50 shades of advisory

March 10, 2014  

“Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway” – Warren Buffett

By Niki Natarajan

The last few years have seen the fox feasting in the hen house. But, by including the fox - aka the investment consultant - in the latest InvestHedge Billion Dollar Club ranking of professional hedge fund allocators, we are aiming to highlight the adaptogenic behaviour of any adviser, either a FoHF or a consultant, in search of a fee.

Pure consulting businesses do not, never have and never will pay much - which is why consultants want to offer fiduciary/commingled services to their clients. This is not new: Frank Russell went this way many years ago, while EACM Advisors was once part of the Evaluation Consulting Group.

But to protect their patch, some FoHFs believe they have to offer their research and other services at a lower fee just to keep hold of their territory. This is because today, in a beauty parade for a hedge fund adviser, a pension fund is likely to have FoHFs competing against the very same consultants that once hosted these searches.

In a twist of irony, one consultant recently admitted to being a discretionary player when he complained about having to show composite returns to the consultant running the search, despite being rivals for business elsewhere.

It is because of this broad spectrum of grey - which spans commingled investing, through customised solutions to advisory services - that we decided to include those consultants that offer commingled, advisory and fiduciary services to hedge fund investors in the InvestHedge Billion Dollar Club.

Traditional FoHFs will not necessarily agree with this move. But at least the fox is under the spotlight. And multi-manager hedge fund investing has never been entirely black and white, to be fair; since the inception of our Billion Dollar club in 2002, FoHFs have been reporting an amalgam of commingled and advisory assets.

A year later, when the two sources of assets were collected as a separate number, it revealed that advisory assets were 7.3% of the total hedge fund assets run by FoHFs. This ratio of advisory assets compared to total assets in hedge funds doubled to 15.4% in 2004 and has hovered at the 13% mark until this current survey.

Assets under advice have now jumped to 25% of total assets with the inclusion of Cambridge Associates, Mercer and Towers Watson. In reality, most consultants manage a spectrum of assets with relatively little on a commingled basis but the majority of the assets are advisory. That said, Cambridge Associates does not offer commingled investing.

In this latest survey, pure commingled investments account for $397 billion across the 105 firms. But there are 46 firms, including three consultants, managing $180 billion in advisory assets.

Veterans of the industry will remember that in 2003 Blackstone Alternative Asset Management was advising the California Public Employees' Retirement System on its direct allocations for a fee of $5 million per annum ( InvestHedge, October 2003).

When Blackstone gave up the mandate, three new advisers - Pacific Alternative Asset Management, UBS O'Connor and Financial Risk Management - were appointed, with the latter rejecting the mandate on what was believed to be fee grounds ( InvestHedge, March 2004).

In the public fund arena, CalPERS was seen as a trailblazer in terms of hedge fund investing. But today - as InvestHedge shows month after month - end investors are increasingly buying hedge funds directly. Their challenge is to choose who to advise them, and this is the territory that has become the battle ground between FoHFs - who have done this job historically - and the consultants, who now believe they are up to speed.

As consultants move into the fiduciary game, transparency of fees is a must. In a white paper entitled Understanding the fees charged within fiduciary management, Aon Hewitt recently highlighted the need for transparency in the fees charged by fiduciary managers.

It believes that fiduciary management fees break down into four main components: fiduciary management provider fees; underlying manager fees (including any fee savings on external managers); investment consultancy fees (if any); and other fees, such as administration costs, custodian fees, legal review fees or transition management fees.

Today, an investor can have a simple conflict-free consulting service from Albourne Partners for $400,000 - or, like the Royal County of Berkshire Pension Fund, it can select a seasoned hedge fund multi-manager such as Grosvenor Capital Management ( InvestHedge, November 2013).

The real question today is no longer who will give me the most for less, but who will really service my needs best?

As this article shows, a headline is not everything. End investors need to read the full story before they buy an adviser based on headline fees alone.

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