By Niki Natarajan
mythical phoenix - with a multi-coloured plumage of gold,
scarlet, purple, blue and green -nears the end of its life
cycle, it builds a nest that ignites and reduces to ashes, from
which a new, young phoenix arises, reborn to live again. So too
the new generation of multi-managers are being re-born from the
legacy ashes of the commingled funds era.
As portfolios become individualised, and the bespoke is
favoured over the commingled, performance becomes much harder
to track. If investors are no longer buying products with
verifiable track records, just how are investors supposed to
know how to pick a good adviser? What else can they use to
judge those with whom they will invest billions of pensioners'
dollars? And are they right to trust their consultants without
Part of the answer I believe lies at the very beginning of
the process: with the people that manage the money. After all,
looking into the whites of the eyes of the person who actually
manages the money is one way of "knowing" whether one should
hire them in the first place.
So why do so many institutional investors abdicate this
responsibility to arguably less qualified others? Probably
because the art of knowing without knowing is hard work that
requires an investment of time, money and energy. But above all
to achieve mastery in intuition it requires practice.
Performance starts and ends with the people who produce it.
Even in the black box world it is still a human being that
programmes the algorithms. So honing one's expertise in
"reading" people is as much a key skill in picking stocks as it
is in buying hedge funds.
Expertise and track record in due diligence, start-up
manager selection and portfolio construction are just some of
the immortal skills that are honed with time and experience to
become what Malcolm Gladwell calls the "unconscious database of
experience" in his book Blink. It is this individual's
unconscious experience that allows intuition to work its
And it is the true understanding of the contribution of
individuals that will see 2012 become the era of the lift-out
as the FoHF industry in particular starts an accelerated
process of consolidation. After all, asset management companies
are merely collections of talent, plus lots of expensive
We are in a period of austerity, which is why the lift-out
is the smart investor's consolidation. While the eager
head-hunters are likely to agree wholeheartedly, I suspect the
M&A boutiques will not. They only paid if a company is sold
as a multiple of assets under management.
But here is the problem with applying the asset multiple
formulae to funds of funds, especially now that the industry is
being controlled by the consultants. In this new consultant-led
era, buying assets could end up being as mythical as the
phoenix, disappearing in a puff of smoke after the deal is
Typically, consultants rush to put asset managers on watch
lists at the slightest sniff of change in personnel or
performance, an act that in itself often damages companies
whose assets start to falter further. With FoHFs as their
rivals, multi-managers are likely to see themselves dropped
without so much as even seeing a watch list. Direct
allocations, as can be seen in cases like Diamondback, are
likely to have a reprieve - as consultants are going to be less
likely to want to be seen as having recommended duds.
But this discussion is not one about conflicts of interests.
It is about understanding that track records and the assets
they support are only worth investing in if one can guarantee
that the person who creates them will stay. Otherwise, in the
hedge fund world at least, wherever the good manager goes, so
too does the money. And the savvy intuitives at the
oft-maligned FoHFs are usually the first to know of these
plans, as Markham Rae found out on day one.
Consolidation of the unprofitable FoHFs is inevitable this
year. But most that are looking to sell either want to get out
of the game or are in a distressed state. Neither of these
scenarios offers a real bargain. But housed within many of the
ailing groups, as Cantor Fitzgerald has arguably found, could
be gold. It might be arduous work, but panning will be worth