Funds of funds fight back: It's alive!

By Rob Copeland

Tue Oct 1, 2013

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In London, still-forceful industry welcomes active judgment on live performance.

LONDON --Now on display at the center of the British Museum's Great Hall, a special exhibition tells the story of the brutal quick death-by-volcano of the once-bustling ancient city of Pompeii.

Similar themes were up for discussion last week one floor down in the corporate event space, where some of the biggest names in funds of funds gathered for the 2013 InvestHedge Forum.

For funds of funds, investment consultants have represented a Vesuvian threat that might annihilate their long-debated double layer of fees. Finally, midway through the fifth consecutive year of either losing or barely maintaining assets (net of performance), fund of funds seem to have settled on a counter-argument that puts consultants on the defensive.

The pitch goes roughly like this: Invest with a fund of hedge funds because at least you'll know how your investment performed. That compares with the consultants' default position that they're experts retained by other big investors, so you should trust them.

As Joseph McCarthy, CIO of fund of funds Islandbridge Capital put it, "The level of complexity and the intensity of what's involved in researching originating and the ongoing monitoring of the managers means that some family offices are going to partner with people who are experts at it and have an auditable track record for making money."

The last bit is a compelling strike against consultants, the by-the-hour bogeymen who studiously avoid being judged on the performance of their recommendations. On one panel, a 20-year veteran of the fund of funds industry lamented that he was losing mandates to consultants who make recommendations, but do not take responsibility. Today the New York Times took a similar tack, lamenting that the pension world "has conspicuously turned a blind eye to demanding track records from their most influential advisers, investment consultants."

Consultants are likely to argue that they provide a broader service than just recommending the highest-performing managers. "We're not solely just judged on the performance of the funds themselves," said Alison Clark, head of hedge fund research at pension consultancy Hymans Robertson last week, speaking on the "Art of Due Diligence" panel. In the "Why Us" section of the Hymans Robertston website, the company says "We are steadfastly independent in every possible way, from our ownership to our advice."

There is recent evidence that funds of funds, the performance of which are available for all to see, are making money. The median multimanager fund is up 3.83% this year, according to the InvestHedge Composite Index. That's naturally going to trail a booming global equities market, but perhaps surprisingly it's only a single basis point behind the median Americas single manager fund, which presumably achieves that return with higher risk (or at least less diversification) – and which has one fewer layer of fees to weigh down the final results.

That's something to brag about, and yet it doesn't appear that end investors are getting the message.

In one particularly bracing moment at the Forum, a billion dollar institutional investor said he simply did not believe there was value in paying funds of funds to select managers and monitor performance for him, but he appreciated them doing the boring work of operational due diligence and regular office visits.

He said this while seated next to a top executive at a large, brand name fund of funds--one in which he later admitted his very pension is invested!

A solution may lie in, of all things, better marketing. While their single manager counterparts have at least generally settled on a consistent pitch as strongholds of uncorrelated alpha, funds of funds have employed a dizzying range of promotions.

Are they risk managers? Shamans who can feel for the next hot strategy? Spotters of new talent? Operational wizards? Negotiators for lower fees?

Even the industry's logos are up for debate, says InvestHedge keynote speaker Davina MacKail, a marketing consultant. She took one look at the branding on display and pronounced the group a "hotbed of…interesting logos that could use with a whole lot of improvement."

"[They give] that essence of conservatism, stability, you're in a safe pair of hands, we're not going to risk your money, you're not going to lose with us. That’s what it's saying, but I actually think hedge funds are risk takers. That's why hedge funds materialized in the first place," she said.

Don't try to gussy up David Smith, chief investment officer of the $5.89 billion GAM Multi-Manager platform.

"The truth is it's very boring but painstaking. You get in front of the managers, you talk to them, you go back, you get your facts, you get your opinion, you cross reference it," he said. "There's nothing magical about what I do. It's just quite a lot of hard work."

Try putting that on a bumper sticker.

ISSN: 2151-1845 / CDC10004H

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