Hedge Funds Were Prepared for Credit Crisis

The group had been waiting for it for months. Discolo said: “If there’s one thing that history tells us, it’s that it repeats itself. The same problems of August happened nine years ago, so you plan for things like this.”

AIG’s history as an insurer and its portfolio of proprietary market holdings makes it unsurprising that predictability, close observation and guarded conservatism are the ruling principles of its strategy.

For Discolo’s 30-strong team, its closely monitored investment strategy is informed by twice-weekly meetings of his staff and is subject to review by AIG’s risk management committee. Parent AIG invests about half the near-$9bn (€6.4bn) that Discolo’s team manages. The company screens 700 funds a year at 20 stages of investment. Because the parent depends heavily on leveraged securities, Discolo’s team uses little or no leverage in its hedge funds of funds.

He said: “Leverage is great when things are going up, but as you can see from this summer, when things go down even slightly, leverage can have a huge magnifying effect on things.”

Discolo is bullish about the way emerging markets are opening to hedge funds and the team sees opportunities in the near future, with India of particular interest. He said: “You have to plant seeds in different places where you see fertile ground. We’re not looking at investments six to 12 months from now, but three to five years from now.”