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Tuesday, December 10, 2019

HF Managers Prefer Lean Teams

Date: Friday, June 13, 2008
Author: Emii.com

More Managers are turning over the idea of the perfect number of individuals to run a hedge fund, Financial News reports.

Staff is the highest cost for many of them and, given that fees depend on assets under management, a slimmer organization means more profits per portfolio manager.

An extreme example of this is U.K. hedge fund manager Gradient Capital, where founders Ivor Farman and Scott Pagel each own 50% of the business.

They have each earned more than £100 million (€126 million) over the past two years, according to Gradient Capital’s accounts published at Companies House, after making returns of more than 40% a year for their investors, and employ only two administrative staff in addition to themselves. Gradient had $2.5 billion (€1.6 billion) under management last year and is closed to investment.

Of 10 single-fund managers canvassed by ABN Amro’s alternative assets group, which covers only those who advise funds that are listed on stock exchanges, just three had more than 80 investment staff. Five of the firms had numbers below 40, despite median assets under management of about $6 billion.

The median staff for a single-manager hedge fund firm with a listed fund is 36. These figures together imply a median value of assets per member of the investment team of more than $150 million.

Assuming the management firm charges annual management fees at 2% of assets under management, that equates to more than $3 million per person per year, with the possibility of performance fees if the fund registers a gain.

Ashmore, a U.K.-quoted emerging markets specialist fund manager that ABN Amro includes as a hedge fund manager, is an outlier among the single-manager firms with listed funds.

It has the highest ratio of assets to portfolio managers, with 25 investment staff running $36 billion, though Ashmore’s long-only assets complicate the picture. Its efficiency is closely followed by another, unidentified hedge fund manager in the survey that runs $14 billion with less than 40 staff.

Mark James, executive director of alternative investments at ABN Amro, cautioned about extrapolating the results of hedge managers that advise on listed products to the hedge fund industry as a whole. If anything, he said, managers running unlisted money are likely to have leaner organizations.

He said: “The listed hedge fund sector favors institutional-quality managers and funds of funds with a long history and a deep infrastructure. This typically implies managers with substantial assets under management. The listed marketplace is not ready for start-up hedge fund managers.”

The preference for leaner organizations is more pronounced among the managers of funds of hedge funds. The average staff for a fund of funds manager is 23, despite similar totals of funds under management.

ABN Amro said in its report: “The nature of a fund of funds is that it outsources hedge fund investments to hedge fund managers, whereas a single manager is doing all investment work in-house. This is to be expected.”