By Niki Natarajan
My blood ran cold the
other day to see a press release from one relatively unknown
US-based private client fund of funds touting a long track
record offering customised hedge fund portfolio solutions.
Normally such a firm would not stick in my mind. But a year
or so ago, when attempting to follow up on reports that the
group had invested in Madoff, we were met with unnecessary
Caveat emptor –the Latin for "Let the buyer beware"
– is really jargon for property law that controls the
sale of real estate after the deal is closed. But it makes
sense here too as some failed funds of funds are seizing the
opportunity to try and re-invent themselves as bespoke
And let’s not forget the consultants and their
rapidly growing implemented consulting businesses –
after all it was only a few years ago that a now defunct US
consultant stuffed pension fund portfolios full of
Don’t get me wrong; I think that the
bespoke/customised portfolio business is the natural next step
in the evolution of multi-managers. But only hire those with a
proven (successful) track record.
Groups such as Blackstone, Permal, Fauchier Partners, K2
Advisors and Morgan Stanley AIP have all proven themselves in
the first phase of the industry’s development.
As Clark Fenton of Fauchier – which has been
running customised portfolios alongside its award winning
funds– warns, customisation is very demanding on time
and resources. "One can get overstretched very quickly if one
gets involved in too much," he says
Pacific Alternative Asset Management Company and EIM are the
pioneers in this bespoke field that, unlike Fauchier, opted to
bypass the commingled stage and jump straight in. Listening to
Paddy Dowdall at Merseyside Pension Fund, it seems that
PAAMCO’s time has come
Unlike commingled funds, bespoke portfolios do not come with
track records, although EIM has opted for a GIPS compliant
composite as its way to bring governance to what will become
the new, but a lot less transparent, face of funds of
I might be biased as I am hosting the 9th Annual
InvestHedge FoHF Awards in New York next month, but there
must be some form of investor comfort to be gained in knowing
that there is some form of peer group performance
In the run up to this event, no fund of funds is safe as the
back stabbing of what toxic trades or managers are contained in
rival portfolios reaches the nadir of camaraderie. But in a way
this almost childish self regulation is arguably an important
way that the industry stays on the straight and narrow.
SEC registered FoHFs have to publish their underlying
holdings, but in most bespoke mandates this is not the case.
Through AP7’s public need for transparency, EIM
proved that bespoke does not protect against investment
failures, such Amaranth and Bear Stearns High-Grade Structured
Credit Strategies hedge fund.
Nor indeed from outright frauds. Since finding Madoff in its
portfolios, EIM, and its other pure FoHF cousins, have upped
their game and gone the managed account route to keep better
track of the content of portfolios.
While I am with Luke Ellis, the new head of
Man’s multi-manager business, that bespoke and
customisation is part of the future of funds of
funds—this will be discussed in more detail at the
Global FoHF Forum in New York on 10 March—very few
will have the scale, people, process, expertise and
infrastructure to even begin to contemplate bespoke
Before throwing the FoHF baby out with the bath water, take
heed of the InvestHedge rule of thumb: if a manager did not
excel as a fund of fund in the commingled field then it is
probably best to avoid them like the plague in any new
Ergo, caveat emptor: let the buyer beware.