By Niki Natarajan
’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
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?