By Niki Natarajan
me I am a doctor." This phrase once instilled trust and hope.
These days less so. Why else are so many more patients turning
to alternative therapies? Is the same true of those used to
trusting their investment consultant without question?
As the land grab for advisory work accelerates some FoHFs
are giving themselves away to retain the pension fund turf
being eroded mandate by mandate by the very consultants that
are supposed to be opening the trustee doors to them.
Among the top 10 largest FoHF there are now many offering a
hybrid solutions with their FoHFs at the core and the ability
to add a few direct names at the edges for little or no extra
in terms of fees.
Meanwhile some (not all) of the brand name consultants
continue to offer their cut and paste hedge fund solutions: one
third to multi-strategy and global macro, one third to
long/short equity and one third to credit. A little Caxton
(even if Bruce Kovner is no longer running the ship); a dash of
Brevan Howard and a sprinkling of Bridgewater (now part owned
by Texas Teachers) and the portfolio is complete. Even a mere
journalist can put a similar portfolio together.
But who is responsible for keeping track of the performance
of these consultants' segregated accounts? Who is paying the
legal fees? How is due diligence done (and paid for)? Are the
consultants responsible for pulling the trigger on a manager
who has strayed off course, or is the pension fund liable? Does
anyone remember Rocaton and their penchant for Amaranth?
And at the same time, who is left to assist those thousands
of pension funds that need FoHFs to trawl through the 2,280
funds run by 556 management firms housed in the InvestHedge
FoHF database alone? Even filtering by assets so that only the
107 largest with $1 billion under management are considered,
one would have missed 50% of 2011's FoHF winners (see pages
24-32). Even bFinance is now no-longer conflict free, having
hired Chris Jones, ex-chief investment officer of Key Asset
Management, to offer advisory solutions to clients.
I was recently lucky enough to be invited to sit in on my
first UK pension fund investment committee meeting where the
three year track record of their FoHF was quite rightly being
What I realised very quickly was that the plan cannot have
been advised by their consultant as to why they should have
hedge funds (performance or protection); what hedge funds are
for (assets or tools) and hence where they should sit in the
portfolio. Nor the nuance of the FoHF they hired: a US equity
biased firm that was plonked in the alternative bucket at the
start of the 2008 down turn; no wonder the plan was not
Now compared to its peers and correctly benchmarked, this
FoHF had not done that badly, but was it the best pick for this
UK pension fund? Was it in the right place in the
The thing that galled me the most was the idea that the very
consultant that put them into FoHFs in the first place has now
changed its tune using the second layer of fees as the main
argument against FoHFs (note that the FoHF in question had
accepted a low flat fee in the first place).
The consultant's new 2012 version 2.0 policy is to offer a
segregated portfolio of direct hedge funds at far lower fees
than pre-existing FoHF. Fees are cheap, but is the investor
getting value for money? As Patrick Fauchier, co-founder of $7
billion Fauchier Partners once said "It's like a doctor giving
a patient a list of antibiotics. What if the patient picks one
that does not work 'oops you picked a wrong one'. Then
FoHFs are fighting back with their FoHF/advisory hybrids.
The big ones believe that this is the right way to go. They
believe pension funds get the benefit of institutional grade
hedge fund reporting and infrastructure for what they see as a
little margin erosion for services without revenues.
The smaller FoHFs, however, are struggling as they need
their fees to pay for the ongoing due diligence costs that
funds of funds incur because of the dynamic nature of manager
and strategy selection. Assuming performance is one's goal,
this group is where you will find it.
For now at least, with the hybrid solution pension funds do
get the benefit of proper experienced manager selection and due
diligence. But is this model ultimately sustainable? Is this
the wrong prescription for a potentially fatal lack of