By Susan Barreto
“We now know that every particle has an antiparticle, with which it can annihilate. There could be whole antiworlds and antipeople made out of antiparticles. However, if you meet your antiself, don’t shake hands! You would both vanish in a great flash of light.”
Stephen Hawking, A Brief History of Time
Most in the hedge fund industry would agree that funds of hedge funds and investment consultants have a little too much in common for their own good. But the idea that they are getting along famously these days may come as a surprise.
The premise of a recent panel at the Global FoHF Forum, hosted by InvestHedge in New York, was to illustrate the treacherous terrain that consultants and funds of funds tread when they are forced to compete for the same institutional investor capital.
Maarten Nederlof of PAAMCO was the only fund of funds manager on the panel but the discussion still found that the crux of the debate is unsurprisingly based on fees.
Are advisory fees based on the size of the portfolio or the services done? If FoHFs want to offer up their expertise on the cheap outside the LP structure, what determines what that is worth if it isn’t the standard 1% management fee and 10% performance fee? Are consultants incentivised to build portfolios with real alpha?
What end users need to know is that consultants are now succumbing to the quandary that has plagued the funds of funds industry in recent years. Namely, how do you pay a staff of analysts, while charging discounts to larger clients that look good as referrals to future potential clients?
Nowhere is this is more prevalent than in the public pension fund community that has three main consulting groups now active in direct allocations: Cliffwater, Albourne Partners and Aksia. These groups are no longer competing directly with funds of funds for mandates but with each other. They may, however, want to take heed of the sustainability issues at play in the fund of funds industry. And they may also want to ask themselves, why did Mercer pull out of the US public defined benefit market?
The first casualty in this consulting conflict is Aksia’s contract with New York State Common Retirement Fund, which relied on the firm to develop its direct hedge fund programme. Albourne Partners won the new contract with the $141 billion pension fund (see story, page 11), and the prevalent speculation is that the fee structure offered up by Albourne was a flat fee for New York’s $4 billion programme and therefore lower than what trustees were paying Aksia over the last three years.
New York City Employees, meanwhile, are relying on Aksia as their small initial allocations have so far been via Permal. The size of this hedge fund programme is likely to stay small, but may include a direct hedge fund portfolio. Aksia is also working for another three years with Ohio School Employees’ Retirement System, which has a $1 billion direct hedge fund programme.
Meanwhile one of Albourne’s long-time clients, the Teachers’ Retirement System of Texas, is preparing to grow its hedge fund stakes, possibly adding another $6 billion to the hedge fund pool (see story, page 8). For Albourne, the growth of client portfolios is important as the firm has 195 staffers globally and monitors investments in more than 2,000 funds totalling $230 billion.
Consultants can be paid on a flat-fee basis rather than an asset-based or performance-based fee schedule. The asset size may drive the flat fee, but the complexity of the consulting mandate is a driving factor, which means a smaller fund sponsor with more complex needs may dictate a higher fee than a huge client with simpler needs.
The physics are in flux in an expanding institutional universe. The quantum mechanics at play will lead to a greater dichotomy between hedge fund investors based on their size rather than their momentum.