Investor Roundtable Report 2017

Multi-managers: January 2017 D­ elivering for investors INVESTOR SOLUTIONS FORUM: ROUNDTABLE REPORT Investors will focus If a manager on managers who delivers, it’s OK truly deliver to pay for that UCITS are There’s becoming  only one the ‘go to’ Messi diversifier or one Ronaldo It’s expensive There’s huge to mine alpha – interest in how that’s just to access Europe how it is We’ll be there when opportunities happen

IN A CHANGING WORLD, BY THE TIME YOU MASTER THE GAME, THE RULES HAVE CHANGED. ANTICIPATING YOUR BUSINESS ENVIRONMENT At Securities Services, we support your business in adapting to ever changing regulations. Our expertise across the globe ensures your assets are serviced effectively in over 100 markets. www.securities.bnpparibas The bank for a changing world BNP Paribas Securities Services is incorporated in France as a Partnership Limited by Shares and is authorised and supervised by the European Central Bank (ECB) the ACPR (Autorité de Contrôle Prudentiel et de Résolution) and the AMF (Autorité des Marchés Financiers). BNP Paribas Securities Services, London branch is authorised by the ACPR, the AMF and the Prudential Regulation Authority and is subject to limited regulation by the Financial Conduct Authority and Prudential Regulation Authority. Details about the extent of our authorisation and regulation by the Prudential Regulation Authority and regulation by the Financial Conduct Authority are available from us on request. BNP Paribas Securities Services, London branch is a member of the London Stock Exchange. BNP Paribas Trust Corporation UK Limited (a wholly owned subsidiary of BNP Paribas Securities Services), incorporated in the UK is authorised and regulated by the Financial Conduct Authority. ©“3 man chess”

Contents Panellist biographies ��������������������������������������������������������������������������������������������������������������������������������� 4 Chapter 1 The multi-manager world today ������������������������������������������������������������������������������������������� 7 M&A: Trend towards consolidation set to continue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Chapter 2 Investors, consultants and potential conflicts��������������������������������������������������������������������� 14 Chapter 3 Technology: How will it change the business?��������������������������������������������������������������������� 19 Chapter 4 Distribution and structures��������������������������������������������������������������������������������������������������� 22 Chapter 5 Fees – and how to justify them ������������������������������������������������������������������������������������������� 25 Financing: Investors and banks dial down leverage. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Introduction Ever since the late 1960s, funds of Neil Wilson hedge funds (FoHFs) have played a With returns from underlying hedge prominent role in the development funds seen as increasingly disappointing John Willis and evolution of the hedge fund world. Indeed, in recent years, particularly in 2016, these Report produced in a­ ssociation with over the following 40 years, the managers pointed questions have arguably become of managers running commingled FoHFs had ever more acute, leading some to see it as an become arguably the single most important existential crisis for FoHFs if not the whole type of allocator to hedge funds – contributing multi-manager sector. close to 50% of all hedge fund assets just prior to the global financial crisis of 2008. In this environment, it is not surprising there has been a continuing trend towards more Since 2008, however, the picture has consolidation – with a succession of mergers and changed markedly. While hedge fund assets acquisitions. There has also been increasing talk overall rebounded strongly and surged on to that only by being ‘specialists’ in certain niche new highs, the traditional funds of funds did areas can multi-managers survive – in contrast not – with their assets continuing to languish with the traditional ‘generalist’ FoHF which at or around the same levels. consciously seeks to diversify risk and sources of return by allocating all across the strategy range. Nevertheless, multi-managers today still allocate roughly 20-25% of industry assets Nevertheless, despite what some – at $600 billion or so, it is still a far from increasingly see as this existential challenge, insignificant sum. That said, a decreasing the sector persists – and clearly still plays an proportion of it is in traditional commingled important role in the life of the industry, not funds (FoHFs), and ever more is in other types least in identifying and nurturing new and of multi-manager vehicles such as customised, emerging talent. bespoke or advisory mandates, sometimes via managed accounts or so-called ‘funds of one’ With the help of important support from our set up for specific clients only. partners at BNP Paribas Securities Services, we were able to bring together for this roundtable In the intervening years since 2008, the an impressive group of prominent players in the whole business model of the traditional business. They talked in compelling ways about FoHF has come increasingly under scrutiny. why the sector is still so important to investors This has been for various of reasons – from – and the significant role it can still play in events like the exposure a small minority had the hedge fund world. We hope you find this to Bernie Madoff’s fraud; to whether it is still resulting report interesting and illuminating. feasible to charge an extra layer of fees in an era of persistent low interest rates and lower Neil Wilson John Willis potential returns. Wilson Willis Management Ltd provides specialised services including analysis, commentary, bespoke research and conferences to the asset management world, with a primary focus on hedge funds. For more information contact: Neil Wilson, [email protected] or John Willis, [email protected] Multi-managers: Delivering for investors | January 2017 3

Panellist biographies Adam Sweidan Aurum Funds Adam is Chairman of Synchronicity Earth – a UK based Charity which aims to scale up and deepen the impact Adam is a founding member of Aurum Fund Management of environmental philanthropy. Adam is also Patron of Ltd. and Chief Investment Officer of Aurum Funds Limited Nature for the International Union for Conservation of and Aurum Research Limited, the research arm of the Nature (IUCN) and an Honorary Conservation Fellow of Aurum Group. Adam is also a Director of several of ZSL (Zoological Society of London). Adam graduated from Aurum’s Bermuda and Irish listed offshore funds. Adam Northwestern University in Chicago with Bachelor of Arts has been investing in the alternative investment industry degree in History. for more than 20 years. Prior to co-founding Aurum Fund Management Ltd, Adam worked as a hedge fund research analyst for European Investment Managers (EIM). Andrew McCaffery Aberdeen Asset Management Andrew McCaffery is the Global Head of Alternatives and where he was a founder member of the Alignment Group Head of Solutions based in Aberdeen’s London Investors division. Before joining BlueCrest in 2008, he office. Andrew is responsible for all alternatives globally, was head of absolute return strategies at Aberdeen. Prior including hedge funds, private equity, infrastructure and to that, Andrew was CEO of Attica Alternative Investments property multi manager and for oversight of the Aberdeen Limited in London, a fund of hedge funds business. Earlier, Solutions, Multi-Asset and Quantitative Investment he had been a Managing Director at UBS overseeing Strategies Departments. Andrew is chairman of the Pan global coverage of hedge fund investors, having been an Alternatives Investment Committee, and a member of architect of the investment bank’s hedge fund business all of the investment committees within the division. planning and also a member of its proprietary risk Andrew is also a member of the Group Management committee. Joining the industry in 1983, Andrew held Board of Aberdeen Asset Management PLC. Andrew joined senior roles in fixed income and capital markets prior to Aberdeen in 2011 from BlueCrest Capital Management, joining UBS. Ian Lynch BNP Paribas Securities Services Services business in EMEA. He was also the Country Head of the Credit Suisse Group in Ireland. Ian Lynch is the Global Head of Hedge Fund Services at BNP Paribas Securities Services. For over 20 years, he has Ian joined the Credit Suisse Group in June 2007 from supported hedge fund managers in growing, adapting and Bhramavira Capital Partners, where he was the Chief elevating their businesses. Operating Officer. Prior to that, Ian worked at Citigroup for two years as a Director, responsible for Prime Brokerage Ian was previously a Managing Director of Credit Suisse Sales. Prior to Citigroup, Ian was a Managing Director at in the Investment Banking Division and a member of the Citco Fund Services, where he spent six years in various Equities department with responsibility for the Prime Fund management roles across Europe and Asia. Services (PFS) business globally. Prior to the establishment of PFS, Ian was responsible for the Advanced Prime Jack Inglis AIMA executive director of London Capital Group plc from 2007 to 2010 and currently sits on the board of the Chartered Jack Inglis is the Chief Executive Officer of the Alternative Alternative Investment Analyst Association (CAIA). He Investment Management Association (AIMA), a role he began his career in 1983 at UK stockbrokers James Capel has held since February 2014. He has been in the financial (which was subsequently acquired by HSBC) and has services industry and closely involved with hedge funds for extensive experience in origination, distribution, financing over 30 years. He has held senior management positions and trading across the fixed income and equity capital at both Morgan Stanley, where he served for 16 years, markets. He holds a Master of Arts in Economics from and Barclays, where he was prior to joining AIMA. From Cambridge University. 2007 to 2010 he was CEO of London based hedge fund manager, Ferox Capital Management. He served as a non- 4 Multi-managers: Delivering for investors | January 2017

Lynda Stoelker Stenham Asset Management Prior to this role Lynda was responsible for equity long/short strategies, with a particular focus on Asia and Lynda is a member of the Investment Advisory Committee Emerging Markets, having launched the Stenham Asia and responsible the oversight of the research process. As Fund in 2005. Lynda joined Stenham in 1999 and has Head of Investment Research, Lynda has orchestrated the spearheaded many initiatives during her tenure thus far. growth and development of the current research team Prior to joining Stenham, Lynda held a role in a financial and its processes and is responsible for the day-to-day services firm. Lynda is a Chartered Alternative Investment management, assisting with the direction of research, Analyst and holds the Investment Management Certificate. ensuring the process is efficient and that best practice is employed at all times. Martin Bendersky Antarctica Asset Management Martin Bendersky is Head of Research and Risk Between 1997-2002 Martin worked at the strategic Management at Antarctica Asset Management since management consulting firm Booz Allen & Hamilton Inc. 2010. Prior to AAM Martin was Managing Director at assisting clients in Argentina, Brazil, Chile, Venezuela and Nutrimenta Finance & Investments Ltd, a family office the USA with regards to business strategy and corporate based in Geneva. Since joining Nutrimenta in 2002, Martin finance issues including strategic business goals and was responsible for Alternative Investments for the group. assessing investment or divestment opportunities in the At Nutrimenta Martin was instrumental in developing Latin American region. From 1995 to 1996, Martin was the group’s capabilities in sourcing, researching, and due an analyst at Molinos Rio de la Plata. Martin has a BSc diligence of hedge fund investments globally across all in Industrial Engineering from Buenos Aires University, strategies. He also was actively involved in developing the earned a Masters from San Andres University and an portfolio and risk management framework and analytical MBA with Distinction from Kellogg’s Graduate School of tools for single investments and portfolios as a whole. Business. Michael Perotti Falcon Money Management overseeing all aspects of the firm’s business including Investment Management. Prior to setting up Falcon, Michael Perotti is Founding Partner & CIO of Falcon Money Michael worked as CIO for Swiss Private Bank, Union Management, a UK based Institutional Asset Management Bancaire Privee in London, managing client portfolios Firm, he founded together with Beazley Insurance Group across a variety of asset classes. in 2009. Falcon allocates client money to Alternative Investment Strategies, and Michael is responsible for Michael Swift Abbey Capital Exchange and European Interest Rate Trading at Bank of Ireland in Dublin from 1997 to 1998. Previously, Mick was Mick Swift is the Deputy Chief Executive Officer Treasurer and EVP at Bank of Ireland’s New York Branch, & Research Director at Abbey Capital Limited, the where he ran the trading and sales operation from 1994 Dublin‑based alternative investment specialist. to 1997. He initially joined the Treasury Division of Bank of Ireland in 1984 where he traded Foreign Exchange and Mick is a member of Abbey Capital’s Board of Directors Interest Rate Markets on a proprietary basis. In 1992, he and Investment Committee, and is a Principal of the firm. became Head of Interest Rate trading at the bank. As Research Director, he manages and oversees Abbey Capital’s research and risk management processes as well A frequent guest speaker and presenter at conferences as portfolio construction. throughout Europe, Asia and the U.S., Mick has addressed topics including alternative investment policy development, Mick joined Abbey Capital in May 2002 after fifteen risk management and the managed futures industry. years as a trader and manager of trading teams. Prior to joining Abbey Capital, Mick was a Director at Allied Mick graduated with a Bachelors Degree in Commerce Irish Capital Management (AICM), a Dublin-based CTA from University College Galway and holds an ACMA from 1998 to 2002. While at AICM, he worked in a qualification. trading capacity and also on product research and risk management. Previously, Mick was the Head of Foreign Multi-managers: Delivering for investors | January 2017 5

Niki Natarajan In Ink (London) dinner rewarding top performing funds of hedge funds. An experienced moderator on investor panels, Niki now also After writing and editing InvestHedge for more than presents on communication-related topics, most recently 12 years, Niki founded In Ink (London), a company at the Amsterdam Investor Forum, HedgeNews Africa specialising in creative content and communication. and AIMA. Prior to HedgeFund Intelligence, Niki was at Niki has more than 20 years’ experience as a financial Financial News, launch editor of Global Fund News, editor journalist with a focus on asset management and in of Foreign Exchange Letter, and reporter on Global Money particular the global funds of hedge funds industry. During Management. A qualified NLP coach, Niki graduated in this time, Niki organised and hosted the InvestHedge Geography from Durham University. Forum, a two-day event held connecting investors with hedge funds, and the InvestHedge Awards, the annual gala Omar Kodmani EnTrust Permal New York where he developed the firm’s international mutual fund business. Prior to Scudder, Mr. Kodmani Omar Kodmani, CFA, is Senior Executive Officer and worked for four years at Equitable Capital (now part of Global Head of International Business Development Alliance Bernstein). He is a CFA® Charterholder and of EnTrustPermal. Mr. Kodmani was appointed Chief serves on the Advisory Board of the CFA® (UK). Executive of Permal Group in 2014, having previously been its President. Prior to this appointment, he was He holds an M.B.A. in Finance (Beta Gamma Sigma) Senior Executive Officer, responsible for monitoring from New York University Stern School of Business, a Permal’s international investment activities as well as asset B.A. in Economics from Columbia University and a G.C. gathering initiatives. Certificate from the London School of Economics. Before joining Permal in 2000, Mr. Kodmani spent seven years with Scudder Investments in London and Páraic Cosgrave BNP Paribas Securities Services GlobeOp. Previously, he held leadership and sales positions at International Financial Systems and Páraic Cosgrave has been Global Head of Sales and Integral Development Corporation, both providers of Relationship Management for Alternative Fund Services sophisticated software to financial intermediaries and Business at BNP Paribas Securities Services since July asset managers. 2015. Páraic is a graduate in Management Science & Páraic has over twenty-five years of experience in Industrial Systems Studies from Trinity College, Dublin. international capital markets. He served as Head of EMEA Alternatives Business Development at SS&C Robert Howie Mercer Investments for over fifteen years. Whilst at Mercer he been involved in both research and has consulted to clients across Robert is a Principal in the Hedge Fund Boutique, a unit Europe and the Middle East, including pension plans, within Mercer Investments. Located in London, he leads sovereign wealth funds and wealth managers. Prior to the manager research and generation of intellectual joining Mercer, he worked for Barclays in London and capital for alternative assets in Europe, focusing on hedge African Life (now part of Sanlam) in South Africa. funds, insurance-linked securities, multi-asset and other liquid alternative strategies. Additionally, he advises Robert has a Master of Business Science from the institutional investors on the use of alternative assets, University of Cape Town, and is a Fellow of the Institute including manager selections and portfolio construction. of Actuaries. Robert has nearly twenty years of experience within the financial services industry, and has been with Mercer Steve Smith CdR Capital (O’Connor) SBC/UBS, Dune Partners, Albourne Partners, Credit Suisse and Blue Crest Asset Management. Steve Smith is a founding partner of CdR Capital, a private investment office. CdR has offices in Geneva, London, During his time at Credit Suisse, Steve was responsible Dubai, Miami and Sao Paulo. Together with its affiliate, for the $65 billion liquid alternatives business that CdR Hollander, CdR currently has $3.5 billion of fee included funds of hedge funds, single manager funds, as earning assets from large families and institutions. well as Index and Quantitative funds. Steve, who started his career in 1986 at Bankers Trust, Steve has a B.A in Law from Downing College has extensive management experience from both the Cambridge, where he currently serves on the investment investment banking and asset management industry. committee. In addition to Bankers Trust, Steve has worked for 6 Multi-managers: Delivering for investors | January 2017

Multi-managers: Delivering for investors Chapter 1 The multi-manager world today SUMMARY POINTS • Recent performance, the ‘existential challenge’ – and overcoming it • Commingled funds versus customised and bespoke solutions • ‘Specialists’ and ‘generalists’ • Ongoing consolidation and M&A Not surprisingly, those taking part in wrong’. But I think there’s a lot more reasons Going forward, investors the roundtable felt that – despite beyond that now – [not least] in the portfolio will discriminate between the very obvious challenges in the construction required.” managers who truly deliver current market – there is still a very positive idiosyncratic returns – and role to play for multi-managers in the hedge During the financial crisis, returns from those who say they do, but fund world going forward. individual hedge funds were on average sharply in reality piggy-back on negative, but also very widely dispersed, with a market beta As Jack Inglis, the chief executive officer significant minority – notably in the managed of AIMA, the industry trade association, put futures sector – delivering sharply positive Michael Perotti it at the start of the discussion: “Funds of performance. At multi-manager level, however, funds continue to be a very important part of given the diversification, it proved much harder our membership. We continue to have about to outperform. And when some FoHF players a hundred fund of fund groups from around (even if only a small minority) were revealed to the world who are members of AIMA and we have exposure to Madoff, the reputation of the remain very keen to focus on this particular FoHF sector as a whole took a massive hit. segment of the industry, which we believe still has a very valuable role to play.” Niki Natarajan, who now runs communications firm In Ink (London) but Inglis went on to add: “I still very firmly previously covered the sector for 12 years believe that what multi-managers provide is through the trade publication InvestHedge, a very important source of access – because described the unfolding of events as follows: of the teams and models and expertise they “Madoff, Lehman and the financial crisis had have built up. Years ago, a funds of funds was made the fund of hedge funds industry as a all about the three Ds: diversification, due whole look a bit like the emperor exposed with diligence and – importantly – deniability: ‘I no clothes, which [also] impacted negatively on give you my money – and I blame you if it goes those professional groups that were actually Multi-managers: Delivering for investors | January 2017 7

The industry has had a adding value.” “My first observation is that we are entering couple of years where The InvestHedge Billion Dollar Club – a ‘post fund-of-fund world’. The traditional performance hasn’t been format is not a category that’s growing any up to scratch – and that’s comprising FoHF groups with $1 billion or more. It is slowly transitioning into something causing some pressure. But more – had hit peak assets of over $1 trillion else – or fading. The key for us is to be on the I am firmly of the belief that by the end of 2007, managed or advised at that evolving side of the trade.” it’s cyclical. I don’t think it’s time by 151 different groups. But by half-way structural. through 2016, there were only 85 firms left in Kodmani noted how the sector had already the Club, and their combined headline assets evolved into a variety of different formats – first Omar Kodmani were barely more than $600 billion. and foremost into customised accounts for large sophisticated clients, liquid vehicles like Funds of funds continue to Nevertheless, the underlying rationale for the UCITS, and some other hybrids. But, he added: be a very important part role of the multi-manager remains compelling, “Regardless of what the label is or what the of our membership… we Natarajan suggested: “The business model format is, the need for a professional approach believe they still have a with its additional layer of fees and not always to selecting and managing hedge funds is very valuable role to play. glittering performance was shown to have always going to be there.” flaws. But what people fail to understand is Jack Inglis that, even now, not many investors can afford Recent performance had certainly added to the cost of doing hedge funds solo.” the challenge, he felt: “I think the industry has had a couple of years now where performance A ‘post fund-of-fund world’? hasn’t been up to scratch – and that’s causing The roundtable brought together participants some pressure and a lot of negative headlines. from some of the longest running FoHF firms in But I am firmly of the belief that it’s cyclical. I the business, and revealed a diversity of views don’t think it’s structural. about the nature of the ‘existential challenge’ – and what those in the industry could or should “The bottom line I think is that the format be doing about it. is changing, the things that make it work are changing, and we’ve got to get used it,” Omar Kodmani, senior executive officer Kodmani concluded. “I think the good players and global head of international business will survive because people have a more development at EnTrust Permal, put it like this: strategic view of asset allocation and will 8 Multi-managers: Delivering for investors | January 2017

There’s a feeling among many FoHFs that they have been under-serviced by their vendors in recent years – so we have reinforced and strengthened our capabilities, building on over 45 years of operational know-how across a range of strategies and structures Ian Lynch not want to be selling at the bottom. But the the sector – and the role it plays. “If you read Madoff, Lehman and the sector may take time to grow again, without the newspapers or the media, you’d think the financial crisis had made finding the tools and strategies to really achieve hedge fund industry is dying. And that, for some the industry as a whole meaningful performance.” reason, funds of funds is a ‘dirty’ business,” look like the emperor he said. “Well, if you’re picking hedge funds with no clothes, which Adam Sweidan, a founding member and – which is by the way far more complicated also impacted those chief investment officer at Aurum Funds, took than analysing equities – I think you are adding professional groups actually arguably a more positive view of the outlook. something valuable. I think we definitely can adding value. “I think the eulogies are a little premature,” add value – and it’s a very difficult thing to do.” he said. “The problem is that you’ve got a Niki Natarajan finite amount of alpha and then the industry Adding the perspective of a broader asset exploded in size – so even though we’re talking management firm was Andrew McCaffery, about this existential crisis, I think we were at a global head of alternatives and group head of new all-time high in the size of the [underlying solutions at Aberdeen Asset Management, a hedge fund] industry only recently.” large firm active in many areas, including the multi-manager side. “One of the big questions “The problem is we’ve got thousands of is: Is the industry really shrinking – and how do managers and only very few people who can you measure that?” he asked. “I think what’s manage money well,” Sweidan continued. happening is a reallocation process.” “Thousands of people play football, but there’s going to be one Messi or one Ronaldo.” He also felt the industry could well survive another period of what is seen as “From my perspective, Aurum invests with 40 a disappointing performance: ““I think the managers and there’s a lot of work that goes industry can, mainly because of the different into that. If you can find the best managers, put and evolving types of demands from investors them together and create a return stream that’s – this changes the opportunity set for the unique, makes money and is not correlated, then industry, as it can deliver in multiple forms that there’s a demand for that. At the end of the can still deliver value for investors.” day it’s about performance. As an industry, the bottom line is we have to make money.” “We shouldn’t forget that active management has not performed well in recent But Sweidan was robust in his defence of Multi-managers: Delivering for investors | January 2017 9

FoHF Asset Growth 2001–2015 AUM ($bn) 1200 Number of Firms 1000 200 800 600 150 400 200 100 0 50 0 Dec 2001Dec 2002Dec 2003Dec 2004 Dec 2005Dec 2006 Dec 2007Dec 2008Dec 2009Dec 2010 Dec 2011 Dec 2012 2013* Dec 2015 2014* Dec Dec * Including Consultant Assets Source: InvestHedge years, full stop,” McCaffery emphasised. “But I “Before, when we managed discretionary think the bottom line is that we will get through portfolios, we had clients who invested with this period of relative underperformance, us and we managed their money according and the world that lies ahead is looking very to their risk profile. Now clients come to different. I think we shouldn’t write off an us with very specific needs and mandates, industry that actually is evolving.” such as access to niche or difficult-to-access managers or where there are high minimums Customised and bespoke solutions that they can’t meet; or for a very specialist Lynda Stoelker, a member of the investment mandate to complement their overall asset advisory committee and responsible for allocation.” oversight of the research process at Stenham This ongoing trend towards more Asset Management, another of the longest- customisation was also noted by Ian Lynch, Dec 20D0e1c 20D0e2c 20D0e3c 20D0e4c 20D0e5c 2dru0isnDc0nuei6snscgiop2nl0aoDy0neer7tsocint2hte0hDet0yebp8uecssi2noef0sDw0s,ae9mycsom2veu0dlDt1it-eh0ec 20D1e1cgP2alor0biDb1aale2shcSeea2cdu0orD1iftei3hecsedS2gee0rvDf1iuce4enscd. “s2eW0rve1i’cv5ees at BNP got a managers provide access for investors – and balance of business including traditional funds how she felt that it has been moving back full of funds that have been there for a long time, circle by going into more bespoke solutions. some from as far back as the late 1960s, “When we started the business in 1988, we which are still doing well and making money There are a lot of emerging ran bespoke discretionary managed portfolios for investors,” he noted. “But we’ve not seen opportunities – where you for clients – that was where the demand was a lot of new funds of funds coming through back then,” Stoelker noted. “And even when we of the traditional type. Where we’ve seen all couldn’t play it other than started our first fund of funds, it was actually the growth is on the customised side – in the bespoke side that grew more significantly customised solutions.” from a platform or from a at first – until we entered the institutional Lynch also noted how what was once a clear multi-manager perspective. market and found the demand was largely for distinction between multi-managers focusing commingled funds. We’re now back in that on hedge funds and those in other market areas So I don’t think it’s all over [previous] world again, where the demand had also been starting to blur. “We’ve also yet for the industry. is more for bespoke solutions rather than in seen a lot more crossover between traditional commingled funds of funds.” hedge funds of funds and private equity funds Steve Smith “Investors have become more sophisticated of funds, combining in the customised space,” in terms of their requirements,” Stoelker added. he noted. “We’ve seen a lot of the larger 10 Multi-managers: Delivering for investors | January 2017

We shouldn’t forget that active management has not performed well in recent years, full stop. We will get through this period of relative underperformance. Andrew McCaffery managers go into that customised space, set up thought hedge funds could walk on water and I know we’ll be there when units and do quite well.” could do anything in any type of market, which the opportunities happen was an absolute fallacy.” because that’s what we’ve A slightly different perspective was offered by always done. Steve Smith, a founding partner of CdR Capital, That fallacy was to have consequences, of a private investment office which among other course: “The floodgates opened, and with the Mick Swift things co-owns and advises two niche funds institutionalisation of hedge fund markets, of hedge funds products in acceleration and all this money flooded in,” Perotti continued. seeding, and frontier markets with Tages Capital. “Then 2008 showed really what the hedge fund industry at that size could do, which was not “I think there are a lot of emerging walking on water as people expected.” opportunities in the world – where you couldn’t play it any other way than either from a Looking forward, the outlook Perotti platform or from a multi-manager perspective. foresees is as follows: “The solution for me So I agree, I don’t think it’s all over yet [for the is going to be a downsizing of the industry. industry],” said Smith. Alpha opportunities are finite – and hence the pool of managers doing well is not “One of the wiser men I used to know – a highly scalable. Going forward, investors will long time CEO of a large Swiss bank – told discriminate between managers who truly me once: ‘Mate, it’s very simple. You can have deliver idiosyncratic returns – and those who either 50 different reports from underlying say they do, but in reality piggy-back on market managers or you can have one’. I think it makes beta. It’s a bit tough at this specific period in a lot of operational sense!” time because everybody seems to be allergic to funds of funds. But the demand will still be “With our friends at Tages Capital, we there for [genuinely] uncorrelated returns.” started investing in frontier markets about three years ago. We also had an interest in Japanese The issue of industry size was also equity long/short,” Smith continued. “Our highlighted by Martin Bendersky, head of observation about both of those areas was that research and risk management at Antarctica you couldn’t deploy a lot of capital unless you Asset Management. “I’m very much in the took a multi-manager approach – because most same camp as Adam,” he said. “The amount of of the players there were small.” alpha available in the market is limited. I think investors have become a lot more educated and Echoing some of Sweidan’s earlier points assets in the industry have materially increased and elaborating further was Michael Perotti, – so the available pool of real alpha is now founding partner and CIO at Falcon Money smaller than it was in the past.” Management. “The main factor here is one of size,” he argued. “Look at how the industry has This led on to a debate about what multi- evolved. Back in the mid-1990s, the industry managers could or should be doing given was pretty small and largely made up of a few what appears to be so much greater difficulty really good managers – and it did very well as a in identifying where to find performance. whole with good performance. “What we are doing about it is trying to go to managers and opportunities in niche strategies, “Then you come to 2000- 2002, which was as well as to identify where there is structural a period when equities were down roughly opportunity in the market,” said Bendersky. 45% to 50% - and the hedge fund industry as a whole broke even. So the world woke up and Multi-managers: Delivering for investors | January 2017 11

Today we see alpha at Specialists and generalists seeding – in a thoughtful way – was an activity the extremes – from There has for some time been a debate about we all used to do, but had got out of the habit large platforms and from whether multi-managers need to specialise – of doing.” smaller, niche players. whether it be in certain geographic markets, asset classes or niche strategy areas, or perhaps And so far it seems to have been working Martin Bendersky in seeding new funds – in order to survive and out well: “For our friends at Tages, it’s become deliver real value to investors. a brand definer, because they’re seen as not Investors have become just an average run of the mill generalist fund more sophisticated in terms Another participant in the roundtable was of fund – but as doing new and innovative of their requirements. Mick Swift, deputy chief executive and research things,” Smith continued. “They’ve got new director at Abbey Capital, the Dublin-based capital deployed in a world where, arguably, Lynda Stoelker firm which has been a specialist from inception capital is getting scarcer. And they’re able to – in the managed futures area. “It’s still not get in on the ground floor with hedge funds as a very old industry and managed futures is they come to the fore. about 10% of it,” Swift pointed out. “What we find a lot is that education remains a “That’s a smart commercial approach for huge task still for clients and prospects – and Tages, and we’ve been very impressed with their understanding what role a hedge fund, or in growth. But it was driven by client interest, it our case managed futures, plays in a portfolio wasn’t just a smart commercial thing to do.” over time.” For Stenham, Lynda Stoelker said that the firm Despite the changes in the markets and the had also arguably begun as a specialist – which industry, there was still plenty of value to be meant it was still seen by some in that light, had from sticking to your guns and focusing though in reality it’s business had moved on a on what you do best, suggested Swift: “There’s great deal over the years. She sought to draw definitely structural changes happening, a distinction between being a ‘specialist’ in the such as the evolution of the liquid alts space narrow sense, and having a team with specialist and customised mandates – with customers knowledge but in more than one area. looking to solve particular problems. But I still fundamentally believe that there is an alpha “Some people see Stenham as a global macro to be captured from alternatives and from the specialist given that when we started in 1988, managed future space in particular. macro was one of the few strategies available to invest in,” she said. “Over time, we’ve built “The outlook is always uncertain, so whenever a team of specialists across various hedge fund we’re asked to predict for the next twelve to strategies and this is reflected in our fund range 18 months, the answer I always give is: ‘I don’t which includes long/short, macro, credit and know’. But equally I always say: ‘I know we’ll be healthcare as well as multi-strategy funds. I there when the opportunities happen because don’t think as a firm we need to be a ‘specialist’ that’s what we’ve always done’.” in terms of only offering one strategy, but I do think it’s very helpful having a team with For a firm like Abbey, the case for remaining specialist knowledge in each of the areas.” a specialist is clear enough. “We are a specialist because that’s our background [in managed Taking the other side in this aspect of the futures],” Swift went on. “As a specialist, a lot debate was Omar Kodmani of EnTrust Permal, of that comes down to the infrastructure we’ve who argued very strongly that with sufficient developed and our fundamental belief in our size and scale, as well as expertise, it was still strategy in the medium to long term solution. very much possible to add value as a generalist I think there is a value in being a specialist investing all across the range of hedge fund provider, especially around niche strategies. But strategies. “The key to survival is to either be equally, you’ve still got to deliver returns – and a specialist in less transparent areas, more do so transparently and in an efficient price complex areas, or be a solutions provider – structure.” where you can have a very high-touch service proposition to your client,” he said. Another ‘specialist’ participant was Steve Smith of CdR, given his firm’s connection with “Scale is such an important prerequisite for Tages Capital, which specialises in seeding success because scale gives you the research new managers and in frontier markets. Smith budget, gives you the money to spend on explained how that strategic direction had infrastructure and systems; on managed come about. accounts with managers if that’s how your model is; on buying power to achieve discounts “We had clients who were looking to do with the underlying managers,” he went things they hadn’t done before and looking on. “You can be a great seeder and find the for where the opportunities were,” he said. greatest seed candidates, but if you don’t have “So it was driven by client need – and a belief a big pool of capital to work with you’re not broadly that frontier markets were a source of going to get very far. I think you need scale, alpha because there weren’t a lot of people even if you’re a specialist.” doing them. It was also driven by a belief that we were going to end up in a world where “The other aspect I would say favours generalists is our clients – the large institutions, 12 Multi-managers: Delivering for investors | January 2017

Trend towards consolidation looks set to continue One trend that has gathered pace in the learned a little from them,” he said. “It and they had the knowledge and multi-manager world since 2008 has is essential to have a good strategic exposure in the US.” been consolidation – amid a continuing fit… and you have to be philosophically wave of mergers and acquisitions (M&A) and culturally aligned.” Omar Kodmani noted how his firm within the sector. Permal had gone through two pretty Aberdeen’s most recent acquisition significant mergers in the last three The reasons for it have been pretty in the sector had been of Arden years, first with Fauchier in 2013 and the obvious. Some see it as simply driven Asset Management, a US-based in the past year with EnTrust: “I think it’s by assets, with players buying scale – multi-manager specialist – and there a sign of the times,” he said. to counter the fact that there are still were three main reasons for it, said just too many providers out there – a McCaffery: “One, we felt we couldn’t “There are firms that need to trend likely to continue until there is a be a serious and credible global consolidate in order to achieve critical renewed stream of fresh assets coming player without having a strong US mass. Despite the big shrinkage [in into the business. presence. It wasn’t enough to be purely the FoHF sector], there remains over- European. Second, we wanted to have capacity. There are just too many But as in other sectors, not all mergers the access to the managed account suppliers. So that either corrects – and takeovers in asset management infrastructure and the customised with people exiting or with people have always been as successful as type of accounts they had developed combining,” Kodmani continued. intended. – it is very much about solutions and part of that is delivering managed “But if you combine it’s got to Andrew McCaffery noted how his accounts as a tool. make strategic sense. We did it in firm had gone through many: “Aberdeen both instances to build capability and have made to close to 60 acquisitions “The third factor was liquid improve our ability to be solutions over the years across different business alternatives – we had launched and providers across the spectrum, as well areas, so there have been some real subsequently became one of the as diversify beyond the fund of fund mistakes as well as clear successes, largest in liquid alts products in UCITS, category. We did it for lots of strategic and we would like to think that we’ve reasons.” the sovereigns and so on as well as the wealth have a story that gets people interested in Thousands of people platforms,” Kodmani argued. “The trend for what you’re doing,” he said. “Over the medium play football, but there’s them is to go deeper with fewer managers.” term, if you can deliver good performance then only going to be one people will come. There will still be some space Messi or one Ronaldo. The problem for many multi-managers, for generalists – where some investors don’t suggested Martin Bendersky of Antarctica, was know much about hedge funds, and they want Adam Sweidan the risk of falling between two stools – and not a broad exposure to the sector. being either one thing nor the other. “You need to deploy a lot of money to get the attention of “But as there are so many people out to managers, and you need to have the right scale make money, I think you have to approach to do that quickly,” he argued. “At the same delivering performance in a way that is a bit time there are niche opportunities that you different – whether it is by being early with need to be small enough to take advantage of.” managers, whether it is sticking to smaller managers; whether it’s travelling around the Bendersky continued: “Today we see alpha four corners of the world to find managers in at the extremes – at one end, large multi- some particular area of expertise; to developing PM platforms or large quantitative platforms a wide network with managers to get your that can aggregate smaller alphas in a tightly access in the early stages. At the end of the day risk controlled and highly efficient execution you need an edge, whether you call yourself a environment – and at the other, smaller specialist or a generalist.” managers focusing on niche parts of the market where large flows create dislocations in the In contrast with Kodmani’s emphasis on current less liquid markets.” the need for scale, Perotti argued that there could be benefits to the contrary on remaining Where many multi-managers are more relatively smaller. “I think scale can actually be challenged is in the ‘middle’ – where they a hindrance to you,” he suggested. “If you are either don’t have the scale advantage nor the too large and you’ve got too much money to niche alpha opportunity, Bendersky suggested. deploy, it might be harder to perform.” That’s where the bulk of the assets in the industry are – and hence why the average “It depends on which areas you are focusing returns of the industry are perhaps mediocre. on. There are some strategies where scale is important. But if you are too big you can’t do How to distinguish yourselves from the what we’re trying to do – because the good competition was also a theme taken up by managers close quickly and they can’t grow too Michael Perotti, who has been in the industry a big. We want to remain small – to capitalise on long time but now running Falcon, a relatively the benefits of being small.” newer entrant. “I think you always need to Multi-managers: Delivering for investors | January 2017 13

Multi-managers: Delivering for investors Chapter 2 Investors, consultants and potential conflicts SUMMARY POINTS • The changing investor base and how best to serve it:What role for multi-managers? • Consultants and FoHFs – blurring of the lines: Who is eating whose lunch? • Potential conflicts of interest – and addressing them We think primarily about The investor base for hedge funds has and start to allocate directly to underlying funds. the end investor… not changed enormously over the years. As This is particularly true of the larger ones, with paying too much to too Michael Perotti of Falcon had already resources to research the market for themselves. many people all the outlined early in the discussion, the industry had way through. Getting begun by managing money manly for wealthy Nevertheless, as Jack Inglis of AIMA spelled something that’s ultimately individuals and families. Then, over time, other out, there are a lot of investors who still value for money. allocators such as endowments and foundations, lack the resources to perform that research banks and insurance companies had gradually themselves: “Investors are coming from Robert Howie discovered the hedge fund sector as well. so many different sources, and all of them have different reasons for wanting to access Inexorably, the client base has become ever alternatives,” he pointed out. “Some of them more institutionalised, with an increasing might be using hedge funds as substitutes, proportion of the new money in the past some of them might be as diversifiers. Some 10-15 years coming from large allocators like might be just for pure risk factors in other ways. sovereign wealth funds and more particularly As an investor you may have the expertise from public and private pension funds. required to do it for yourself, but with many that’s never going to be the case.” This trend has always been something of a mixed blessing for multi-managers. For many Robert Howie, a principal in the hedge fund years, it was often the case that investors new to boutique arm of Mercer Investments – one of hedge funds would turn to FoHFs first – as the the biggest consultants advising investors – quickest, easiest and most efficient way to gain talked first about the trends among investors, access. Then, over time, as they became more particularly on the pension fund side. One knowledgeable about the sector, then at least needs to distinguish first between the defined some of those investors would start to cut out benefit sector, he suggested, where the trend the FoHF ‘middle man’ with its extra layer of fees is to reduce risk, and the defined contribution 14 Multi-managers: Delivering for investors | January 2017

sector, where there is arguably more need to alternatives play out in this is I think a very Instead of paying for generate higher returns – but also a lot of focus grave question for the industry. I don’t see how someone who has proven on keeping costs down. that works, how that ends up.” over multiple cycles they can do a job, they are “DB plans want to have as few non- Nevertheless, the prima facie case for hedge selling this idea that they’re matching assets as they can,” said Howie. funds remains valid, Howie concluded: “I think giving you the same service “So the pool for risk assets is decreasing in we always need to come back to what investors and can do the same job. DB – certainly in the UK, and in most countries. are trying to achieve with hedge funds. They’re The cake is shrinking, though there is still a trying to achieve an attractive return. They’re Adam Sweidan need to diversify those non-matching assets – trying to diversify the other assets in their and therefore a desire to look at alternatives, portfolio. So that usually leads them to hedge including hedge funds.” funds that have a skill set that will make returns, but also not too correlated to credit The multi-manager sector might be more and equities.” successful raising assets from such investors, Howie suggested, but an ongoing problem is the Andrew McCaffery of Aberdeen elaborated poor or negative image the hedge fund industry on a similar point: “Investors have been as a whole continues to suffer from – notably changing in their approach, and driving their perceptions that it delivers lacklustre returns demand is that they are now looking ever while charging high or extortionate fees. more holistically, and at ‘how does it fit into the overall portfolio?’ as a thought process, With defined contribution pension funds, with greater emphasis of delivering different the aversion to high fees is if anything even qualities into the overall portfolio. This takes us more marked, Howie suggested. “If you think away from talking about hedge funds as being fees are an issue for traditional DB plans, for a unique allocation to contributing a set of risk DC investors fees are sometimes the only issue factors – and to thinking about allocating risk that’s discussed – and hedge funds are not across different elements and different market even on the agenda because of the requirement exposures. to deliver low-cost solutions.” “We’re seeing far more investors talk about Another trend Howie pointed to is the how they take certain strategies and fit them ongoing consolidation among pensions funds, into what we would classify historically as asset notably in the UK, which means pools of class buckets,” McCaffery added. “There is capital to manage will be getting bigger and therefore a massive opportunity for the manager bigger. On the other hand, he also pointed of manager world to evolve by being able to to a countervailing trend – away from big create the products and portfolios that are institutions to individualised savings. needed to meet what are very distinct needs.” The latter trend means that at consultants Niki Natarajan outlined how the quest to win like Mercer a lot of the R&D is now focusing mandates from large institutional allocators, on a future of many individuals with pots and in particular pension funds, had become of savings – not on big institutions: “How Multi-managers: Delivering for investors | January 2017 15

Everyone will start Steve Smith trend would force the industry to change – and going further down the start looking away from pension funds and food chain – looking for something of an obsession in the industry: toward other types of investors again: “It’ll smaller managers, in “There’s always a noise when institutions enter force everyone to start going further down the farther flung places. the market,” she noted. “But you also need to food chain – looking for smaller managers, be really careful about what kind of investors in farther flung places. And I suspect that Steve Smith you are talking about and what they need.” the capital that will relate best to that will actually be the family offices as much as the In managing money, it’s “Every hedge fund I’ve spoken to in the last large institutional allocators. So our business is not just about search and few months wants pension fund clients,” she designed to have both institutions and families selection. It’s also portfolio continued. “But if they actually realised what as clients. construction, sizing, the pension fund would ask them to do and for risk management and what money, they’d probably prefer a wealth “I suspect that there’ll be a swing back ultimately getting out of manager, or a private client, or something else.” towards family offices as the interesting the manager. marginal investor,” Smith concluded. “Although Recently, the State of New Jersey’s Division I also think that our asset class will probably Omar Kodmani of Investment had appointed BlackRock see a fall-off in total amount of assets.” Alternative Advisors to create a separate account of ‘risk-mitigating’ hedge fund Lynda Stoelker said Stenham was also strategies – with all of the selection and serving a broad cross-section of investor types, negotiation for a fee of only 30 basis points. but who shared some key things in common: “If I look across our investor base, it’s a blend “Following CalPERS’ decision to exit hedge of individuals, family offices, private banks and funds in 2014 on ‘cost and complexity’ grounds, institutions [like] pension funds,” she said. a number of other big institutions have started “But at the end of the day, all types of clients pulling their money too,” Natarajan went on. are using hedge funds to achieve decorrelated “Recently, Rhode Island announced it was returns.” pulling $500 million from hedge funds over the next two years.” Stoelker said Stenham has a group of around 70 approved managers in all across Steve Smith of CdR Capital noted how the different strategies, including some bigger initial wave of institutional capital had first and some smaller managers. “Whatever we’re changed the industry 10-15 years ago: “That constructing, whether it’s a multi-strategy fund wave was great in terms of assets, but also of 20 funds or whether it’s a niche portfolio of had the tendency to be a sort of category macro managers, we can do it from that list of killer for many funds of funds,” he recalled. 70 managers,” she said. “It drove the emergence of the multi-strategy firms, who could offer immediate in-house risk “I think what’s important is understanding management – not delayed and imperfect risk the needs of the client and constructing a management one month later. suitable portfolio for those needs. I believe we can service the needs of a wide range of client “When it was multi-strategy firm A against types, as long as we’re doing our job properly in hedge fund of funds B, they [the former] won selecting what we believe are the appropriate because their business model was deemed hedge funds and constructing portfolios to be superior – for as long as they were according to the clients’ requirements.” sufficiently diversified,” Smith continued. “[But] we have now passed the peak for multi- Consultants, competition and conflicts strategy and my suspicion is that many of the Particularly in the period following the financial large multi-strategy firms, almost all of them, crisis of 2008, more institutional investors will close down or go private as BlueCrest did.” started to invest directly with hedge funds, relying on advice from consultants – rather Looking forward, Smith argued that this than allocating through FoHFs. This, perhaps inevitably, led some FoHFs to start complaining that the consultants, as cut-price competitors, were ‘eating their lunch’. That said, what were once seen as two distinct worlds – of multi-managers and consultants – appear to have been converging from both directions over recent years. From one side, an increasing number of traditional FoHF groups have been offering not just customised, bespoke solutions but also advisory services akin to the consultants. Meanwhile, a number of the consultants have been offering ‘implemented solutions’ and ‘fiduciary management’ for their clients 16 Multi-managers: Delivering for investors | January 2017

– a more full-service, discretionary set of Andrew McCaffery There is a massive capabilities not unlike a FoHF group. opportunity for the solution that works for them.” multi‑manager world This latter trend was one aspect of the Howie said Mercer is clear with clients about to create the products industry highlighted in a recent FCA market and portfolios that are study on the asset management industry the range of options on how they can work needed to meet what (interim report published November 2016). The with the firm. “We have a very substantial are very distinct needs. report shone an uncomfortable light on the programme of researching direct hedge funds whole mainstream long-only world for a variety – so clients can build their own portfolios using Andrew McCaffery of reasons – including among other things a that research. Or they can engage us on an lack of transparency on performance and fees, advisory basis. Or they can fully delegate to us. I think it’s a very different and alleged closet index-hugging among asset thing if you are putting your managers: https://www.fca.org.uk/publication/ “We think primarily about the end investor – own money at risk. market-studies/ms15-2-2-interim-report.pdf who is concerned about getting returns; having those returns diversified from other assets; and Martin Bendersky On consultants, the FCA report noted the also not paying too much to too many people high concentration of business among the all the way through. Getting something that’s top few firms. It also highlighted “concerns” ultimately value for money.” about the trend towards more fiduciary management and whether that was really in “In any financial organisation it is imperative line with investors’ interests. “We consider to understand the conflicts you face, and then that this poses… a conflict of interest ensure there are the appropriate processes and could result in poor outcomes for end and procedures to maintain your integrity investors,” the report noted. with clients,” Howie continued. “We centre everything we do around the investors, and Niki Natarajan said the FCA’s attention to what they need. And whether they want the potential conflict of interest with fiduciary to access us through a traditional advisory management is significant – given that KPMG’s relationship or a fully discretionary relationship, most recent survey on the subject found they will get exactly the same intellectual that a massive 75% of new mandates were capital. I think that’s really important, and that awarded without a competitive tender process. you don’t do special deals – that you’re not (Although that covered all types of mandates, it favouring some clients over others. I think that’s included hedge funds, she noted). the key thing to get right.” “This conflict conversation has been there “Clients can buy products. They can buy for many years,” she argued. “In the early services. But you need to treat all your 1990s when the balanced world moved to customers fairly,” Howie concluded. “It can be specialist equity mandates, Frank Russell was challenging – there are challenges being an the consultant everyone turned to. Very quickly organisation which is so diverse and has so it made sense for them to create an in-house many different clients with so many different fund of their recommended [long-only] picks. requirements.” Later they have had a few funds of hedge funds too.” Among the more traditional multi-managers, not all of course take a sceptical or negative “But then it’s also worked the other way view of consultants. Mick Swift of Abbey around – with some funds of funds reinventing Capital noted some of the positive role they themselves and going more and more down the generally play: “Different potential investors advisory route, with some taking up mandates access the market differently, so many investors on effectively advisory fees.” use consultants. I’m quite open minded in that sense, as consultants also play a very valuable Lynda Stoelker of Stenham said that, most role in education of the investors.” importantly, the client needs to be completely clear about the type of service being bought: “If a client comes to a consultant with a clear requirement for either their discretionary or advisory services, then there is a clear distinction in how the consultant works with that client,” she said. “But if the client approaches the consultant not entirely sure of which approach to take, that’s when there is a higher potential for a conflict of interest.” Defending Mercer’s role as a top consultant, Robert Howie emphasised: “We have always been an advocate of hedge funds and very much an advocate of a multi-manager approach to hedge funds. [But] the way we structure ourselves is all about the clients – getting the exposure they need through a Multi-managers: Delivering for investors | January 2017 17

Investors - the growing weight of pension fund money Capital invested* by $1bn Club hedge fund investors and # of investors by allocator type, 2014 - 2016 (to 17 June 2016; $m) $250m 238 227 $200m $208 $190 203 $168 $150m $122 $123$120 $100m $107 $104 2014 $50m $96 2015 $0m 2016 $66 $67 $83 $84 $65 $49 $66 $61 $54 $44 $23 $20 $25 $26 $26 $22 $20 $18$13 Insurance $36 company $23 Public Private Sovereign Endowment Asset Foundation Wealth Bank Family $5 $3 $7 $1 $0 $4 Total # of pension manager manager office Other investors Investment fund sector wealth fund plan trust pension fund Source: Peqin Ltd, 2016 *= $763bn AuM collectively invested by 238 institutional $1Bn Club HF investors as of June 2016, with a net increase of 11 investors YoY and a 4% AuM growth over the same period (17% over 2 years) We have always Swift did not view consultants as competitors incumbent upon firms like us to raise our been an advocate for a specialist like Abbey: “We’re pure game and not just put our clients in the of a multi‑manager managed account allocators. So as a manager household name funds that the consultants approach. of managers, we have our own infrastructure, are recommending. We need to be [adding our own proprietary technology, our own value and doing different things like] looking at Robert Howie platform, and these are key to what we provide. emerging managers, or being a little contrarian That’s not a business the consultants are in.” in terms of entry point and exit.” Martin Bendersky of Antarctica said the key Adam Sweidan of Aurum agreed: “All is fair issue was accountability – while acknowledging in love and war – and business. You can cry that not just consultants but also many about people eating your lunch, but everyone FoHF firms offer both advisory as well as wants to eat food, so everyone’s got to raise discretionary services these days. their game and perform – then there’s space for everyone.” “If you manage money, you are accountable for your decisions and results. If you advise He too queried the value for investors in someone, you give someone material and taking the advisory route: “The thing I will say advise them on whether they want to invest or is that managing money and writing reports, not,” said Bendersky. “We obviously do both or recommending managers, are very different – as the market requires us to provide both things. In the ecosystem, there is room for services, the business has evolved from a pure both. But it can be a bit disingenuous to go to FoHF model and we have had to adapt to the a pension fund and say: ‘Don’t worry, we’ve current world. But I think it’s a very different got no track record, we’ve never managed any thing if you are putting your own money at risk money before but we can send you a report – as opposed to telling someone: ‘This looks every month – it’s the same thing, and we’ll like a good investment’.” charge you only 20 basis points.’” Others did question the value for investors Sweidan concluded: “Through the lens of from advice only. Omar Kodmani of EnTrust fees, that might look like it makes sense. But Permal said: “In managing money, it’s not just if the end result is losing 20% in the next about search and selection. It’s also portfolio bear market, it’s doing a real disservice to that construction, sizing, risk management and pension fund – and the fees are huge, you’re ultimately getting out of the manager. The just paying in a different way. Instead of paying buy-list approach often fails to come with sell for someone who has proven over multiple recommendations until it’s too late. cycles they can do a job, they are selling this idea that they’re giving you the same service “The fact that consultants have come and can do the same job.” into our domain is a market reality. But it’s 18 Multi-managers: Delivering for investors | January 2017

Multi-managers: Delivering for investors Chapter 3 Technology: How will it change the business? SUMMARY POINTS • Fintech, data science,AI etc – the new ‘Uber’ for multi-managers? • Digitalisation and social media – what’s the right approach? • Outsourcing, and its issues How will potentially rapid changes solutions to clients, and those solutions may A lot of things defined in technology change the be across several different parts of your firm as ‘fintech’ are in fact landscape and mode of operations – so combining data sets also becomes very very old businesses in the asset management industry? In other important,” Lynch continued. “That gets us with a bit of technology industries, from Uber in the taxi service sector thinking about technology in a whole different added. But I think it’s also to Airbnb in the travel business, the impact way. It leads to a drive for talent as well, which a very real thing. of technological change has been totally has become a real challenge for everybody – revolutionary. Can it or will it be just as huge in that is, in getting talent interested in financial Steve Smith asset management? services.” There is certainly plenty of talk about how At the same time, all of this has been ‘fintech’ developments such as blockchain, data happening in an environment where industry science and artificial intelligence (AI), through performance – and fees – have been getting to the invention of so-called ‘robo advisers’, squeezed. “We’re all getting paid less fees – may impact the industry. and if the funds are getting paid less fees, then we’re getting paid less fees too,” Lynch pointed Ian Lynch of BNP Paribas argued that out. “Obviously, although fees have come down ongoing developments in these areas were massively [per million dollars of assets], the things the industry cannot ignore: “Technology industry has also got bigger over the years, has become so critical in the life of the industry which offsets that a bit. But technology will still already, in some ways it feels like a fiduciary play a huge part in making this business work business,” he said. “In our business, servicing going forward.” of clients is becoming more complex, data is becoming more important, and combining that Lynch also highlighted developments in data has become more and more important.” digitalisation. “Clients need to be learning about robo advisers,” he argued. “If they “People talk about ‘solutions’ and delivering Multi-managers: Delivering for investors | January 2017 19

There is the art as well as want to be dealing with millennials then they just like ours who were allocating on behalf of the science – and the art will need to deal with robo advisors, how to very large pools of capital - and all online, it remains crucially important. educate millennials and having interfaces that could be robotic.” they like to use.” Adam Sweidan Smith added: “Their technology was The latter point was echoed by another really good and their delivery really slick. of the participants who has been taking a The difference between their world and close interest in technological developments ours is there is no regulation of the financial – Steve Smith of CdR Capital. “Our thinking services industry in China. So I think one of was, certainly for our family clients, that if the challenges we face is that other parts we couldn’t – within three to five years – of the world are going to get really good at encapsulate what we did for them in an app technology - because they are not encumbered then we ought not to be in business,” he said. by some of the restrictions that define us.” “We’d also done a lot of fintech investing Niki Natarajan highlighted a recent alongside our clients and for ourselves, partly Greenwich Associates survey of 130 asset to understand and partly because we think management firms – and their increasing use of it’s interesting,” Smith went on, though he social media. added some major qualifications on what that involved. This theme was taken up by Andrew McCaffery of Aberdeen. “In the DC world, many “A lot of things defined as ‘fintech’ are in individual investors will not want to make a fact very old businesses that just happened to decision around every specific component of have a bit of technology added,” Smith pointed their investments and they will want to have out. “But I think it’s also a very real thing. One readymade types of portfolio.” of the places we looked was in China and the chilling thought is we came across a business However, he added: “Some will also want opportunities to tap into asset allocation or to 20 Multi-managers: Delivering for investors | January 2017

choose their own underlying funds.” Ian Lynch Technology has become McCaffery continued: “We made a purchase so critical in the life of day was six or seven faxes. Now a lot of the industry… Clients of a small investment management firm with Aurum’s business is information management need to be learning about a successful digital platform, which we’re now as much as fund management. Now we have robo advisers, how to using to reverse engineer into an Aberdeen three software developers, plus an information educate millennials and platform. We’re grown substantially in certain librarian.” having interfaces that ways on social media – we have our own they like to use. app, where you can go and access an array of But the ‘art’ remains crucially important Ian Lynch information and insights from Aberdeen. as well as the science, Sweidan emphasised. “One of the biggest value-adds we add is Managed futures is a very “One of the key goals is for access to many advising when to sell,” he said. “And when data intensive area and also of our funds, and to allow [people] to run their I think of the big sell recommendations of a data rich environment ISAs and their SIPPs and anything else off of it. my career, what really saved me were all the – and that makes it We hope for this to be available to a breadth ‘soft’ things like noticing the arrogance of a very attractive for many of individuals/investors over time. We think that manager at a conference, or in a meeting – technologists. brand will play a significant part.” nothing that Google would ever be able to pick up on, thank goodness.” Mick Swift Mick Swift of Abbey Capital talked about how developments in technology had always Sweidan concluded: “We’re in an been important in the CTA world. “Managed information overload world, a world of futures is a very data intensive area, certainly data versus knowledge, knowledge versus at single manager level, and also a data rich wisdom – where these philosophical aspects environment – and that makes it very attractive of managing information have never been for many technologists,” he said. “Part of this more important. But if you don’t have the comes back to the challenge of delivering infrastructure to manage that information, you information to the client and how you deliver can’t even start with it.” that information – as people are bombarded with information. One of the benefits of the A further technology-related dimension multi-manager funds of funds is that it’s a highlighted by a number of the participants single line item.” was the increasing prevalence of outsourcing in the industry. “I don’t know what the industry will look like in five years’ time. I’m not sure who As Jack Inglis of AIMA emphasised: the participants will be, who will be the big “With outsourcing, one very important thing drivers,” Swift continued. “We all grew up in is that the vendor checks have to be so, so a world where you went to the bank and you rigorous. I should add that with the cyber had some form of relationship – that’s all gone risks you face in your business, outsourcing now, it’s over. In fact, banks have very little can increase them as well. So with technology information about us nowadays in the way that advances come efficiencies, but also more Google or Facebook has.” risks as well.” For Adam Sweidan of Aurum, the Omar Kodmani of EnTrust Permal added: developments in technology were of course “We’ve seen [some] competitors outsource important, but not the only key aspect to ODD to India. And it’s done very cheaply, it’s success in the industry: “Luckily for the multi- mostly desk-based and telephone-based. But if manager industry, there is the art as well as you’re dealing with someone who’s on a much the science. If you don’t keep up to date with lower cost base, the value of what you do on the science, you can’t play,” he said. “When site will only show when things go wrong – we started 22 years ago I remember a busy until then, it just makes things that much more competitive.” Mick Swift Multi-managers: Delivering for investors | January 2017 21

Multi-managers: Delivering for investors Chapter 4 Distribution and structures SUMMARY POINTS • Onshore products – on the rise • UCITS – more than ‘a wrapper of convenience’? • Retail and branding • Managed accounts – for and against There’s a huge interest in Following the financial crisis of assets there,” he added. “There’s actually been the US in how to access 2008, two trends came to the fore more activity in the AIF world as opposed to Europe in a meaningful way. among multi-managers seeking UCITS, but the growth overall for us over the to raise assets. One was a resurgence in the last year has been phenomenal.” Ian Lynch popularity of managed accounts. Another was a new-found popularity for offering hedge “It’s becoming clear everyone trusts the fund products in onshore fund vehicles such as UCITS brand [in particular],” added Niki UCITS structures in Europe and so-called 40 Act Natarajan. “Even though you can do more funds in the US. with the AIFMD in terms of strategy, flexibility and freedom, people are still saying: Let’s start Ian Lynch of BNP Paribas noted how US with UCITS. If product development and asset managers have become more interested in UCITS, growth are indicators of success, it would seem as well as in gaining registration as Alternative alternative UCITS are becoming the ‘go to’ Investment Fund (AIF) managers to distribute diversifier of investment portfolios.” new or existing funds onshore in Europe. The popularity of UCITS has certainly “US managers coming to Europe need to gathered ever more momentum in recent years. have a proper vehicle to access the European As Adam Sweidan explained about his firm’s market,” Lynch pointed out. “There’s a huge initially cautious approach to it: “Aurum first interest in the US in how to access Europe in discussed a UCITS portfolio about five or six a meaningful way and we’ve had a lot of new years ago, but patiently waited until we could clients come in, plus a lot of existing clients source enough UCITS managers that were good with new products. Mostly in the non-UCITS enough to give client money to. So it finally space but also some in UCITS.” launched in April this year.” “There’s been particular interest in the “Aurum’s first UCITS fund now holds ten insurance sector – we’re seeing a race for underlying funds. By year end I expect it will 22 Multi-managers: Delivering for investors | January 2017

If you want to engage with high net worth, retail, private banks and anyone who distributes, you have to have UCITS. Omar Kodmani be fully invested, and we’re actually starting to Andrew McCaffery of Aberdeen felt that the There is a real risk that find [other] managers that can compete with whole trend may well attract more attention some strategies will get put the first managers we found,” Sweidan added. from the regulators: “There are issues to in UCITS products they were “So I think it’s improving, it’s an evolving remember [with UCITS],” he suggested. “It’s a never designed to fit. space. I think the quality and the diversity of label that gives credibility but is not necessarily the managers is improving and good firms are reflecting the quality of the investment Jack Inglis starting to see it as an opportunity.” proposition. From our perspective, the main issue is: How do you have a product range that Omar Kodmani of EnTrust Permal offered a is fully accessible to the asset allocator and similar perspective on UCITS as a format multi- the individual decision maker? That pushes you managers can hardly now ignore: “If you want towards greater activity in the regulated space.” to engage with high net worth, retail, private banks and anyone who distributes, you have As a result, McCaffery felt: “If you enter to have UCITS – and it’s not just for Europe, the UCITS space, then you should expect it’s for anything outside the US because Asia more scrutiny, especially if the product is also embraces UCITS; Latin America embraces accessible on platforms that end up with UCITS. The private banks that used to have big access to retail investors.” product desks that covered hedge funds have reconfigured to it – so that is the new format If the industry is indeed going to focus more you have to work with.” on retail, then another issue Niki Natarajan highlighted was that of branding: “If the The rise of UCITS has thus far overcome hedge fund industry is going to get more and some initial scepticism from traditional offshore more assets through UCITS, liquid alternatives players that the onshore European structure, or even Europeans going to America in 40 used in the past primarily for traditional long- Act funds, then the real question is: Is it the only funds, was not really suited to all hedge performance and the talent that’s going to win fund strategies – and hence a risk that some the asset raising game, or is it the brand?” players may cause disappointment by trying to shoe-horn inappropriate strategies into it. “I don’t think the hedge fund industry has ever really understood the concept of As Jack Inglis of AIMA put it: “There is a real branding,” Natarajan added. “Are you going risk that some strategies will get put in UCITS to rely on distributors, say retail banks in products they were never designed to fit – and Italy or Spain? If you’re going into the retail that UCITS becomes a wrapper of convenience market, those funds will [probably] need to be it was never designed for.” sold on an app.” That sentiment was echoed by Lynda Given the greater restrictions on how UCITS Stoelker of Stenham: “Just because there can be run, another issue raised was whether hasn’t been an event yet in UCITS, people they can be expected to deliver performance shouldn’t get too relaxed there won’t be. We similar to traditional offshore funds over time. need to be careful that, just because there hasn’t been say a liquidity issue yet, doesn’t As Michael Perotti of Falcon put it: “There mean it won’t happen.” are two risks [with UCITS]. One is this risk of people trying to fit a round peg in a square Multi-managers: Delivering for investors | January 2017 23

For some investors, if hole in trying to execute strategies that are not their institutional clients want these days,” you cannot demonstrate meant for UCITS. Kodmani added. “We can seek to correct for a managed account that with managed accounts by asking them offering… you won’t “And then there’s the other point: If you do to be more concentrated or more focused – even get past the first UCITS properly, with appropriate due diligence, and by having transparency over everything, part of the RFP. and you only put strategies in that you can we can monitor overlaps and make sure that properly execute in a UCITS format, then managers are doing what they do best – and Andrew McCaffery you’ve got to recognise that maybe there’s two taking more risk than they otherwise would in hundred basis points of alpha versus equities – their flagship funds.” I don’t think the hedge rather than five to six hundred basis points in a fund industry has ever non-UCITS format.” Andrew McCaffery said that he too viewed really understood the managed accounts as an essential part of the concept of branding. Perotti concluded: “I don’t think the investor armoury of capabilities at Aberdeen. “There realises that the recent similar performance [of are some investor mandates, especially with Niki Natarajan parallel UCITS and non-UCITS] is hiding that notable levels of customisation, where you disparity, because everything is not performing need to offer managed accounts to compete that well – so you’re not seeing the difference effectively,” he argued. “For some investors between the two coming out.” we’re seeing that if you cannot demonstrate a managed account offering and depth of Managed accounts – back to the future understanding and experience, then you won’t Managed accounts, by contrast, are a even get past the first part of the RFP.” traditional structure that go back to the early days of the industry, particularly on the As with UCITS, however, there were some managed futures side. As Mick Swift of Abbey differences of view about managed accounts Capital noted: “Managed futures and FX tend among the participants. Michael Perotti of to be very well suited to managed accounts.” Falcon for instance pointed out that many top managers who are in high demand will not set The popularity of managed accounts was up managed accounts – thus limiting access to boosted after 2008, when more investors some very good opportunities. became aware of their benefits – including, in theory at least, greater transparency and “Some strategies are not suited for managed control than being invested alongside other accounts, hence you will only get a watered investors in a commingled fund. down version of the fund,” Perotti added. “Hence, whilst there is a space for managed Nevertheless, Swift said that the level of accounts, primarily for regulatory reasons, from knowledge around managed accounts among our experience it does not add value in terms of many investors remains quite low. “There’s also achieving higher performance.” a lot of historical baggage around managed accounts,” he added. “But at the end of the Sweidan said Aurum had a similar view: “If day, a managed account is I think a more I look through the managers held in Aurum’s efficient vehicle to manage volatility.” portfolios, there’s only one I can think of that also offers managed accounts. And his money is EnTrust Permal is another firm that has in the fund.” historically done a lot in managed accounts. As Omar Kodmani noted: “[We see it as] part “If Aurum’s top 15 managers offered of our competitive edge – the fact that we managed accounts, I’d be telling you now have proprietary investments with managers about Aurum’s great managed account and those investments are different from business,” Sweidan added. “I’m just very their flagships.” pragmatic about it. There’s nothing wrong with adding value if you can. The same as with Kodmani explained the thinking as follows: UCITS, if you don’t perform you’re just going to “The traditional arguments for managed get fired in the future.” accounts are: liquidity that you control; transparency; and potentially lower fees. But Lynda Stoelker said Stenham had a similar on top of that it’s all about customising the view on managed accounts generally not being investment – so you can get that extra alpha needed – but that the firm had at least once and have a differentiated return stream. That made an exception: “Most of our underlying is something we can provide that a lot of fund managers don’t offer managed accounts our competitors have not gone into or don’t and we don’t necessarily feel the need to invest have the scale to get into – and it’s a way for via that route,” she said. us to compete.” “But we did it once in 2008 – when we Kodmani cited the ability to offer managed wanted a tail risk fund that hedged the risks accounts as relevant in particular to insurance specific to our portfolio,” Stoelker explained. companies worried about Solvency II and to “We didn’t want to manage the overlay banks worried about Basel III. ourselves – we didn’t have the expertise to do that. So we had a managed account with “With institutionalisation, managers are a manager who had the specialist knowledge generally taking less risk and diluting their who created a product specific to our needs.” performance – because they think that’s what 24 Multi-managers: Delivering for investors | January 2017

Multi-managers: Delivering for investors Chapter 5 Fees – and how to justify them SUMMARY POINTS • The ‘extra layer’ for multi-managers – is it sustainable? • Negotiating discounts – and passing them on • ‘Race to the bottom’ – and holding the line Asurprisingly vigorous aspect of the for hedge funds if they want to have a crack at Fees are sometimes the roundtable discussion was on the that market.” only issue that’s discussed issue of fees – normally a topic that – and hedge funds are many industry participants dance around and Given the recent and continuing downward not even on the agenda don’t like to be specific about. trend on fees, Jack Inglis of AIMA asked because of the requirement aloud: “I wonder if the downward trend is so to deliver low-cost Robert Howie of Mercer had already embedded now that a year or two of [strong] solutions. outlined the hostility of some investors to performance might not be able to arrest it?” the level of fees in hedge funds earlier in the Robert Howie discussion, but also emphasised the following “I think there is also a darker cloud on the points: “Fees are scrutinised and certainly the horizon – and that’s the overall perception second layer of fees [for multi-managers] have the industry is held in at the moment,” added been,” he explained. “There’s been a lot of Inglis. “Given that boards of trustees are taking pressure on those to come down a lot – and more and more of an interest in what they’re they have easily halved if not more than halved paying for and what they’re invested in and in the last five years.” particularly at a time when there is increasing hatred against the ‘elite’. Let’s not deny it – we “But it’s not just about the level of fees,” have got a big risk here.” added Howie. “It’s about the structure of the fees which I think is often overlooked – Martin Bendersky felt that the multi-manager something as simple as having a meaningful sector in particular was facing problems due hurdle rate before performance fees are paid. It to the fee issue: “Over the last few years the seems reasonable that you pay for performance industry has fallen into the trap of competing only when that’s meaningful, rather than only on price – making scale even more important just above zero.” to access certain strategies or to support the systems required,” he argued. “However, scale is Howie emphasised what the industry was up the enemy of alpha in many strategies, making against: “For individuals’ savings – on some achieving great performance a great challenge.” platforms for ISAs, for instance – they are more frequently screened for fees rather than “The problem we have is that the market for performance. People are asking: ‘What is is forcing us into a race to the bottom on the cheapest way I can access something?’ So fees,” Bendersky added. “We still need to when we think about the future, and marketing find managers who can extract extra alpha – to millennials, this is going to be a big problem and to do that well, we need skill, we need infrastructure, and we need investment in Multi-managers: Delivering for investors | January 2017 25

There is also a darker cloud on the horizon – the overall perception of the industry… particularly at a time when there is increasing hatred against the ‘elite’. Jack Inglis The problem we have is our business to be permanent. So it’s a bit demonstrate a solid track record, you do have that the market is forcing of a contradiction between what the market the ability to charge higher fees.” us into a race to the bottom wants – lower fees – and what that requires: on fees. specialised skills, infrastructure and a breadth “At the underlying manager level, there’s of knowledge across multiple asset classes, a lot of focus on whether you negotiate Martin Bendersky markets and strategies. It means you need to fees – and that varies. There’s some you can’t grow bigger in order to find alpha, but not too negotiate, there’s some you can,” Stoelker big to invest in smaller managers.” added. “Do I want to pay 2 and 20 for a manager that’s essentially managing a long- Niki Natarajan observed: “If you can show only equity portfolio with an index overlay? you’re performing, you can charge what you Absolutely not. But if there is a manager charge. And obviously it comes down to scale charging 2 and 30 that’s doing something very – if somebody is going to give you a massive complex, unique and consistently returning 10- mandate, they’ll want a fee discount. That’s an 12% net, I’m okay with that.” institutional thing anywhere.” “Some people accept the argument that Omar Kodmani of EnTrust Permal said one they would rather have less management fee solution was to pass on the pressure for lower and more performance fee. But others take the fees to the underlying managers: “What we see argument that [the latter] maybe pushes the is not so much a visceral reaction to the fee, manager into taking too much risk – to [try but to the whole concept of the second layer,” and] achieve the performance.” he conceded, adding: “A lot of the challenge is to try to make that second layer pay for itself Andrew McCaffery of Aberdeen argued that through discounts – and with the right scale the downward pressure could also contain the you can get discounts.” seeds of opportunity for the multi-manager sector: “There is real pressure on fees. I think Lynda Stoelker of Stenham argued that what where there is demonstrable alpha and that the multi-manager market is able to charge capacity is managed well, a manager can charge these days is definitely not anything like the proportionately high fees, and will continue to old 1% to 1.5% management fee plus 10% sell whatever capacity they have. However, the performance fee. As a very broad average, she reality is that is a minority now, and for most of felt the former had fallen to more typical levels the industry fees are coming down. We find the of around 80-90 basis points, though with a opportunity to negotiate fees and significant fee wide degree of variation depending on what discounts is increasing across a wide range of individual firms negotiate. strategies and manager sizes.” “[What you can charge now] depends on McCaffery added: “If you go in with enough whether investors are going into a commingled size and longevity of track record in the space, fund, something bespoke, the size of assets you’ll find that you can construct manager being invested and so on,” she explained. of manager portfolios with a lower TER than “Often if you’re doing something truly many single manager offerings, especially in different that is attractive to investors and can the regulated environment. That, I believe, is 26 Multi-managers: Delivering for investors | January 2017

Investors and banks dial down leverage One of the key areas of practical wouldn’t say it’s completely gone, but knows exactly every cent of where the consideration for multi-managers in it’s certainly a lot lower than at the balance sheet is.” how they run their business is financing peak of the market. Financing lines – primarily, in order to run the business for subscriptions and redemptions are In the CTA world, given the way that efficiently such as handling mis-matches absolutely still there. the futures market trades – on initial arising between periods of subscription and variation margins – it has always and redemption from their investors and “The events of 2008 changed things been relatively easy to dial up or down with underlying funds; but also, where a lot – since then clients have had to the leverage on a strategy, or to add appropriate, to apply leverage to their pay for committed lines. That was leveraged versions. But Mick Swift of allocations. a big change, and there was a lot of Abbey Capital said the appetite from resistance against paying for committed the investor was certainly somewhat In the period since the financial crisis, lines – which could make it an awkward reduced these days: “Whether you want the way the market works appears to conversation with clients.” to set up leveraged versions depends have changed considerably. This has on the investors, but in CTAs there’s been due to various factors – including Lynch continued: “It used to be the certainly less overall leverage going on.” the protracted period of low and near- case that FX lines were uncommitted zero interest rates; new regulatory thus never charged for, versus today Omar Kodmani of EnTrust Permal requirements on the banks; and what where they are all committed lines added: “By coincidence, we have had a seems to be a diminished appetite that come with an associated financing request for a leveraged version on one of among investors to buy leveraged fee. A lot of the change in financing our products just recently, the first time in versions of multi-manager funds. has come from banks understanding a while. But generally our experience has their own balance sheets much better, been, in the post-’08 era, that the investor On the declining demand for leverage, coming out of 2008, then going through likes to decide whether to leverage their Ian Lynch of BNP Paribas noted: “I Basel II and Basel III. Everyone now exposure to us for themselves.” quite a change and quite an opportunity for the a funny way, charging fees is like a new way If you’re doing something industry.” of being a niche manager in the fund of fund truly different and can space.” demonstrate a solid track Steve Smith of CdR also noted how multi- record, you do have the managers in hedge funds may in fact already Sweidan drew an analogy: “It’s almost like ability to charge higher be somewhat more transparent about fees being an organic farmer – who knows the fees. than some other strategy areas, such as private chicken by name and looks after it every day. equity: “We were talking to a real estate fund He’s going to charge more than the battery Lynda Stoelker the other day – and we asked them what was farmer.” the typical total expense ratio of a private The key is being able to equity style structure with real estate as an “I think this race to the bottom [on fees] deliver a differentiated underlying,” he noted. “They looked at us doesn’t end well for anyone,” he argued. “I return with low correlation. blankly and said: ‘Sorry, we don’t know what a think you have to stop and say: Listen, this is total expense ratio is’!” what we charge. This is what we do. This is the Michael Perotti service. It’s expensive... But it’s an expensive Michael Perotti of Falcon noted: “Obviously, business to mine alpha. It’s expensive to we can see fees coming down in the industry find the miners – and this is just how it is. If as a whole, but that’s normal: As returns come we can’t produce, we’re going to go out of down, fees are going to come down. Top business – and that’s just how it should be.” performing managers’ fees, on the other hand, are not coming down. It is a question of supply Michael Perotti and demand.” “The way we justify fees is performance,” he emphasised. “We’re small, so we have to deliver good one-on-one service as well as performance to a small group of clients. But at the end of the day, as long as we’re performing, fees don’t come up in conversation. So fees have come down – but not, in our case, down to the level I hear elsewhere.” “A lot depends on the size of the mandate,” Perotti added. “But the key really is being able to deliver a differentiated return with low correlation.” There are some firms in the business which remain renowned for holding the line firmly on fees. Adam Sweidan of Aurum joked: “In Multi-managers: Delivering for investors | January 2017 27

Multi-managers: Delivering for investors