedge Fund Solutions and Grosvenor, each with long-established funds-of-funds businesses and hefty assets under management, dominate this high-touch niche, sources said.

    Blackstone's hedge fund solutions business, launched in 2000, is far ahead of any value-added service of its competitors, said observers. BAAM had $65 billion under management as of Sept. 30 in a wide variety of discretionary investment strategies.

    “We were an early adopter and it grew out of our focus on being strategic partners with our investors,” said Brian Gavin, senior managing director and BAAM's chief operating officer. “Solutions work is not a business for us; it's part of our strategy for discretionary investment clients as they move through the hedge fund investing life cycle.”

    At the request of clients, BAAM will assist with every phase of that cycle, especially in the transitions between commingled fund and customized separate account management and between creating direct investment portfolios and setting up internal hedge fund investment teams, Mr. Gavin said.

    “Whether you call it partnering, solutions or outsourcing, what we do is assist our discretionary investors in managing their hedge fund portfolios the way they want to,” said William Ferri, managing director and global head of A&Q, New York. A&Q, a subsidiary of UBS Global Asset Management, managed $22.6 billion in hedge funds-of-funds strategies as of Oct. 31.

    Chief investment officers or hedge fund specialists working for sophisticated institutional investors often know how and what they want to invest in — “very specific needs, not cookie-cutter stuff” — but “don't have the global resources to comprehensively manage a hedge fund portfolio. We have those resources and our investors can tap into them,” Mr. Ferri said.

    Grosvenor platform

    Chicago-based Grosvenor offers a suite of solutions for asset owners investing through the firm's discretionary hedge fund allocation strategies, often consolidating direct and fund-of-funds portfolios, regardless of what companies manage them, on the firm's investment platform.

    “Clients' portfolios get a lot of lift from residing on Grosvenor's platform because of the risk management, due diligence, performance reporting and measurement systems. It's a high value-added benefit,” said Michael J. Sacks, chairman and CEO.

    Grosvenor managed $27 billion in hedge fund allocations as of June 30.

    “I don't look at hedge funds of funds any differently than I do other large money managers that are seeking to create strategic partnerships with their investors,” said an executive of an investment consulting firm who asked not to be identified. “Hedge funds-of-funds companies like Grosvenor, Blackstone and others do have the depth of experience to offer sophisticated institutional investment teams advice and additional services beyond money discretionary management,” the source said.

    “These arrangements are the natural outgrowth of relationships between the manager and the investor, as the investor gains more experience and expertise with hedge fund investment.”

    Other managers among the top cadre of institutional hedge funds-of-funds firms also offer value-added services to investors with customized fund-of-funds mandates, but that assistance tends to be clustered on the investment side, rather than on the broad portfolio assistance offered by the largest managers. Examples include portfolio and performance analysis, manager sourcing for direct hedge fund investment portfolios, scenario analysis and due diligence, observers said.

    Besides Lighthouse Partners and Mesirow Advanced Strategies, other firms offering extended services to investors include Aetos Alternatives Management LLC, Aurora Investment Management LLC, Corbin Capital Partners LP, EnTrust Capital Management LP, Goldman Sachs Asset Management, Permal Group and The Rock Creek Group LP.

    Mesirow made a “strategic decision” about 18 months ago “not to get into the consulting/advisory business,” Mr. Fedorinchik said, as well as to retain control of its analysis tool kit. “Internally, we offer a very specific set of investment and operational processes that we can and do make available to our clients, but that doesn't include advisory services,” he said.

    And rather than “give clients access to our portfolio construction and analysis tools, we will perform custom analysis for them. These tools provide Mesirow with a huge competitive advantage, so we do stop short of letting them out of the house,” Mr. Fedorinchik said. n

    Related Articles
    Deals not always the best for funds of funds
    Funds-of-funds managers turn to customized investments
    Aetos Capital recruits global head of client relations and business development
    Aurora darkened by direct investing push
    Texas Perm brings internal portfolio to forefront
    Recommended for You
    ONLINE_180819917_AR_0_ZXNMFGHRAFDD.jpg
    Mitsui, Nomura to acquire Aussie real assets manager New Forests
    ONLINE_170729815_AR_-1_WQFKOCKSIIXQ.jpg
    Clearlake Capital docks seventh flagship fund at $14.1 billion
    Gila Cohen
    Monroe Capital brings on managing director for institutional partnerships
    OCIO, Anchor in Rough Seas
    Sponsored Content: OCIO, Anchor in Rough Seas

    Reader Poll

    May 23, 2022
    SEE MORE POLLS >
    Sponsored
    White Papers
    Crossroads: Politics, Inflation, & Bonds
    Credit Indices: Closing the Fixed Income Evolutionary Gap
    Forever in Style: Benchmarking with the Morningstar® Broad Style Indexes℠
    Q2 2022 Credit Outlook: Carry On
    Leverage does not equal risk
    Is there a mid-cap gap in your DC plan?
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    May 23, 2022 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2022. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Consultants
      • Coronavirus
      • Courts
      • Defined Contribution
      • ESG
      • ETFs
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Opinion
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Russia-Ukraine War
      • SECURE Act 2.0
      • Special Reports
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • Climate Change: The Inescapable Opportunity
      • Impact Investing
      • 2022 ESG Investing Conference
      • ESG Rated ETFs
    • Defined Contribution
      • Latest DC News
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • Trends in DC: Focus on Retirement Income
      • 2022 Defined Contribution East Conference
      • 2022 DC Investment Lineup Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Performance Data
      • P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
      • Future of Investments Research Series
      • Charts & Infographics
      • Polls
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
      • 2022 Innovation Investing Conference
      • 2022 Defined Contribution East Conference
      • 2022 ESG Investing Conference
      • 2022 DC Investment Lineup Conference
      • 2022 Alternatives Investing Conference