Bright spot in the dark

In a year of seemingly endless bad news for hedge funds, many hedge-fund-of-funds managers, especially institutionally focused firms, actually thrived. Assets of hedge-fund-of-funds managers in sister publication's Pensions & Investments' second annual survey rose 31% to $708.8 billion as of June 30, from $542 billion a year earlier. Assets managed in such funds for institutional investors worldwide rose 51% to $462 billion as of June 30, and assets managed for U.S. institutional investors were up 27% from a year earlier, to $124 billion. Institutions are a growing client base for the largest funds of funds. In aggregate, 65% of total hedge-fund-of-funds assets were managed for institutions worldwide, compared with 56% a year earlier. U.S. institutional assets dropped slightly to 22% of assets, from 23% last year. The growth, especially in assets managed for institutional investors, bucks a massive industrywide slowdown in net flows. Hedge-fund-of-funds flows were down 76% to $29 billion in the first half of the year, versus $199 billion for the first six months of 2007, according to Hedge Fund Research Inc. of Chicago. Merely hanging on to assets was a fairly remarkable feat for fund-of-funds managers, given that underlying hedge funds in their portfolios sustained their worst performance since record keeping began, as evidenced by the -0.75% return in the HFRI Fund Weighted Composite index for the first half of this year. In fact, 38 of the 54 fund-of-funds managers included in both the 2008 and 2007 P&I hedge-fund-of-funds manager surveys had strong growth, both as a group and individually. SEI Investments Co. of Oaks, Pa., for example, showed the strongest growth in a year-to-year comparison, with a 77% increase to $1.9 billion, followed by Cadogan Management LLC of New York, which jumped 66% to $7.4 billion, and Evanston (Ill.) Capital Management LLC, which rose 58% to $3.3 billion as of June 30. Just 13 of those firms participating in both years reported a dip in assets, mostly modest single-digit drops. The biggest drop was sustained by London-based La Fayette Investment Management (U.K.) Ltd., whose assets managed in funds of funds dropped 26% to $3.9 billion from a year earlier. "P&I's data confirms that investors remain committed to hedge funds of funds. We continue to chuckle about conversations we were having six or seven years ago with people who predicted that hedge funds of funds would be disintermediated, falling out of favor with institutional investors who would be moving in droves to direct hedge fund investing," said money manager consultant Kevin P. Quirk, founding partner and principal of Casey Quirk & Associates LLC in Darien, Conn. "As we've been saying for some years now, many institutions prefer to work with an expert intermediary, a professional who is equipped to manage a diverse portfolio of hedge funds," he said. "Given recent market conditions that have punished many hedge funds, fund-of-funds managers that can navigate difficult conditions are even more in demand. I don't see a lot of cracks in the hedge fund-of-funds manager-client relationship right now," Mr. Quirk said.

REPORTING CHANGE

Some of the pop in P&I's 2008 total hedge-fund-of-funds assets resulted from two companies that changed the reporting method to include fund-of-funds assets managed by the entire firm rather than just certain subsidiaries. The changes pushed both firms up on the ranking of the largest fund-of-funds managers. The largest such manager was Union Bancaire Privee of Geneva, with total fund-of-funds assets of $57 billion. By reporting assets for the whole firm rather than just New York subsidiary UBP Asset Management, the Swiss investment bank moved from 15th place last year with $12 billion in hedge-fund-of-funds assets. Morgan Stanley Investment Management of New York moved to 11th with $21.8 billion in assets this year, from 20th place with $9 billion last year. UBP's move pushed UBS Alternative and Quantitative Investments of Chicago to second place with total hedge-fund-of-funds assets of $55.7 billion, a 9% increase from the prior year. Man Investments Inc. of Chicago was third with $45.3 billion under management, down 5% from a year earlier. Permal Asset Management Inc. of New York was fourth with $35.5 billion under management, a 14% jump from the previous year. Grosvenor Capital Management LLC of Chicago jumped to the fifth spot from eighth with a 55% increase in assets, to $31.9 billion, based on data provided to the Securities and Exchange Commission. With one exception, the largest managers of overall assets in hedge funds of funds also dominated the global institutional rankings. UBS Alternative & Quantitative Investments topped the chart with $39.4 billion, followed by UBP with $35.2 billion. Blackstone Alternative Asset Management LP of New York was third with $30 billion. Grosvenor was fourth with $29.9 billion, based on the 95% institutional percentage provided as of March 30, 2007, and applied to its hedge-fund-of-funds figure calculated from SEC records. Man Investments was fifth with $26.6 billion. For U.S. institutional investors, Blackstone emerged as the clearly dominant player in hedge-fund-of-funds management with $16.3 billion. The UBS unit was next with $8.6 billion, representing growth of 33%. UBP jumped 10 slots to third place with $8.3 billion, followed by Pacific Alternative Asset Management Co. of Irvine, Calif., with $7.1 billion and Bank of New York Mellon with $7 billion. UBP is one of the longest-established hedge-fund-of-funds managers. The business started in 1972 with customized separate-account fund-of-funds portfolios created for European high-net-worth and institutional clients, said Matthew D. Stadtmauer, managing partner and chief executive of UBP Asset Management. The firm started its first commingled hedge fund of funds in 1986 and began focusing on the U.S. institutional market in 1998. About 62% of UBP's total hedge-fund-of-funds assets is managed for institutions, and 14% is managed for U.S. institutions. Officials at UBP, which strikes direct relationships with institutional investors, are finding its pipeline of new business very full, driven to some extent by an institutional appetite for portable alpha, Mr. Stadtmauer said. UBP's preference to work with institutional investors with long investment horizons has been paying off. "Institutional investors are going into their hedge-fund-of-funds investments with a five-year time horizon, regardless of the economic or market cycle," Mr. Stadtmauer said. "We prefer to work with clients as one of their core managers rather than in a niche satellite strategy." Comparisons between the 2008 and 2007 data of P&I's survey were complicated by a fairly small and shifting universe of hedge-fund-of-funds managers, a handful of which were cooperative in sharing data. The 2008 survey covered 71 firms, 64 of which participated. The survey attracted responses from 16 new hedge-fund-of-funds firms managing a total of $62 billion. Figures for six firms that didn't respond to the survey were obtained from their investment adviser ADV forms filed with the SEC. Large hedge-fund-of-funds manager Lyxor Asset Management of Paris didn't respond to the survey and no longer is registered with the SEC, so the firm's responses to P&I's 2007 survey were used for the 2008 report. Russell Investments of Tacoma, Wash., reported $6.4 billion in hedge-fund-of-funds assets as of June 30, 2007, which were mostly wound down this year. Russell didn't respond to the 2008 survey request, and the $100 million included in the 2008 report came from published sources. Nine firms that managed $14 billion as of June 30, 2007, but didn't respond to this year's survey weren't included, because of lack of reliable data. Notable among the firms absent were Citi Alternative Investments of New York, which managed $4.5 billion in hedge-fund-of-funds assets as of June 30, 2007; HFR Asset Management LLC of Chicago, which managed $3.7 billion; and Morgan Creek Capital Management LLC of Chapel Hill, N.C., which managed $2.2 billion as of March 30, 2007. Christine Williamson is a reporter for sister publication Pensions & Investments.