By Niki Natarajan
"Either there are Greeks in hiding, concealed by the
wood, or it's been built as a machine to use against our walls,
or spy on our homes, or fall on the city from above, or it
hides some other trick: Trojans, don't trust this horse.
Whatever it is, I'm afraid of Greeks even those bearing
Virgil's Aeneid, Book II
funds of funds about the challenges facing them today and most
admit they are very afraid of the industry's Trojan horse: the
consultant. Tempting FoHFs to open their kimonos with promises
of sticky asset flows from the institutional investor, the
traditional consultant has been slowly and insidiously entering
the FoHF arena.
So at the recent InvestHedge Forum, I was shocked to see
that no-one stood up to call a spade a spade in the session
called 'Are the consultants eating the FoHF lunch?'
Historically, the traditional consultants have been the
gatekeepers to the pension funds' purse strings and, like the
implicit trust one has for one's doctor, many investors accept
their consultant's diagnosis without question when it comes to
The reason many FoHFs fear the advent of implemented
consulting - direct manager selection and implementation for a
fee - is not because it is more competition, which is after all
the centrepiece of capitalism, but that it is conflicted
competition. In one case, a consultant analysing FoHFs sits in
the same pool of single-manager analysts.
How hard would a consultant really advocate for a FoHF
investment if direct allocations make them more money? Even
then, is the pension fund really getting the best selection if
many of the best-performing FoHFs choose not to share their
underlying portfolios for fear they will be copied, so
resulting in exclusion from the approved list?
Clearly not all consultants are the same. Some like Callan
Associates, say they only do FoHF searches and specialists like
Albourne openly state they only advise on single managers.
Others such as Northern Trust and Russell Investments - who
used to have active consulting businesses have now opted for
separate asset management divisions, and in the case of Russell
a second go at hedge funds (see page 32).
A recent Prequin survey showed that 12% of alternative
investment consultants exclusively offer discretionary
services, 33% offer non-discretionary advice but a whopping 56%
offer both services. As the general consultant steers his
wooden steed towards asset management it must be observed, too,
that many FoHFs are themselves cantering towards the advisory
None of this transformation, however, is about investor
altruism; it is all about building a sustainable business model
that earns fees. It seems that pure consulting is a dying
In fact, as the investment world heads more towards a more
solutions-based way of investing, a lot can be learned from
EACM Advisors, which started life within the bowels of a
consultancy called Evaluation Associates (see page 26).
Those inside the Trojan horse are the consultants that have
secretly started offering direct allocations, while still
offering FoHF advice. In such cases, who should the pension
fund listen to? A consultant with little or no track record
offering implemented consulting or a fund of funds, with a
long-term proven commingled track record?
But the real danger both hedge funds and FoHFs face as they
take the path of consultant is the 'approved' list. Generally
operating from a low resource base, most consultants do due
diligence on those they deem to be institutionally sound. Those
that pass join the approved list, from which consultants direct
their clients' money.
As the cult of the consultant is relatively new in the hedge
fund world, only those with a long-only institutional memory
will remember the business risk of all of one's money coming
from consultants alone. Just as fast as the asset floodgates
open to approved managers, so they can close.
A change in the investment team can result in a hiatus in
assets, so what is going to happen when the founders of hedge
funds start to retire? Institutional money may be sticky, but
is the consultant's loyalty to a manager assured?