By Claire Makin
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
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
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
"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
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
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
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
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
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
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
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
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.