Friday, April 22, 2005

 

Edhec on Struc. Pdts for Pension Funds

Schemes should ‘look at structured products’

IPE.com 22/Apr/05: SWITZERLAND - The pension fund world lacks risk management and should look at structured products, an investment conference in Geneva has been told.

Koray Simsek, a professor of finance at the Edhec business school, advocated pension funds gaining exposure to guaranteed structured products.

Such products, Simsek said, offer a guarantee on the capital initially invested. “I am in favour of using them. These are called third-generation portfolio insurance products so they are a bit more sophisticated,” he told IPE on the sidelines.

“They would be very desirable especially to underfunded pension products.”

Senior Watson Wyatt consultant Edouard Stucki agreed that they may be useful to underfunded pension funds, which have decreased their exposure to equities.

But healthy funds would cut their downside risks, but in the process do away with the up-side risk. “When you are a fully funded fund, you may want up-side,” he observed.

Simsek and Stucki were speaking at a conference organised by Edhec.

Simsek explained that pension funds have two ways of implementing risk management: diversification and risk hedging, with guaranteed structured products in the latter category.

He argued they have risk-reduction properties and that once pension funds used these products, there would be no further need of risk diversification.

“They are natural investment vehicles for institutional investors keen on non linear pay-offs,” he told delegates.

Allocation to these products would depend on the pension fund’s risk aversion. He said for instance that investors with strong risk aversion would replace bonds with such structured products, while those keen on risk could avoid them all together.

But institutional investors should watch out for counterparty risk.

“As consultants we want providers with significant experience and legal teams who understand where pension funds are coming from, Stucki said.

He also mentioned the issue of costs, which had alienated some Swiss consultants to the product.

“Many colleagues do not like structured products,” he said - explaining that the consultant community does not justify the costs involved, which he said could be lowered through a higher degree of transparency.

By Cecilia Valente

Saturday, April 16, 2005

 

Get to Ivan Vercoutere for Shopkorn (Albourne Village 4/15/05)

12/04/2005 Prince of Liechtenstein's firm made $6bn from hedge funds

Bloomberg reports, Liechtenstein’s Prince Hans-Adam II made his debut in hedge funds by investing in Long-Term Capital Management LP. LGT Capital Partners, his family firm, put $2.5 billion more into similar funds and has earned $6 billion for investment in buyout firms and hedge funds. Now, LGT is pushing to expand to compete with Man Group Plc and UBS AG. LGT Capital’s hedge-fund business, which reduces risk by spreading its money among multiple funds, helped the firm prosper when Hans-Adam battled parliament for more power and police probed allegations of money laundering in the country of 34,000 people. The political conflict was settled in the prince’s favour two years ago when an intergovernmental anti-money-laundering body ruled that Liechtenstein was in compliance with international reporting regulations.

Thursday, April 14, 2005

 

Get to Michael Dobson at Schroders! (P&I Daily 4/14/05)

Katherine Breedis, Chris Costanza, Tatiana Pohotsky and Joanna Shatney joined Schroder Investment Management as analysts on the U.S. large-cap equity team, said Martin Luz, spokesman. All are new positions. Schroder is searching for one more analyst to round out the team, which now totals 13, Mr. Luz said. The hirings are "part of Schroder's continuing program to build out its North American investing capability," Peter Clark, CEO of Schroder's North American operations, said in a news release. Schroder had $204 billion in assets under management as of Dec. 31. Ms. Breedis and Ms. Shatney were both vice presidents and senior analysts at Goldman Sachs. Mr. Costanza was an associate director and analyst at UBS. Ms. Pohotsky was vice president and analyst at Independence Investments. Kelly Frederick, Goldman Sachs spokeswoman, did not return a call by press time seeking information on Ms. Breedis and Ms. Shatney's replacements. Bill Dentzer, UBS spokesman, did not have information on filling Mr. Costanza's post. An official at Independence said the firm is evaluating whether it will replace Ms. Pohotsky.

Wednesday, April 06, 2005

 

Incubation Competition

Sowing the Seeding

By Chris Clair, Reporter
Monday, April 04, 2005 4:26:20 PM ET

Incubation can be a ticket to success and prosperity for start-up hedge fund managers. But not all new managers choose to take the ride.

Like singles in a lonely city, hedge fund incubators and start-up hedge fund managers find themselves drawn to one another by mutual desire and circumstance. Each has something the other wants, and amid the swirling colored lights and thumping dance music of what we can surely now acknowledge is a giant hedge fund party, many on both sides are taking steps to make sure they do not wake up alone in the morning.

Not all relationships work out, however, and some managers are deciding it's better to fly solo than hook up with a partner they may later wish they'd never met. Not to draw out the relationship analogy too far, but some managers have learned by word of mouth or through personal experience that while incubators can make for fine suitors early on—plying the funds with seed capital, advice and client introductions—down the road they can sometimes wind up taking more than they give.

To consummate a seed capital or incubation relationship, start-up hedge fund managers not only must provide the incubator with capacity in the fund, they must also sell to the incubator an equity stake in the business. This guarantees that the incubator both reaps the rewards of what hopefully is a wise and early investment in the manager's fund and that it also shares in whatever financial gain there is to be had in the growth of the manager's business.

It can be a win-win, as it has been for Lyford Group International Ltd., New York. Chief Operating Officer Joseph Bucci says Lyford got a timely boost from J.P. Morgan Incubator Strategies, which infused the former Bermuda-based family office fund with US$12.5 million and provided valuable help finding a New York office and working through the intricacies of opening the fund to outside investors. "The family liked the idea of—since they didn't have much awareness of the hedge fund industry—of having someone more involved in the marketplace assist them in meeting their goals of getting the fund up and running," Mr. Bucci says.

Lyford's case is somewhat unusual in that the fund wasn't technically a start-up. Chief Investment Officer Samer Nsouli had been running this particular family's money since 2002 using the same global macro strategy Lyford has now opened up to outside investors. When it came time to broaden the fund's reach, Mr. Nsouli went looking for help. He found it at J.P. Morgan, with which Lyford already had a private banking relationship.

In August 2004, J.P. Morgan Incubator Strategies made Lyford the sixth hedge fund manager in which it had taken an equity stake. Simon Lack, chief executive of J.P. Morgan Incubator Strategies, said the fund and its investors currently have placed about US$100 million in seed money with seven hedge fund managers. An eighth fund is on tap to join in April.

This relative handful of funds has been selected out of more than 1,100 proposals. "Obviously that's a tiny percentage, which means that the average new hedge fund manager isn't that strong," Mr. Lack says.

Yet there are still any number of large investment banks, and even smaller firms, eager to provide seed capital and incubate emerging managers. The rationale is simple: Good managers grow faster, so finding them early and securing capacity is crucial. Find the right manager, and an incubator or seed capital provider can ride a nice gravy train. Or maybe several.

That the number of firms seeking new managers with offers of incubation or seed capital has increased is not surprising to Mr. Lack. "Since we set our business up three years ago, there's certainly more capital and more opportunities out there," he says. "You can think of it having grown at roughly the same pace as the industry itself."

Indeed stacks of articles and hours of seminars have been devoted to dissecting how managers can find seed money and secure incubation. Just as many of those have targeted the firms that provide those services, telling them how to find the best managers.

An article in Absolute Return magazine about raising capital described the simple formula for raising money if you're a start-up hedge fund manager: You have worked for Tiger Management, SAC or other top hedge fund; have a proven record for making money; drop US$1 million or so on infrastructure; and have a strategy that's all the rage with investors. Simple.

For everyone else—which turns out to be a lot of people—incubation and seeding are ways to gain an advantage. It worked for Cognis Capital Partners LLP, London, a European distressed and high-yield-credit, event-driven fund that J.P. Morgan Incubator Strategies seeded in December 2003. Last year the fund, which relies on fundamental credit analysis to identify opportunities in distressed, mezzanine and high-yield corporate debt in Europe, was up 24%, according to Chief Executive Myra Tabor, and as of February 2005 had US$311 million under management.

Ms. Tabor said Cognis was spun out of the Royal Bank of Scotland, and immediately knew it wanted to find a partner. "We all came from private equity backgrounds, so we understood the value of a partner," she said.

A number of firms contacted Cognis offering help and capital, but the principals were "pretty choosy." Ms. Tabor said she got the impression that the firms they heard from early on thought that because Cognis was new and eager to get up and running that its principals would take the first deal offered to them. They didn't. Instead a number of institutions approached them and they eventually were introduced to Mr. Lack via J.P. Morgan's London office. "J.P. Morgan understood our strategy and people there had known us for a long time," Ms. Tabor said, and that upped the confidence level.

Mr. Lack says Cognis would have generated the returns even without J.P. Morgan's help, but it would not have reached its capacity nearly as fast. Doing so has allowed the fund to collect more management fees, making everyone, including J.P. Morgan, a lot more money.

"They [Cognis] are very qualified and would have been successful in any event," Mr. Lack says. "But we feel they've been more successful more quickly through the strategic partnership."

But for every Cognis there are 175 proposals from hedge fund managers that J.P. Morgan decided to pass on. For whatever reason, whether it was the business plan or the strategy or some flaw uncovered during due diligence, those managers were deemed too big a risk. And when it comes to incubation and seeding, there is more at risk than the manager's own money. When banks get involved the stakes go up—for everyone. Fund failure means not only the manager loses, but a major firm with shareholders to whom it must answer has to take a business loss. The potential doom is magnified for the incubator or seed capital provider by the fact that it is dealing with an emerging manager, an inherently more risky bet given the lack of a track record and the fact that statistically between half and two-thirds of all new businesses ultimately fail. A study from Columbia University paints a slightly more upbeat (if by "upbeat" you mean that instead of breaking your ankle in a fall you only severely sprained it) picture, claiming 30% of new funds don't last more than three years.

"The downside clearly is that start-up funds are more risky," says Mr. Lack. And while good return comes without risk, those risks can be managed. Hence the large number of proposals J.P. Morgan discards.

Those managers may find what they're looking for elsewhere. Or they might not, and then they will be forced to go it alone or give up the dream. Sometimes, though, it is not the incubator that isn't interested in a seeding or incubation arrangement. It's the manager.

There are any number of managers out there who do not fit the successful-pedigree, hot-strategy criteria outlined earlier. Yet they pursue their strategies as self-contained units; as solo artists. They prefer not to get bogged down with seeding and incubation, agreements that require them to give up a part of their company and share profits for the length of the contract. Weigh the cost of the relationship before they start, and decide to operate alone. They take on all the risk, bear all the burden but if they're right, they reap all the reward.

Occasionally, Lyford's Mr. Bucci says he hears of managers who get into seeding or incubation relationships where everything works great in the beginning, but sharing success causes a strain that grates on the manager. Some of that depends on the relationship between the manager and the seed capital provider or incubator. Some firms are very hands-on, getting involved in day-to-day decisions and demanding sign-off power for everything from office space to prime brokers. Others are less involved, essentially writing the manager a check and letting him operate freely, within the constraints of whatever risk profile the manager has agreed to. And to that end, the manager must provide full transparency and position reporting.

Sometimes managers and incubators looking for the same thing find each other. Then life is great. Other times, though, mismatches occur and feelings can get hurt.

The process is getting more refined. As it does mismatches will probably become less common and success stories will multiply.


CClair@HedgeWorld.com



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