NIKI NATARAJAN, EDITOR, INVESTHEDGE
In a recent poll of the
InvestHedge Billion Dollar Club - made up of 103 funds of
hedge funds (FoHFs) with more than $1bn in assets - 61% of
those that responded stated that consolidation was likely to
continue over the coming five years. Yet, at the same time, an
overwhelming 76% of the same universe said they would only grow
their businesses organically.
Five years ago, the world had yet to experience the
aftershocks of Lehman's demise, the global credit crunch and,
of course, the Madoff affair. Since then, 28 FoHF groups have
fallen below the $1bn level, with a further 28 considered
completely defunct, most in the wake of Bernard Madoff's
The more interesting story, five years later, is which FoHFs
have not only survived but also managed to grow. On 30 June
2007, there were 147 FoHFs in the InvestHedge Billion Dollar
Club managing $956bn; today, only 78 of those are left and they
run $538bn. This universe of 78 funds managed $718bn five years
ago and has since lost 25% of its assets.
Five years ago, the top 10 players included UBS, Permal,
HSBC, Man and Grosvenor, all of which are still in the top 10
today. Meanwhile, Union Bancaire Privée, GAM, Credit
Suisse, Amundi and Lyxor have fallen out.
The top 10 largest firms of June 2007 collectively manage
$161bn today, but have seen a loss of 2.3% in their assets in
the first six months of 2012 and a stellar 49% drop in assets
over a five-year period.
What is clear is that the after-effects of the last five
years have left the once $1.1 trillion industry dazed and
confused about the best way forward.
The number of FoHFs is shrinking as a result of both poor
absolute and relative performance as well as consolidation.
Some 24% of the respondents of the now $600bn industry are
looking at acquisitions as a route to grow their business.
Others believe that the way forward is through creating bespoke
Of those that believe M&A is the way to survive only 37%
saw their assets grow in the first half of 2012. But firms need
to realise that if they fail to attract net new inflows and/or
demonstrate lacklustre performance, they are going to shrink
and will therefore have no choice but to either acquire or be
acquired to survive.
For this reason, M&A is likely to dominate the 2012
stage. At least seven FoHF deals have been completed or
announced this year, including the landmark sale of Financial
Risk Management - which managed $8.7bn at the end of 2011 - to
the Man Group that already owns the multi-manager businesses of
GLG, RMF and Glenwood. This deal has propelled FRM back into
the top 10 with assets of $19.5bn; FRM had been languishing in
Union Bancaire Privée, which currently runs $13.1bn,
has completed its own transformation - post the purchase of
Nexar Capital Group - by renaming the firm UBP Alternative
Investments. Despite also buying Allianz Alternative Asset
Management and Ermitage, UBP has lost 71.5% of its FoHF assets,
equivalent to $32.7bn, over the last five years.
On the cards are Kenmar Group and Olympia Capital Management
that have agreed to merge, as have Rothschild & Cie Gestion
and Paris-based HDF Finance. Meanwhile, Crestline Investors in
Texas continues to pursue its strategy of acquiring relevant
distressed assets. Crestline saw its assets grow by 13.6% in
the first half of the year, boosted by around $300m of assets
from Lyster Watson's legacy FoHFs business. In 2009, the firm
acquired various assets relating to Northwater Capital
Nevertheless, M&A is not the only way FoHFs can grow.
Firms, including ABS Investment Management, have joined
investment banking advisory firms, such as Evercore, while
Prisma Capital Partners has taken the private equity route by
teaming up with KKR. Prisma saw its assets grow by 1.6% in the
first half of 2012 and 106% over the five years ending 30 June
M&A aside, the next five years is about staying
relevant: sourcing new managers, mixing tailored portfolios and
finding ways to offer what clients need. In addition to
consolidation, many of the survey respondents believe that to
survive FoHFs will need to specialise, while nearly 45% of the
universe believe that customisation is the main way forward,
especially if the lines between FoHFs and consultants continue
to blur. Fee compression will be inevitable as managers and
consultants fight for advisory business.
Blackstone Alternative Asset Management, which has retained
its title as the largest FoHF in the world with $41bn in
assets, is all about evolution and adaptation. In the first
half of the year, the New York-based firm grew by 5.36% and,
over five years, it has seen its assets grow by nearly 96% due
to its evolving cocktail of bespoke, advisory, seeding as well
as commingled offerings.
FoHFs that want to survive the next five years will need to
perform. The overall performance for 2012 to the end of July
was 1.33% but down 6.8% over the last five years, according to
the InvestHedge Global FoHF Composite.
For now, however, the exodus of assets that has defined the
last five years has stopped. In the first six months of 2012,
the asset growth of the InvestHedge Billion Dollar FoHF Club
was flat and it appears that the assets under management have
been stable around the $600bn mark since June 2009.
For the first half of 2012, 53 firms, which had $293.4bn
under management, had either flat or positive growth rates and
collectively saw their assets grow by 9.5%, while 50 firms with
$306.3bn under management saw their assets fall by 7.7%.
Ranked by assets, the top 10 largest firms that manage
$230bn have seen these assets grow by 1.5% during the last six
months. Over five years, this universe has lost 8.9% of its
The next step in the evolution of the FoHFs business will be
a resolution of the conflicts between consultants and FoHFs,
which is resulting in pension funds taking advantage of the
increasingly blurred lines of the growing advisory space to get
The key for success in hedge fund investing, whatever the
route taken, will be to know how to ask the right questions of
their providers and advisers because what has become clear is
that advice at either low or no fees, in a bid to regain market
share, is a zero sum game where the investors will get what
they pay for during the next crisis.