For investors disenchanted with the equities market, and for money managers with bold ambitions, hedge funds are the current fashion. Hedge funds allow money managers the freedom to take both longand short positions in all kinds of securities. They can use leverage. And for successful hedge fund managers, they offer the incentive of taking home a hefty 20 percent of investment gains as wellas 1 percent of assets for a management fee. No wonder the consensus is that the hottest talent is exiting banks and mutual funds to set up hedge fund vehicles. Most hope to follow in the footstepsof hedge fund managers like Bruce Kovner, the celebrity manager of the Caxton Associates who was purported to take home $600 million last year. On the golf course or before board meetings, executiveswill exchange anecdotes about hedge fund managers like Kovner, Paul Tudor Jones of Tudor Group or Jim Simons of Renaissance Technologies as if they were football stars. Ironically for private banks,nearly all the hot hedge funds are closed to new entrants. This is due less to exclusivity than to financial logic. If you are one of the best performers in the industry and you are successful for anumber of years, your wealth is going up, since part of the virtuous circle of hedge funds is that the management aligns their own capital with yours, said Patrick Fenal, chief executive officer ofUnigestion, a European specialist asset management firm that runs a family office for private clients in London. When a fund manager is successful, his own capital becomes an increasingly largerpercentage of the portfolio. And at some point, the fund manager finds that a smaller optimal amount of money under management enables him to be more profitable than larger amounts. In the end, theygive privilege to their own money, said Fenal. Thus the funds become closed to new money. It is the opposite dynamic from conventional asset classes, said Guy Paterson, managing director ofUnigestion’s family office in London, contrasting hedge funds to investment funds which take all comers. The exclusivity element leaves many private banks with a dilemma: How to find up and cominghedge fund managers to satisfy client demand. The worst that can happen as a product provider is to have clients asking for something you don’t have, commented a private banker. But scouting for newtalent entails a serious outlay of expertise and resources. While some private banks have been shedding staff in the wake of the equities meltdown, others have been hiring in their hedge funddepartments. Coutts & Co., for example, has launched four branded funds of hedge funds since 1998. A fund of hedge funds is a blend of 30 or so hedge funds. Coutts employs 15 people withexpertise in selecting hedge fund managers and monitoring them on a daily basis. At Barclays Private Bank, clients are offered a selection of 11 in- house managed hedge funds, a fund of hedge fundsas well as advice on selecting outside managers. In reality, said Olivier Zucker, global head of investment advisory for Barclays Private Bank, using single manager funds with different strategiesonly makes sense when the client has a very large portfolio. But while a fund of funds might be more suitable, just like equities, you can tell someone they are better off in a mutual fund, but theyprefer the excitement of choosing individual stocks. Barclays has 12 analysts researching independently managed hedge funds, triple the number it had two years ago, according to Zucker. Smaller bankswhich do not have or desire the capability to launch their own hedge fund may use third party providers. That has been the case at some of the smaller Swiss banks, which have sold funds of hedgefunds for decades. say some private banks will occasionally know when there is a redemption in a hot hedge fund by another client and can bring a new entrant into the fund. But such privilege is notfor everybody. How do you know, asked Jacob Schmidt, a hedge fund analyst at the research firm Allenbridge Group, that you will get the best deal. Someone else may have $500 million?
So for the most part, private banks are scouting for new talent. Talent is a one out of a thousand thing, said Fenal. * Sharon Reier is a freelance journalist based in Paris. [Not to be reproduced without the permission of the author.]
