By Niki Natarajan
in a DIY age of Home Depot and B&Q and yet kitchens and
bathrooms that are crafted by an expert typically last longer,
cause less stress to the family and work just that much better.
There is, of course, a cost for expertise.
But, as IKEA now offers professionals to fit the kitchens
bought in the store, so too are funds of funds offering
customisation services to investors that have realised that DIY
hedge fund portfolio construction might be cheaper, but is not
Funds of funds such as K2 Advisors, Morgan Stanley AIP and
Blackstone Alternative Asset Management have entered this new
"Age of Customisation" - a space that PAAMCO and EIM have
dominated for years - and are now offering portfolio completion
and customised portfolios.
Advisory work used to be considered a low-cost B-list
service that many groups phased out. But following the entrance
of groups such as Aksia, there has been a revival of this form
of hedge fund portfolio service.
It is the natural next step for established funds of funds
to have the starter packs for novice investors, and
strategy-specific offerings for the sophisticated multi-manager
aficionados. After all, they have already invested in the
infrastructure of research and due diligence.
And now, for a 'consulting' fee, they can either put the
hedge fund portfolio together from scratch or, even better,
take a look at the whole alternatives portfolio and add in the
bits that are missing.
Investors are right to query fund of funds fees, but what
they need to realise is that not all funds of funds are born
equal. In his book Outliers, Malcolm Gladwell analysed the
skill set of the genius, and concluded that what the genius
always has is 10,000 hours of expertise in the field.
So why do newcomers think that they can spot a winner, a
fraud, or an ego-led accident waiting to happen better than the
veteran due diligence teams with 10,000 hours on their CV?
The Madoff-effect has been like a monsoon sweeping away the
debris, leaving only those left that truly deserve to be called
multi-manager experts. In a session entitled Passion and
Performance: What really drives sustainable FOHF returns? at
the InvestHedge Forum, taking place in London in September, we
will examine the secrets of the genii with more than 10 years'
experience to find out what makes them stay top performers.
If you take off weekends and holidays, it is these funds of
funds still run by the founders that have invested more than
10,000 hours that are the winners. It is this kind of expertise
that can, and should, still charge fees - to pay for due
diligence, market intelligence, manager selection and asset
As Henry in Tom Stoppard's play The Real Thing, explains:
"This thing here, which looks like a wooden club, is actually
several pieces of particular wood cunningly put together in a
certain way so that the whole thing is sprung, like a dance
floor... If you get it right, the cricket ball will travel two
hundred yards in four seconds, and all you've done is give it a
knock like knocking the top off a bottle of stout, and it makes
a noise like a trout taking a fly....
"Now, what we've got here is a lump of wood of roughly the
same shape trying to be a cricket bat, and if you hit a ball
with it, the ball will travel about ten feet and you will drop
the bat and dance about shouting 'Ouch!' with your hands stuck
into your armpits. This isn't better because someone says it's
better, or because there's a conspiracy...it's better because
And so too are the fund of funds experts with great
performance year after year.