Back to basics – but who is the teacher?

Wed Oct 10, 2012

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It does not actually mean the world will end; but it does mean that change is on the way


By Niki Natarajan

As the trustees of the $2.4 billion Willis Pension Scheme announced plans to hire Towers Watson to manage a $160 million hedge fund portfolio on a fiduciary basis, funds of hedge funds everywhere were vindicated in their fears that more and more consultants are indeed stealing their lunch.

Until relatively recently, consultants such as Towers Watson were trusted as the advisory gateway to the great and the good of the pension fund community. But as became evident in the session entitled 'Consultants: Trojan horse or modern day saviour?' at last week's InvestHedge Forum, many of the traditional consultants these days are becoming asset managers - and, to be fair, many funds of funds are now turning to consulting to claw back their market share.

As the once-clear lines between different services are muddied in investors' minds by the fifty shades of hedge fund advisory, some consultants like Mercers are going as far as re-inventing the wheel. Mercer, like Frank Russell before it, is harnessing the continuing desire for commingled hedge fund products by creating its own. Does no one remember the specialist consultant of the early '90s that advocated that all pension funds leave the path of the balanced mandate to head down the specialist equity route?

On the back of this trend, Frank Russell entered the long-only multi-manager space and evolved into hedge funds. But its first stab at fund of hedge funds died and who knows what has happened with its second go now that Ed Robertiello has left to join CalPERS?

Someone once told me that there are no prizes for being right, which is sad really as I am sure my shelves would be full of gongs. So the fact some of the new hedge fund advisers do not have audited track records - and others either have very thin or relatively inexperienced due diligence teams - is of no comfort to the army of award-winning funds of funds, some with track records dating back 40 plus years, that filled the Great Court of the British Museum last week for the InvestHedge Awards.

Fighting back, however, is not going to change the prevailing trend, as the Maya found out when their advanced civilisation started to decline. Between 300 and 900 AD the Maya was one of the most sophisticated civilisations in the pre-Columbian Americas. They developed a sophisticated writing system and used an elaborate calendar system to provide dates.

In fact it is the Maya Long Count Calendar that is going to run out on 21 December 2012, heralding many "end of the world" prophecies - a bit like most of the reports on FoHFs in the mainstream press. Just because a calendar ends, does not actually mean the world will end; but it does mean that change is on the way.

Despite their sophistication, by about 800 AD the Maya civilization was in decline. The good news is the Maya are still around today albeit in reduced numbers, but to do this they left behind everything they knew and went back to the jungle; back to basics.

While I am not advocating that FoHFs go back to the jungle, anyone that wants to make a mark in this new institutional investor driven world needs to learn just one new skill: the ability to ask questions.

The self proclaimed Jason Bourne of pensions, Rob Gardner, co-founder of Redington Partners and consultant to savvy investors DMGT and SAUL -both covered in this issue - is one of the few independent consultants who takes this fully on board.

Comparing investing to personal fitness, Gardner says in his 'seven steps to investing' that it is all about working with the client to create the appropriate outcome. And as most life coaches and personal trainers know, to create a well formed appropriate outcome one needs to ask well thought through questions.

Penny Green of SAUL is all about the questions. "You have to ask questions… it's not about being nice or making friends but about making money and adding value, as well as how a particular strategy fits in and affects the total investment strategy of the fund." And when it comes to hedge fund investing and the art of asking the right questions, Green and her team learned the skill from the experts; the funds of funds.

ISSN: 2151-1845 / CDC10004H