Rich try unusual moves to join hedge funds

Date: Monday, November 27, 2006
Author: James Mackintosh, FT.com

With enough money, a private jet and a house in the Hamptons are easy enough to acquire, but wealthy investors are finding they have to resort to devious tactics to get the latest must-have: a stake in the world's best hedge funds.

The flood of money pouring into the hedge fund industry has seen the best fund managers shut their doors to new money.

Some of the industry's biggest names – Stevie Cohen of SAC Capital, Paul Tudor Jones of Tudor Investments, Louis Bacon of Moore Capital, Steve Mandel of Lone Pine Capital and many others – do not need to expand further and often believe more cash would hurt their returns.

"The reality is that it is only a tiny number of hedge funds that are any good and of those an increasing number are either limiting inflows completely or have the luxury of deciding who their investors will be," says Mark James, director of alternative investments at ABN Amro.

Some wealthy investors are so keen to get a foot in the door they are taking sly steps to get their cash into so-called "closed" funds. Several funds have seen well-off individuals transfer money to their depository bank, triggering automatic issuance of units in the fund, even though they were not wanted.

"It is incredibly annoying," says one London fund manager who has been closed for several years. "People are quite flabbergasted, especially very wealthy people, when you send their money back."

Most of the tactics used by investors are less underhand. Big institutions know closed hedge fund managers often accept money from longstanding clients, friends, "good" investors and charity funds. Even the toughest fund manager is likely to replace redemptions, operating a wait list for these investment chances.

But investors still find it hard get on such lists.

Some funds of hedge funds believe they can get a foot in the door through their relationships.

London's GAM backs a lot of new funds, and uses that early connection to get extra money in later. The $27bn Permal, the oldest surviving fund of hedge funds, believes its sheer size gives it an advantage in securing a position on the wait list.

But Omar Kodmani, senior executive officer at Permal, says the company also uses its contacts with other investors to buy their stakes when they want out.

Hedgebay, a Nassau-based company, is trying to create a more organised secondary market in hedge funds by linking buyers and sellers via a website that has listed 15 buy and sell offers worth $67m in the past 10 days.

Many hedge funds do not allow secondary trading, as they want to control who their investors are, and they get a cancellation fee if customers leave during the long lock-up periods that follow an investment.

A final trick can overcome opposition even to secondary trading. Hedge funds held by a nominee bank can be bought and sold by the final investor without the fund being told – although some make an effort to retain control by sending monthly updates only to the named investor. As long as they get the hot hedge performance they wanted, many investors don't care that they are investing blind.