AllianceBernstein’s FoHF business grows exponentially in four years

June 09, 2014  

Sustainability of beliefs and a consistent investment approach underpin the secret of the group’s long-term success

By Claire Makin

 
  Greg Outcalt
 
  Marc Gamsin
In less than four years, AllianceBernstein Alternative Investment Management has grown its multi-manager hedge fund business from $3 billion to more than $8 billion in assets. What is more, the group has achieved this feat as many of its competitors have seen their growth stalling or their assets shrinking.

Marc Gamsin, who co-founded the group along with Greg Outcalt in 1996 as SunAmerica Alternative Investments, attributes its success to longevity, firmly held beliefs, and the consistency of its investment approach. "We are doing the same things and investing with the same types of funds as we have for 18 years," he says.

Gamsin is head of AB Alternative Investment Management, while Outcalt is deputy chief investment officer. They also oversee nearly $4 billion in private equity assets. The team was acquired in October 2010 by New York asset management group AllianceBernstein, but has retained its base in Los Angeles.

The team's long experience of hedge fund investing means it has access to the highest-quality managers, Gamsin says. It was already a major player in the 1990s when the industry was in its infancy, and the same people are still making the decisions at AB Alternative Investment Management. From the perspective of its hedge fund managers, "we are viewed as a stable long-term institutional investor and a very good partner for them", he points out.

 
    
The team has also been able to capitalise on its track record. After 2008 and 2009, many multi-manager providers rushed to add commodity trading advisers, short-only managers and other types of tail-risk protection to their portfolios in a bid to prove that they were doing something to prevent a future catastrophe. As a result, they were not well-positioned to benefit from the post-crisis rally.

"We made a different decision," Gamsin says. He and his team did not think that their portfolios needed a radical overhaul. Instead, they believed that much of the market decline was due to illiquidity, and that prices of even the worst-performing assets, such as bank debt and corporate credit, would rebound when liquidity returned. "As a result, we did very well as the markets recovered," he says.

The 18-year performance of AB Alternative Investment Management's GIPs-compliant multi-manager hedge fund composite is 8.9% annualised through to the end of March 2014, well ahead of both the hedge fund and global equity indices. These results have been achieved with less than half the volatility of the equity indices.

But neither of these advantages would lead to the rapid growth that the business is experiencing without a third element: the ability to adapt to a new and fast-changing hedge fund landscape.

To keep up the pace, the team has received broad support from AllianceBernstein. Over the past four years, the New York-based firm has added systems and people to the alternatives investment team to help cope with its growing asset base. Operational due diligence, risk analysis and client reporting have all received a substantial boost.

The latest and most senior new hire was in February 2014, when Michael Conn joined the team in the newly created position of head of strategy, operations and development. Conn had previously been managing director and head of corporate strategy and development at rival TCW Group.

Gamsin himself was president of the alternative investments group at SunAmerica, and later at AIG Life & Retirement - the domestic life and retirement savings arm of AIG - which acquired SunAmerica in 1999. He was also in charge of AIG L&R's corporate development and legal affairs. A corporate attorney by training, he had been a partner in the Los Angeles law firm of O'Melveny & Myers, where he represented investment fund sponsors and other financial services clients.

Outcalt had been executive vice president of the alternative investments group at AIG L&R, where he had previously headed the firm's risk management and investment accounting groups, and contributed to its activities in investment management and corporate development.

The acquisition has worked, primarily because it was a good cultural fit from the start, Gamsin says. He and Outcalt wanted their team to be acquired by a firm that valued long-term client relationships, conscious that they were asking their former colleagues at AIG L&R to become a client. "It was very important to us that our new firm would value that relationship as much as we do and AllianceBernstein fit the bill," he says.

Gamsin and Outcalt also wanted their new parent to be respected by the hedge funds with which they invested. AllianceBernstein has a fundamental research-driven philosophy that is respected by the hedge fund community, and so news of the takeover was well-received by managers, Gamsin says.

AllianceBernstein itself is the result of a merger in 2000 between Alliance Capital and Sanford C. Bernstein, an old-established New York private client group. The firm is now a $457 billion global business, 64%-owned by AXA, that encompasses institutional investors and retail mutual funds, as well as private clients.

With the weight of AllianceBernstein behind it, the alternatives team has been attracting new institutional mandates, particularly for customised hedge fund portfolios. The customised side of the business now accounts for more than $6 billion of AB Alternative Investment Management's $8.2 billion under management.

Most of AB Alternative Investment Management's assets are from very large institutional investors based in the US, Europe and Asia. Gamsin says that the team aims to develop a deep understanding of their needs and portfolio objectives, and to maintain close relationships with them.

Another source of inflows is AllianceBernstein's private client group, which the alternatives team regards as an attractive institutional client. In October 2012, a closed-end fund was launched under the 1940 Act regulations (InvestHedge, April 2014). The AllianceBernstein Multi-Manager Alternative Fund has already raised more than $1 billion and has returned 10.7% annualised since inception through to the end of March 2014.

The fund is broadly diversified and invests with such blue-chip managers as William Ackman's Pershing Square, JANA Nirvana Offshore, Oaktree, Canyon and Third Point, as well as recent fund launches with limited capacity including Falcon Edge and Nokota. It is run alongside the alternative investment group's traditional commingled onshore and offshore partnership for qualified investors, the AllianceBernstein Multi-Manager Hedge Fund Portfolio.

The team's philosophy is based on traditional investment beliefs. One is the superiority of fundamental investment strategies based on bottom-up research. The other is the ability of selected managers to add alpha.

"We made the decision very early on that we didn't favour quant-driven strategies such as CTAs or market-neutral," he says. As well as avoiding 'black box' strategies, the team also steers clear of strategies or funds that are highly leveraged or rapidly traded.

Its favoured investments fall into three broad categories: long/short equity, credit (distressed debt and relative-value credit), and event-driven. The team's asset allocation decisions have generated about half of the team's outperformance over the years, according to Gamsin.

The rest of the outperformance has been generated by manager selection. As Gamsin admits, it is difficult to prove superior selection skills. But his team produced numbers to support its claim after a query was raised by Howard Marks, the founder of Oaktree Capital Management, at a presentation he attended.

Marks remarked on AB Alternative Investment Management's strong track record, but wondered if the outperformance was driven by funds that the team had invested in long ago, but were since closed.

So AB Alternative Investment Management dug into its track-record information to find out. It split underlying managers into the 'vintage years' in which they were hired, and then measured the outperformance of each vintage against the HFRI FoHF index through to December 2013. The results were conclusive: each of the 'vintage years' outperformed the index, but managers selected in the early years did not do any better than those who were selected later.

Gamsin outlines several reasons for the team's competitive edge in manager selection. The first is its longevity. "We have a lot of experience, as we've been around longer than most and were early investors with some of the most successful managers in the industry," he says.

As a result, the team can draw on a large network of managers, investors, prime brokers and other sources for due-diligence purposes. "We can generally find someone who's worked with a manager and is able to verify his background, track record and reputation for integrity," he adds.

The second differentiator is the team's willingness to invest with new funds. These are not new managers, as Gamsin points out, but experienced managers leaving a prop desk or established hedge fund to start their own shop. The median underlying manager track record is nearly 10 years. One quarter of the team's investments were made within the first year of a fund's launch. "As a result, we are viewed as a preferred investor when a high-quality manager starts a new fund," he notes. While not all of these early stage managers have worked out, overall they have returned 300 basis points above the group's broad portfolio.

Finally, the team never gives up on the potential for capacity with best-in-class closed funds. Nearly 60% of the commingled fund's managers are closed to other investors. "We try to engage with great funds we want to invest with even if they are closed," Gamsin says. Investors often pull out unexpectedly, and AB Alternative Investment Management is willing and ready to step in and take up the spare capacity, however small. This policy contrasts with many of its competitors, who will turn down an undersized allocation.

The team has no preference for managers of a particular size, but does require their size to be appropriate for their strategy. Among its smallest managers is a $500 million small-cap long/short manager that has committed to cap its assets at $1 billion. At the other end of the spectrum are managers who are focused on acquiring portfolios of mortgages or corporate loans from European banks, and require substantial assets under management to be effective.

Once invested, the team tends to stick with its managers, although managers are watched closely for signs of a deteriorating competitive edge. Turnover is a relatively low 10% to 15% a year. Managers on the 'watch' list include those who are causing unease because of operations; personnel turnover; a significant change in strategy or portfolio composition; performance that is inconsistent with the strategy; or asset growth that is perceived to be unmanageable.

As for asset allocation, unlike many multi-manager providers, AB Alternative Investment Management is not looking to gain a competitive edge by making dramatic shifts between strategies. The team will make top-down calls, but these tend to be incremental and only for compelling reasons. For instance, it increased allocations to distressed debt and residential mortgages after the financial crisis.

"We have never had to make the big allocation bets that other funds have made to generate return," Gamsin says. In fact, the team's best overall decision was simply to stick with its traditional asset allocation after 2008, he points out.

Instead of shifting things around, the team prefers to make sure that it has picked the right managers and combined them in a well-constructed portfolio. With this in mind, portfolio construction and risk management are closely intertwined.

Diversification is a core concept. Portfolios are diversified among up to 50 different funds, focusing on different regions and sub-strategies. Within the three broad strategy buckets, funds are chosen for unique areas of focus. The long/short equity bucket includes broadly diversified global funds, as well as funds specialising in technology, biotechnology, electric utilities, Asia and Europe, for instance. Distressed-debt managers focus on different segments of the market.

Each manager is vetted for the quality of its own risk management processes and downside protection.

At the same time, the risk management team, headed by Akhil Jain, monitors any changes in manager's underlying exposures, and looks at a raft of other statistics that allow it to identify systemic risks and conduct cross-correlation and scenario analysis.

Jain and his team have also developed a proprietary multifactor risk model that helps to explain the performance of a portfolio and its underlying managers. This, in turn, allows them to identify which managers are producing true alpha, as opposed to performance that derives from systematic risks or betas.

The model relies on several factors to explain returns. They include the classic quant factors of value, growth, momentum and volatility, plus more that AB Alternative Investment Management prefers not to name.

These factors can explain the vast majority of betas in the portfolio, according to Gamsin. He and his team have looked at models based on up to 90 factors, but he says that these only confuse the picture. "We found that by adding a lot of other factors you are adding a lot of noise that tends to mask the idiosyncratic manager-driven return in your portfolio," he points out.

Many of these additional factors turn out to be transient and, while they may help to explain past performance, they may not apply in the future. As a result, AB Alternative Investment Management prefers to base its model only on those factors that have been proved to persist over time.

Despite the increasing sophistication of risk modelling and measurement, not all of the group's clients are heavily focused on volatility targeting and other quantitative measures of risk. Some do not view risk as volatility, but in terms of permanent loss of capital, Gamsin says.

The team's ability to cater to the needs and objectives of its individual clients is one of the group's strengths, and customised business has grown fast. Discussions about new mandates often focus on long/short equities and early-stage managers. "These are the areas that seem to resonate with clients," he says.

Some institutions who are seasoned FoHF investors will typically have underlying investments in larger hedge funds, but are keen to access interesting start-ups. Other clients may be new to hedge fund investing but are looking to add hedge funds to their portfolio.

FoHFs used to be the vehicle of choice for these new investors, but this is no longer the default position. "Some of them want long/short equity managers as a substitute for long-only managers who they see as only providing beta to the market," Gamsin says.

In response to this changing world, multi-manager providers will have to develop new tactics to survive the next stage in the evolution of the industry, he believes.

The days when a provider could offer only a commingled generic FoHF are long gone, in his opinion. Instead, providers need to tailor their offering to the unique needs of institutional clients, and also reach out to new groups of investors looking to invest in alternatives, such as the retail and private wealth markets, he says.

The key is to provide services and create appropriate products for a very diverse mix of clients.

This is one reason why FoHFs are aligning themselves with larger asset management groups that can support them with the platforms and distribution channels they need.

AB Alternative Investment Management has already travelled a long way down this road. "With our institutional relationships, private client group and experience in alternative investing for the retail market, we are very well positioned to grow in an industry that is rapidly changing," Gamsin says.





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