By Niki Natarajan
The ’80s cult of AUM is back. The mantra of AUM has been revived for the new age of hedge funds, and more specifically, funds of hedge funds. Assets under management has always been the primordial sound for those in the ‘business’ of investment management, because the greater the assets, the greater the management fees.
In Hinduism, when each letter of the mantra, Om – A-U-M – is looked at individually, it is said to represent Shakti, the divine energy united in its three aspects: creation, preservation and destruction (or liberation).
With performance in the hedge fund industry struggling to win fans (and performance fees), the mantra of AUM – once widespread when balanced mandates of the late ’80s were in fashion – is having a revival. Reincarnated funds of funds are now marketing themselves as ‘solutions providers’, and the need to prove performance is brushed under the carpet as bespoke solutions by definition come without a track record. For this business assets are king.
Like fast food and high-street chains, designed to distribute lower-cost product to the masses, there will always be the gourmet restaurants and boutiques. For the discerning customer, a handful of elite boutique funds of funds will still continue to do what they do best in the way they know how to do it. For them, performance and wealth preservation will always be the name of the game.
FoHFs that have lost their vision, purpose and spirit will simply become fodder for the asset amassers such as Crestline Investors, which bought the $300 million FoHF business of Lyster Watson, and Kenmar Group, which bought the ailing Olympia Capital Group and is said to have its sights set on new territories. The real issue with these mini deals is whether or not the assets actually stay; in most cases it is only usually as long as the tie-in dictates.
But it was the much bigger Man Group/Financial Risk Management deal that seems to have fired the starting gun in the real race to grow assets.
So asset gathering rather than alpha hunting seems to have become the main hedge fund game. The new goal is to be one of the top 10 FoHFs in the InvestHedge Billion Dollar Club. Double-digit billions of assets are no longer enough to enter the Super League any more; for entry to the elite, $20 billion is now the minimum ticket. And with a combined $19 billion under management, this deal will be transformational for Man’s multi-manager business, which will be branded Financial Risk Management.
If the rumours of EIM in merger talks are true, then this year will see many more hedge fund M&A deals. The only ones likely to have any real impact will be the alliances that create $20 billion asset management warehouses for those investors that buy the ‘big is best’ mantra when it comes to investment solutions. The truth is that, even if two more $10 billion-dollar groups merge, few will stand the chance that Luke Ellis has to build the next generation of absolute return multi-manager firms.
Apart from the reunion of the two former Nomura employees that spent a decade together previously building FRM, Man’s department store houses managed accounts, managed futures in the AHL wing, hedge funds in the GLG arm, as well as multi-manager with FRM, plus the experience learned from integrating RMF and Glenwood.
Ironically, had Blaine Tomlinson sold FRM when it had peak assets of $16 billion, for perhaps less than he had wanted, he could have walked away with a lot more money in his pocket, while Ellis may never have left. As it is, as non-executive chairman, Tomlinson is not likely to see a penny unless assets are retained over the next three years.
It is said that money is simply a manifestation of energy – and looking at the latest obsession with AUM, one can see that the FoHF world of the next few years could be heading towards destruction. Looking back at the late 1980s – when Gartmore, PDFM, Schroders and Mercury Asset Management were the big four asset managers in the UK – one can see history repeating itself.
The true nature of active, alpha hunting hedge funds means that dabbling in due diligence, cocktail party research and Pooh Bear-style portfolio management of the sort indulged in by hedge fund novices will simply not survive. Does no-one remember the once avant garde specialist long-only equity consultant Frank Russell and its eventual failed hedge fund attempt? Are lessons ever really learned, or is asset management destined to reincarnate endlessly into eternity?