Coast Asset Management readies for growth

In a period of market volatility and anxiety, a Santa Monica, Calif., investment firm is preparing to expand. Coast Asset Management LLC, which manages about $6.7 billion in assets for institutional investors and high-net-worth individuals, expects interest in its alternative investment products to climb as investors shy away from equities. The 16-year-old firm, best known for its funds of hedge funds, has recruited new executives to focus on boosting its international presence and to develop new investment strategies for clients who are eager for alternatives. In addition to the $3.9 billion in funds of hedge funds that Coast manages, it also directs about $2.8 billion in complementary strategies, such as fixed-income arbitrage and such structured products as collateralized debt obligations.
"As a firm, we believe the trends that one has seen over the last five to 10 years of increased institutional participation in alternative markets and their increased allocations will continue, not just in North America, but on a global basis,'' said Roger Hartley, Coast's chief operating officer. He was one of the firm's recent hires, brought on board in December from Jefferies Putnam Lovell Securities Inc. of New York. At Putnam Lovell, now a division of New York-based Jefferies & Co. Inc., Mr. Hartley helped Coast secure a minority investment from Boston-based private-equity firm Summit Partners LP in August 2005. Institutional investors are thinking more broadly about the classes of investments they are looking for, hunting for all types of assets that aren't correlated to equities, Mr. Hartley said. Additionally, the level of sophistication of wealthy individuals has increased, either from advice they are following from financial intermediaries or from specific expertise they have developed themselves, he said. In mid-2007, Coast opened its first international office in London, in part to diversify its client base, which is mostly in the United States. The London-based sales team is targeting the United Kingdom, Europe and the Middle East. The firm is evaluating whether the Asia and Pacific Rim marketplace, including Australia, Japan, Korea and Taiwan, should be its next international expansion, Mr. Hartley said. Coast, which has about 27 investment professionals, increased its overall staff by about 35% last year, to 93, said Troy Spencer, chief administrative officer. The firm this year is executing a deliberate expansion of its global footprint to reach new markets focused on global returns, he said. The firm declined to discuss details of its products, such as performance. Hedge funds are limited in what they can say without running afoul of rules restricting public solicitation of clients, said David Friedland, president of the Aventura, Fla.-based Hedge Fund Association. The amount of institutional assets going into the $1.79 trillion hedge fund industry has jumped since 2000 as performance of the equities and fixed-income markets has been just so-so, said Ferenc Sanderson, a Denver-based senior research analyst for hedge funds with Lipper Inc. of New York. Investment in funds of hedge funds also is increasing, with some funds specializing in strategies that focus on emerging markets, investments in a particular country or region, or long/short bets. The average return for the approximately 900 funds of hedge funds that Lipper tracked last year was 9.7%, Mr. Sanderson said. The Standard & Poor's 500 stock index returned 3.7% last year. One of the benefits of funds of hedge funds is that they tend to have more stable average returns than a single hedge fund, Mr. Sanderson said. Also, instead of a single manager, funds of funds typically include between eight and 50 underlying funds, therefore reducing single manager risk. There have been several high-profile hedge fund collapses in recent years, including Greenwich, Conn.-based Amaranth Advisors LLC and Boston-based Sowood Capital Management LP. "If you are invested in a large number, then you're less likely to suffer a blowup that will destroy the whole portfolio," Mr. Sanderson said. Additionally, institutional investors also typically like that the manager of a funds of hedge funds conducts the due diligence, selects the funds within the portfolio and monitors the portfolio, so they don't have to do these jobs, he said. Funds of hedge funds, however, carry a double fee structure, with paying fees of the underlying hedge funds and the management and performance fees of the fund of funds' manager. Essentially, there is a bigger hurdle to climb to make money, Mr. Sanderson said.