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
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
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.