10 years on: the rise of The Stalwart Five

Mon Sep 5, 2011

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This new decade has the look and feel of a new and more enlightened phase of hedge fund investing


By Niki Natarajan

In the beginning there was Soros (& Steinhardt) and only a few knew their number. It was those that thrived. A decade ago, investors that took their first hedge fund steps are now de facto experts but these days now that Soros has shut up shop and other brands have marketing teams, a rolodex is of limited use.

It is this dynamic that cookie-cutter FoHFs are struggling with as the industry continues to transform from commingled child to individually customised teenager.

This 10th anniversary issue takes a look at the FoHF family album to discover who is still here; who has passed away; who is still growing; and who has found a way to continue for another decade.

While average hedge fund performance today can definitely be described as lacklustre, the alpha-hunters are still out there and still performing. To understand the secrets of longevity, InvestHedge talked to the industry's oldest families (pages 28-30).

While the intricacies and nuances of the global FoHF industry have changed year after year over the last decade (pages 33-47) what is clear is that multi-manager investing from the first days of LCH Investments, 42 years ago, is here to stay.

But as Rick Sopher, chairman of LCH Investments says, the time has come to stop talking about (and using) hedge funds as an asset class but as the active asset management tool that they were always designed to be.

The rise of strategy-specific FoHFs from Banque Privée and Permal, as well as the growth of customised portfolios for the ever growing group of institutional investors, are all about using hedge funds as a tool.

For the latter to become a credible alternative to commingled FoHFs, GIPS compliance will have to become mandatory. The aim is to stop the bespoke trouble-makers, with no discernable track record, from tarnishing the industry in the way that fad-driven investing did prior to the crisis.

The new decade is likely to have fewer new launches - as track records and economies of scale will become ever more important. While performance is still a key driver, the five firms that have emerged to become The Stalwart Five clearly have something else in their armoury too.

Like characters from an Enid Blyton novel, The Stalwart Five - FoHFs that were the InvestHedge Billion Dollar Club's top 10 largest firms ten years ago and are still in the top 10 largest today -have had lot of adventures. Blackstone grew up from a little boy in shorts, with powerful private equity parents, to a headstrong head boy of a prestigious $37.2 billion institution. Grosvenor, the shyer, less well connected cousin, takes the bat as sports captain at its $24.5 billion academy.

Permal, adopted by Legg Mason after Haussmann was taken into care, is now more adventurous than the other boys in the gang. Eager to experiment with managed accounts, UCITS, single-manager and longer lock-up funds, this cheeky chap seems to win the teachers over to stay at the top of the class.

Quellos never really liked school and refused to talk to anyone. But Seattle's secretive investor knew that if he accepted his new step parent, BlackRock Alternative Advisors, he would grow into a handsome teenager, leaving behind his mysterious and gawky past.

Like George in Blyton's Famous Five, Lyxor is the girl in the gang that wants to be a boy. Like all girls, Lyxor developed managed accounts early and knew what grown up investing was really about.

This new decade has the look and feel of a new and more enlightened phase of hedge fund investing. Whatever format investors chose for their hedge fund portfolios, they do need to know that who they pick today needs to be around in the next decade.

Sustainability of people, process and edge are topics that will thus be covered next week at the InvestHedge Forum: 'Building a Sustainable Future' at the British Museum on 13-14 September.

When InvestHedge was first born, LCH's Sopher recalls that it was not universally popular. "Possibly because some established players did not appreciate its intrusion into their private arena." Today it is still the only publication dedicated to the news, performance and analysis of the global hedge fund investing arena.