This unique book considers trends within the marketplace and strategies for hedge fund managers to gain success with investors and outshine competitors.
Hedge Funds: Crossing the Institutional Frontier is a most timely addition to the hedge funds discourse, considering changes in the industry itself: how hedge fund managers should be reacting to consolidation in the industry and the changing demands of investors. This book provides you with a detailed account of the key issues facing the hedge fund industry, and strategies for hedge fund managers to gain success both over competitors and with investors from leaders in the field.
Sohail Jaffer has brought together 18 experienced industry leaders who discuss trends within the marketplace and the challenges confronting the industry:
What are the key factors in a successful hedge fund evolution?
What are the business models and structural issues in Hedge Funds Mergers & Acquisitions?
What is the impact of institutionalisation of the industry, and how is this transforming the hedge fund and funds of funds marketplace?
What are the risks and opportunities for hedge funds in this new environment?
What are the issues in combining hedge funds and structured products?
How can hedge funds meet the dangers (and opportunities) of private equity investments?
What are the operational and regulatory risks facing the industry and how can the industry best meet these?
How can hedge funds get the best from their prime broker?
Understanding investible hedge fund indices
How to successfully leverage a hedge fund portfolio
What are the new drivers for successful investments, including entry into new markets such as Asia.
Other titles edited by Sohail Jaffer:
Alternative Investment Strategies (published 1998)
Islamic Asset Management: Forming the Future for Shari'a-Compliant Investment Strategies (published 2004)
Islamic Retail Banking and Finance: Global Challenges and Opportunities (published 2005)
Multi-Manager Funds: Long-Only Strategies for Managers and Investors (published 2006)
Funds of Hedge Funds chapter in The New Generation of Risk Management for Hedge Funds and Private Equity Investments, edited by Lars Jaeger with 43 risk management experts (published 2003)
Summary
Summary
Part 1 considers the current trends in the hedge funds marketplace In Chapter 1, Tom Brown, Giles Drury and Neil Fatharly from KPMG introduce the key trends and challenges facing the hedge funds industry, including capacity, investor money blows, involvement of regulators and convergence with other investment sectors. This is followed by Eric Weber from Freeman and Co., LLC who in Chapter 2 considers hedge fund mergers and acquisitions – what are the business models driving deals? In Chapter 3, Brad Southern, also from Freeman and Co., LLC looks at the nuts and bolts of M&A in the industry – how and why does it happen: what are the motivations for buying and selling, and what are the key structural issues in hedge fund M&A. This part concludes with Philip Manduca from Titanium Capital, who looks at the evolution of hedge funds, from start ups, to established hedge fund businesses.
Part 2 considers the changing demands of investors in hedge funds. This part opens with Alan H. Dorsey from CRA Rogers Casey, who examines institutional investors’ expectations of hedge funds and growth within the industry as it becomes increasingly institutionalised. Blaine Tomlinson from Financial Risk Management provides some practical pointers that investors might use to identify future hedge fund ‘winners’ in Chapter 6. In the following chapter, funds of hedge funds are discussed by Omar Kodmani of the Permal Group – how do they continue to earn their keep and have we reached the peak of investment through these vehicles? Robert Jaeger from EACM Advisors, LLC challenges the conventional myths of hedge fund investing in Chapter 8 – what are the practical realities of what hedge funds should beware? In the final chapter of this part, Bruce Brittain and Andrew Wittkop from Pimco look at the impact of the institutionalisation of the hedge fund marketplace and how their investment practices are transforming the hedge fund marketplace.
The third part of the book considers the risks and opportunities for hedge funds themselves as they approach the new frontier. In Chapter 10, Lothar Mentel from Threadneedle provides an overview of structured products and hedge funds – illustrating their fundamental concepts and discussing their strengths and weaknesses. In Chapter 11, Sir David Cooksey from the EVCA discusses the threat to hedge funds from private equity investors and the impact of this convergence on the investment landscape. Jean-René Giraud from Edhec-Risk Advisory describes the operational risks confronting hedge funds in Chapter 12, which are then considered by Andrew Shrimpton from the Financial Services Authority in Chapter 13 in the light of future industry regulation. This part is concluded by Jim Lafaman at Credit Suisse who discusses the changing role of prime brokers and how hedge funds can ensure best practice.
In the final, Part 4 of this book, our contributors consider some new strategies which may be adopted by hedge funds and investors to ensure the best returns. The part opens with Tom Schneeweis, Vissilis Karavas and Igor Grasic who discuss investible hedge fund indices – how are these constructed, what are the management and performance issues, and what is the relative performance of investible indices and traditional fund of funds products. In Chapter 16, John Dunn III from Thunderbird, The Garvin School of International Management looks at the cost of leverage in hedge fund portfolios and how useful (and dangerous) it can be. This is followed by a discussion of hedge funds in Asia by Khiem Do at Baring Asset Management – what are the growing opportunities in the region. Finally, the book is concluded by Sudhir Krishnamurthi from The Rock Creek Group who summarises the changing nature of the hedge fund industry and considers some strategic decisions in constructing hedge fund portfolios.
Part I – Trends in the hedge funds marketplace 1. Identifying the key trends and challenges shaping the growth of the global hedge fund industry. Tom Brown, Giles Drury and Neil Fatharly, KPMG 2. Hedge fund mergers and acquisitions: the industry trends and business models driving deals. Eric Weber, Freeman & Co. LLC 3. Hedge fund mergers and acquisitions: how and why does it happen?. Brad Southern, Freeman & Co. LLC 4. From start-ups to big swingers: hedge fund boutique to hedge fund business. Philip Manduca, Titanium Capital Part II – The changing demands of investors. 5. Examining the increasing institutionalisation of an industry: what are institutional investors’ expectations of hedge funds?. Alan H. Dorsey, CRA Rogers Casey 6. Picking future hedge fund winners. Blaine Tomlinson, Financial Risk Management 7. Funds of funds in the brave new world: earning their keep. Omar Kodmani, Permal Group 8. Myths and realities of hedge fund investing. Robert Jaeger, EACM Advisors LLC 9. The institutionalisation of the hedge fund marketplace. Bruce Brittain and Andrew Wittkop, Pimco Part III – Risks and opportunities for hedge funds. 10. Combining hedge funds and structured products. Lothar Mentel, Threadneedle 11. Private equity: dangerous territory for hedge funds or a new opportunity?. Sir David Cooksey, EVCA 12. Hedge fund operational risks: risks without rewards?. Jean-René Giraud, Edhec-Risk Advisory 13. FSA update: supervising hedge fund managers not hedge funds. Andrew Shrimpton, Financial Services Authority 14. Prime brokers: analysing their developing roles in the marketplace. Jim Lafaman, Credit Suisse Part IV – New strategies for hedge fund investing. 15. Angels and demons: demystifying investible hedge fund indices. Thomas Schneeweis, University of Massachusetts and Lyra Capital Vassilis N. Karavas and Igor Grasic, Lyra Capital 16. Leverage in hedge funds and leveraging hedge fund portfolios: the alpha and the omega and the ‘in between’. John E. Dunn, III, Thunderbird, the GarvinSchool of International Management 17. Asian hedge fund markets come of age. Khiem Do, Baring Asset Management 18. Strategic decisions in constructing hedge fund portfolios. Sudhir Krishnamurthi, Rock Creek
About the authors
About the Editor
Sohail Jaffer Sohail Jaffer is a Partner within the FWU Group, the international financial services group headquartered in Munich. FWU Group’s core activities comprise asset management, bancassurance (unit-linked investment plans) and individual pensions.
As Managing Director of Premium Select Lux SA, an asset management subsidiary of FWU AG in Luxembourg, his responsibilities include fund product development, the evaluation and selection of external asset managers for multi-manager programmes and building international distribution across bank and other financial intermediary channels for a broad array of private label wealth management solutions including a Dynamic Quant global equity investment strategy and Socially Responsible Investment products.
From June 1998 until June 1999 he was Senior Vice President within the International Mutual Funds Group of Scudder, Stevens and Clark Ltd, based in London and responsible for international product development in Europe and Japan. From 1989 to 1998 Mr Jaffer worked in Citibank London. He was with the Financial Institutions Group until 1996 and later was Director within Citibank’s Alternative Investment Strategies Group, which formed part of Citibank Global Asset Management. His responsibilities included international business and product development, designing structured fund products linked to a broad spectrum of alternative investments, and the sales and marketing of a wide range of Alternative Investment Funds to institutional investors in Europe and the Middle East region. He is a UK qualified accountant (FCCA) and was an Audit Partner with PricewaterhouseCoopers.
A Council Member of the Alternative Investment Management Association (AIMA) for the Benelux region, he was also Chairman of AIMA for two consecutive terms from 1997 to 2000. He is also an active member of AIMA’s Investment Research Committee. He has written extensively on alternative investments throughout the financial media, and is the editor of Alternative Investment Strategies, Funds of Hedge Funds for Professional Investors and Managers, Islamic Retail Banking, Finance and Islamic Asset Management and Multi-Manager Funds all published by Euromoney books.
Sohail is a member of ALFI’s Asset Management Advisory Committee and of ALFI’s Hedge Fund Committee. ALFI is the Association of the Luxembourg Fund Industry.
About the contributors
Bruce Brittain Bruce Brittain is an Executive Vice President and product manager for PIMCO’s Absolute Return Strategies (PARS). He joined PIMCO in 2002 from Lyster Watson & Company in New York where he was responsible for the firm’s hedge fund institutional advisory business. Mr Brittain has had a professional investment career spanning economic research, foreign-exchange product management, fixed-income capital markets and equity derivatives at Salomon Brothers, Swiss Bank Corporation and Lehman Brothers. He has 24 years of investment experience, including five in the hedge fund industry, and holds a Master’s degree in Economics from the London School of Economics and Political Science, and a Ph.D. in Economics from the University of Chicago.
Tom Brown Tom Brown is a partner in KPMG’s Financial Sector Practice in London where he is Head of Investment Management & Funds. He has over 15 years experience in working with clients in this sector as auditor and as advisor. His current clients range from some of the worlds largest global asset managers through to boutique hedge fund managers, pension funds and investment companies. He is a regular speaker at industry events and conferences and is the author of the KPMG report Hedge funds: a catalyst reshaping global investment. He works closely with the Investment Management Association and the Alternative Investment Management Association.
Sir David Cooksey David Cooksey has been a venture capital fund manager since 1981 when he founded Advent Venture Partners. Advent invests in and builds early stage companies in the information technology, telecommunications and life sciences industries. He was the first Chairman of the British Venture Capital Association in 1983/84. He is currently Chairman of the European Venture Capital Association. He has served on the Court of the Bank of England for 11 years, latterly as chairman of its directors. He chaired the Audit Commission for nine years and was a Governor of the Wellcome Trust. He is currently undertaking a review for the UK Government of the effectiveness of its spending on medical research.
Khiem Do Khiem Do joined Barings in 1996 as an Investment Strategist for the Asia Pacific region and became the Head of the Asia Pacific Equity Investment Team in 1997. He is the Manager of the Baring China Absolute Return Fund. Khiem joined the firm from Citicorp Global Asset Management in Sydney, where he was the Chief Investment Officer. Khiem received his B.A. in Economics (Hons) from Macquarie University (Australia). He was designated an Associate Member of the Securities Institute of Australia in 1979. Khiem is fluent in English, Vietnamese and French. Khiem Do has extensive investment experience; his investment management skill set covers Asia Pacific and Global equities, Australian and Global bonds, currencies and derivatives.
Alan H. Dorsey, CFA Alan Dorsey is the head of the Non-Traditional investment and research group at CRA RogersCasey, a pension consultancy located in Darien, Connecticut. This group includes hedge funds, private equity, real estate and hard assets. His previous work experience includes securities analysis, private equity, hedge fund CIO and investment banking. Alan is a member of Wesleyan University’s Investment Committee and is a past Trustee. His recent book, How to select a Hedge fund of funds: pick the winners and avoid the losers, was published by Institutional Investor Books in 2004 and is a contributor to a number of other Euromoney Books’ titles. His new book will be published by John Wiley & Sons in early 2007 and is entitled Active alpha: a portfolio approach to selecting and managing alternative investments.
Giles Drury Giles Drury is a senior manager in KPMG’s Financial Services Advisory practice. He has 12 years’ experience in the investment markets. He began his career at Barings and was a freelance consultant for eight years before joining KPMG. Giles has assisted many of the world’s leading Financial Services companies, from global investment banks to hedge funds and private equity firms. He is a committee member of the Alternative Investment Management Association and was on the editorial board of KPMG’s publication Hedge funds: a catalyst reshaping global investment. Giles holds an Executive MBA from Cass Business School.
John E. Dunn, III John E. Dunn, III is an asset management consultant working with a variety of hedge funds and institutional investors globally. A frequent speaker at hedge fund conferences worldwide, John also has an academic background, previously teaching investment management at Thunderbird, and is an Advisory Board Member to Infiniti Capital, a global hedge fund investor.
Neil Fatharly Neil Fatharly is a member of KPMG’s Global Investment Management and Funds Leadership team responsible for strategy, product development and marketing. His professional experience in financial services spans over 17 years during which he has worked with leading asset management and hedge funds. He is a frequent conference speaker in the United States and Europe on a range of topics including Hedge Funds, Product Development in Asset Management, Branding and Segmentation Strategy. Neil is a member of the Alternative Investment Management Association’s (AIMA) Marketing Committee and a Member of the Securities & Investment Institute.
Jean-René Giraud Jean-René Giraud is C.E.O. of Edhec-Risk Advisory, the consultancy arm of the Edhec-Risk and Asset Management Research Centre, and is in charge of their international development and operational risk research programmes. Created in 2003, Edhec-Risk Advisory is an exclusive advisor in the fields of risk management and asset management. Prior to launching this activity, Jean-René has spent several years in the city at various positions within Investment Banks and Management Consultancy firms. Jean-René started his career in Paris, where he supported the development of a software company specialised in portfolio management and led the consultancy activity of the firm.
Igor Grasic Igor Grasic is the Head of Due Diligence and a Senior Portfolio Manager at Lyra Capital LLC. He has over 10 years experience in the investments industry. Previous posts include Senior Due Diligence Analyst at SAC Capital Advisors, Investment Analyst at Global Asset Management (GAM), USA Inc., and Senior Portfolio Analyst at Fidelity Investments. He has a Bachelor of Science in Finance from the Fairfield University.
Robert A. Jaeger Bob Jaeger is Vice Chairman and Chief Investment Officer of EACM Advisors LLC, a wholly-owned subsidiary of Mellon Financial Corporation. EACM is a fund-of-funds manager serving a global group of institutional clients. EACM's expertise embraces both hedge funds and high alpha long only managers. In 1984, Bob became one of the founding members of the investment management team that eventually developed into EACM. Prior to entering the investment business Bob was a member of the faculty at Yale University and at the University of Massachusetts at Amherst. Bob holds a B.A. from Princeton University, a B.Phil. from Oxford University, and a Ph.D. from Cornell University. He is the author of All About Hedge Funds (McGraw-Hill, 2002).
Vassilis N. Karavas Vassilis N. Karavas is Managing Director responsible for the Quantitative Analysis & Risk Management group at Lyra Capital LLC. He holds a Ph.D. in Management Science from the University of Massachusetts at Amherst, an M.Sc. and a B.Sc. in Industrial Engineering from the Technical University of Crete, Greece. He is also a senior research associate of the Center for International Securities and Derivatives Markets at the University of Massachusetts and a senior research associate of the Center for International Securities and Derivatives Markets at the University of Massachusetts. He has authored a number of articles, edited books, and has numerous presentations in the alternative investments area.
Omar Kodmani Omar Kodmani joined the Permal Group in 2000, where he is Senior Executive Officer, Permal Investment Management Services Limited. Mr Kodmani is responsible for monitoring Permal’s international investment activities as well as asset gathering initiatives. Previously, he was with Scudder Investments in London and New York for seven years where he developed the firm’s international mutual fund business. Prior to joining Scudder, Mr Kodmani worked for four years at Equitable Capital (now part of Alliance Capital). Mr Kodmani is a Chartered Financial Analyst, and holds an MBA in Finance (Beta Gamma Sigma) from New York University Stern School of Business, a BA in Economics from Columbia University and a GC Certificate from the London School of Economics.
Sudhir Krishnamurthi Sudhir Krishnamurthi is Managing Director and co-founder of the Rock Creek Group. Sudhir was previously Director of Investments at the World Bank, responsible for equities, fixed-income and alternative securities. Before that, he was Director of Corporate Finance, managing US$27bn of World Bank equity. He has also worked extensively on derivatives and structured products. Prior to joining the World Bank, he was an assistant professor at MIT’s Sloan School of Management. Sudhir has degrees from the Indian Institute of Technology and the Indian Institute of Management. He received a doctorate in business administration from Harvard Business School.
Jim Lafaman Jim Lafaman is a Managing Director of Credit Suisse in New York and Head of the Equity Prime Brokerage Business. Jim joined Credit Suisse in 2002, responsible for the development of the operating platform to support the growth of Prime Services. Prior to this, he was a Managing Director at Morgan Stanley, which he joined in 1985 and where he was most recently the Head of Infrastructure and Strategic Operational Development for Equity Financing Services. He began his career in the industry at Goldman Sachs in 1980, prior to which Jim was a proud member of the US Navy where he garnered numerous recommendations including Sailor of the Quarter honors for Attack Squadron (VA) 34 in 1979. Philip Manduca Philip Manduca, Managing Director of Titanium Capital has over 17 years experience in the hedge fund industry. He established Daiwa Securities in the fund of hedge fund sector in 1987, when he launched the first privately placed fund of funds in Japan in 1988. In 1990, he founded his own global macro hedge fund business, with assets of just under US$1bn, which was re-located to the UK in 1993. He was one of the few positive performing fund managers in 1994. In 1995 he diversified his activities into Emerging Europe, and successfully sold the global macro business in 1996.
In 1999, a large US hedge fund manager asked him to build out their US operation in Europe, and he established a hedge fund business. He recruited the fund managers and established a global distribution structure in Japan, the Middle East and the USA. In 2001, Mr.Manduca successfully sold this London based business to a Luxembourg bank. In 2002, Mr.Manduca established Titanium Capital in London. It is an equity partnership asset management company, focusing on developing a series of high quality hedge funds in a variety of strategies, in an integrated business model.
Lothar Mentel Lothar Mentel joined Threadneedle Investments in 2005 as Head of Product Development, responsible for developing the asset manager’s product range, particularly its absolute return solutions. Lothar joined Threadneedle from Barclays Capital where he was Head of Product Development, Head of Performance Analysis & Risk and a Director of Woolwich Plan Managers, the bank’s retail unit for structured products. Lothar began his career at Commerzbank, where he was Head of Performance Measurement. He is an active industry spokesperson through his associations with the IMA, APCIMS and EFAMA. He earned a Masters in Business Administration and Economics (Diplom Oeconom) from Ruhruniversität Bochum.
Professor Thomas Schneeweis Thomas Schneeweis is the Michael and Cheryl Philipp Professor of Finance at the School of Management at the University of Massachusetts Amherst, Massachusetts, Director of the Center for International Securities and Derivatives Markets and Editor of The Journal of Alternative Investments. He is also Director of Research for Lyra Capital LLC. He has published widely in academic and practitioner journals in the areas of traditional and alternative investment, has been quoted in most major financial publications, and has provided commentary on various US, European and Asian financial news programmes.
Andrew Shrimpton Andrew Shrimpton graduated from Oxford University (St Catherine’s College) in 1985 with a BA in Human Sciences. He began work as an analyst of UK financial companies and then a portfolio manager of segregated accounts in 1988. As an Executive Director at Goldman Sachs Asset Management in London, he was responsible for building an emerging markets team which launched an offshore fund in 1996. He joined the FSA in 1999 to supervise asset managers where he has led projects on ‘splits’ and ‘precipice’ bonds, authored FSA Discussion Paper, Split capital closed end funds (December 2001), and co-authored Hedge funds: a discussion of risk and regulatory engagement (June 2005). Andrew became the first asset management sector manager in April 2004 and the first head of hedge fund manager supervision in October 2005.
H. Bradley Southern Brad Southern is a Partner with Freeman & Co., focusing on providing M&A advice to asset management firms. He was with Putnam Lovell NBF and UBS prior to joining Freeman. Recent transactions in the alternative area include representing the Bank of New York in its purchase of Urdang Capital Management and Deerfield & Company in its sale to Triarc. Other clients Brad has represented in asset management transactions include The Royal Bank of Scotland, Deutsche Asset Management, Hansberger Group and Eaton Vance. He holds a JD from Harvard Law School and an MBA and a BA from Rice University.
Blaine Tomlinson Blaine Tomlinson is Group Chief Executive Officer of Financial Risk Management, the company he founded in 1991. From 1991–1997, FRM provided research and consultancy services for family offices and distribution companies and in 1998 launched its first discretionary commingled fund of hedge funds. FRM focuses primarily on institutional clients globally and manages over US$12bn across a number of multi-strategy and single-strategy investment vehicles. The firm has offices in New York, London, Tokyo, Guernsey and Sydney. Before establishing FRM, Blaine held various trading and senior management positions in the interest-rate swaps markets at Citibank, Nomura and AIG Financial Products.
Eric Weber Eric Weber is a Partner and COO at Freeman & Co., LLC, an investment banking and consulting firm focused on the global financial services industry. He leads the firm’s asset management practice and has authored or co-authored over a dozen research reports and white papers on the industry, including one of the first to address Convergence in Alternatives and Hedge Fund M&A. He has advised clients on successful alternative asset management transactions including the Bank of New York’s acquisition of Ivy Asset Management, Zurich Capital Market’s sale of its hedge fund related businesses, Hamilton Lane’s acquisition of Richcourt Group, and Guggenheim Partners.
Andrew Wittkop Andrew Wittkop is a Product Manager focused on PIMCO’s Absolute Return Strategies (PARS). He joined PIMCO in 1999, previously working as a portfolio analyst with the Global Portfolio Management Team and also within the technology group focusing on portfolio attribution modeling. Mr Wittkop has five years of investment experience and holds a bachelor’s degree in Economics from the University of California, Los Angeles and an MBA from NYU-Stern School of Business.
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