A look at the FoHF line-up of 2003: where are they now?

May 12, 2014  

GEMS to return to Billion Dollar FoHF rankings by buying Kenmar Olympia as M&A activity continues to reshape a changing industry

By Niki Natarajan

   
  Kevin Pakenham
The recent announcement that GEMS Group is buying the Kenmar Olympia Group, which itself completed its deal with Olympia Capital Management in 2012, prompted a look at how much the industry has changed over the past decade and ask whether or not this Pac-Man-like gobbling of smaller FoHFs is going to be a feature of the future as assets under management becomes the dominant mantra?

The 10-year time span, which includes the financial crisis of 2008, saw the Lehman Brothers collapse and the Madoff fraud as the two events that seismically shifted the face of the funds of hedge funds industry. In the funds of hedge funds space, however, most still believe that Madoff had the most profound effect, forcing investors to re-assess their use of FoHFs.

While the timing of the fraud and the financial crisis makes it is easy to blame Madoff for the change in investor buying attitudes, experienced institutional investors were always going to want to manage their own portfolios of hedge funds. Participation of alternatives in the defined contribution movement would have always played a part in how hedge funds and FoHFs would one day be used and it could be argued that the events simply speeded up an inevitable process.

A decade ago, 77 firms managed $198 billion in assets and the composite performance of the industry was up 9.62%. Today, just fewer than half of those names stand in the current InvestHedge Billion Dollar Club as the individually recognisable brand they were a decade ago (see table, page 30). Without double counting, this group of 39 firms now runs roughly $450 billion, which is 62% of the 2013 InvestHedge Billion Dollar Club that with 105 members currently manages $728 billion. At the end of 2013, the InvestHedge composite of all FoHF strategies was 8.67%.

The Man Group has been one of the biggest buyers of FoHFs although it had already bought stakes in RMF (2002) and Glenwood Capital Investment (2000) before 2003, meaning the two groups appeared separately in the 2003 listings. Man merged the assets of all its FoHFs, including those acquired when it bought GLG Partners in 2010, after it bought Financial Risk Management in May 2012.

The rationalisation was inevitable after it emerged that RMF was an investor with Bernard Madoff. In 2003, FRM was the eighth-largest FoHF in the world, dropping in the rankings to 21st place by the end of 2011. This FoHF asset agglomeration that is now run by Luke Ellis as an open-architecture hedge fund solutions business, with its own managed accounts platform, is the 14th-largest player.

Twenty firms have left the original 2003 rankings completely. Apart from Guggenheim Partners, which offers a different business proposition to the simple FoHF it ran in 2003, most of the FoHFs saw their assets dwindle after the financial crisis and some, like Focus Investment Group and Coronation International, have fallen under the $1 billion hurdle for the InvestHedge Billion Dollar Club, or like DB Absolute Return Strategies have chosen to shut shop rather than forge a partnership or enter a merger.

Tremont Capital Management and Optimal Investment Services were among those that saw their FoHF businesses close completely after it emerged they had large investments with Madoff. Ivy Asset Management, the sixth-largest firm at the time, is also no longer in existence due to its association to Madoff.

Ivy was part of the Bank of New York Mellon so any remaining assets are likely to have been managed by the bank's only remaining institutional FoHF business, EACM Advisors. In 2003, EACM was called Evaluation Associates Capital Markets and was 41 in the ranking. Evaluation is an example of a FoHF that started life incubated inside the bowels of a consulting firm, Evaluation Associates, which in 2011 was bought by Mercer Investment Consulting.

Casualties of Madoff have fallen into three camps. Those like Tremont and Optimal that have shut shop and those, such as RMF - then number two in the rankings - whose brand has now been absorbed into FRM. Although EIM is only now in the throes of a merger, the Swiss-based firm struggled to shake off the events, dropping from 22nd place to 59th over the decade and eventually choosing to merge to preserve the remaining business. EIM's deal with Gottex Fund Management is likely to see the EIM brand disappearing, although for Asia, Gottex has kept the Penjing brand after buying Penjing Asset Management in 2012.

The third type of Madoff investor is the one that has found a way to survive albeit in a smaller, humbler form. Only two firms that have managed this successfully have a Swiss banking legacy and are Union Bancaire Privée (UBP) and Notz Stucki.

UBP's strategy has been to overhaul the investment team and basically start again under Arie Assayag by buying his firm, Nexar Capital, which had already bought Allianz Alternative Asset Management in 2010 and Liberty Ermitage the following year in 2011, as the new engine in 2012. Retaining the UBP brand but driven by a new team, UBP Alternative Investments, which was once the fourth-largest FoHF, is now the 16th-largest.

Other 2003 Billion Dollar Club members that got caught up in the Madoff net such as La Fayette Investment Management, Meridian Capital Partners, Pioneer Alternative Investments and Silver Creek Capital Management still exist, although La Fayette is no longer in the 2013 InvestHedge Billion Dollar FoHF rankings. In the M&A rumour mill both La Fayette and Pioneer are reportedly up for sale. In 2013, Pioneer saw a further 17% of its assets flow out, leaving it with $1.26 billion.

What makes the GEMS Group deal interesting is that this second round of M&A is seeing FoHFs buying groups that have already bought FoHFs; real asset aggregation. The Kenmar Group had merged with Olympia Capital Management in 2012, but the combined deal will see GEMS Kenmar-Olympia Group return to the InvestHedge Billion Dollar Club with more than $2 billion. Although GEMS was removed in the 2013 full-year rankings, it is likely to have been below $1 billion for a while, possibly losing assets as a legacy of its own involvement in Madoff through GEMS Advisors.

The new group offers multi-strategy alternative and long-only funds of funds on macro and thematic strategies, as well as a range of systematic global and sectorial single funds. Additionally, the group owns an exclusive managed accounts platform, CLariTy Managed Account & Analytics Platform, through which the newly merged firm will offer dedicated tailor-made solutions. Through GEMS, the FoHF trio will also be active in private banking.

What is interesting to see is that, of the 2003 Top 10, half of them are still in the rankings. Permal, which was the third-largest group, is now the ninth-largest group in the rankings (which now includes the consultants). Its slot was partially boosted by its purchase of Fauchier Partners in 2013, as well as becoming part of a larger asset management organisation, namely Legg Mason, which happened in 2005.

UBS Global Asset Management A&Q is not only in the top 10, but from seventh place it has risen to fourth slot in the most recent survey, where consultants Mercer and Cambridge have entered above it, largely on the back of their consulting and advisory assets. In 2002, UBS reported its wealth-management hedge fund portfolios as a separate entity and, had those assets been merged back then, the group would have been the fifth-largest even in 2003.

Quellos Capital Management retained its prime slot through a merger, in this case with BlackRock in 2007 and, although it is the only FoHF provider for the asset manager and largely still does things in the way it has always done them, Quellos rebranded to become BlackRock Alternative Advisors. It is believed that the former Merrill Lynch fund of hedge funds assets that were in the rankings when BlackRock bought Merrill Lynch in 2006 are also part of the total under management today.

Goldman Sachs Asset Management and Grosvenor Capital Management have been chasing each other's tails for the past decade, coming in ninth and 10th respectively in 2003, and now moving up to sixth and seventh still in the same order in 2013. In 2007, the latter sold a stake to private equity firm Hellman & Friedman, giving it the power to stay independent.

Many of the top 20 FoHFs of 2003, including JP Morgan Alternative Asset Management, Credit Suisse and Mesirow Advanced Strategies, have retained their brand and largely grown their business - with Blackstone Alternative Asset Management becoming the clear winner in the FoHF game, jumping from 12th slot to top slot in a decade and seeing its assets grow from $4.8 billion to $54.29 billion, a leap of 1,031%.

Pacific Alternative Asset Management Company, which is part-owned by Franklin Holdings, has seen its assets grow by 391%, taking it from 23rd to 12th place. Harris Associates, an affiliate of Natixis, has rebranded but continues to operate business as usual. In fact, despite the advent of consultants, the merger mania and a host of other changes, Harris, now operating as Aurora Investment Management, may have only jumped one slot from 25th place to 24th, but its assets have trebled as the firm, still run by its founders, continues to grow organically, embracing change like the liquid alternatives market.

Lyxor Asset Management, once 11th-largest, has trebled its assets but now resides in 23rd place. Its cousin, also owned by Société Générale, Amundi Alternative Investment is now in 36th position, despite buying the FoHF business of Crédit Agricole that a decade ago was in 16th place and absorbing the Lyra Capital assets.

Other names that are no longer in the 2003 survey have been bought by other groups including Coutts, which is now the Aberdeen Asset Management fund of hedge funds engine, and Citigroup, which forms the spine of SkyBridge Capital's alternative business. Both firms were bought in 2010. Oxford Advisers was bought by Desjardin in 2007, while what was left of AIG was sold to Bridge Partners, which is owned by the Pacific Century Group, and Alpha Investment Management was bought by the Safra Group in 2004.

Although Crestline Investors was not part the 2003 Billion Dollar Club, it has bought up the legacy assets of two former members. In 2010, it bought Northwater Capital Management, which was in 28th place in 2003 but lost its footing when it was found to hold Petter's assets; and in 2012 Crestline bought the FoHF assets of Lyster Watson, which decided to pull out of FoHFs in favour of the single-manager business and to build a hedge fund replication arm.

Atlas Capital Group and HDF Finance are stories of FoHFs that were sold when the founder died. Atlas was bought by Sciens Capital Management, which also bought the managed account platform of the Partners Group that pulled out of hedge funds to focus on replication, while in 2012 HDF - France's first FoHF - was bought by the Paris-based arm of one the Rothschild investment groups to form Rothschild HDF Investment Solutions.

Some groups such as Bucephale and Synthesis Asset Management have disappeared and it can only be assumed they have shut shop as there seems to be no news of their businesses. Given the furore over the founder of Common Sense Investment Management in 2013, it is unlikely that this firm, which was the smallest $1 billion dollar firm in 2003, will be in the rankings in 2014; whether or not there will be any assets left to buy is another question.

What is certain is M&A in the FoHF space is not over yet. "There is plenty of value in the FoHF business," says Kevin Pakenham, managing director of Pakenham Partners in London. "The simple model of discretionary FoHF management has morphed into a sophisticated set of client services: specialist FoHFs aiming to access particular geographies; advisory services to build tailor-made solutions using different alpha capabilities; routes to access emerging managers; and income-generating solutions," he explains.

"These service developments reflect the disparate set of clients needs, from sophisticated clients who can set their own service agenda, to retail demand that is finally able to access the FoHF offerings directly, as regulation catches up with the opportunity set," he adds.

What remains to be seen is how many of the quality independent firms will eventually opt for a deal, and whether or not it will be a deal to grow assets, broaden their product or services range - or, as in the case of K2 Advisors, add retail distribution to the armoury.

According to Pakenham, there are two types of M&A transaction that continues to get done. "Acquisition of AUM where the management capability is relatively weak and can either be dispensed with or swiftly integrated into the existing processes," he says.

"Or acquisition of AUM, coming with management skills including client servicing ability and track record, which complements, for the acquirer, existing capabilities and fills out the product offering in the important area of absolute return." What the GEMS and the UBP mergers have shown is that there is potential in the market for a player to buy a FoHF that has already bought one or two FoHFs, suggesting asset aggregation is starting to take hold as the main name of the FoHF game. How many FoHFs will still be in the 2023 Billion Dollar Club remains to be seen.



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