Colonial Seeks Hedge Fund to Join Gore, 452 in Alliance Stable

Date: Thursday, June 18, 2009
Author: Malcolm Scott, Bloomberg

Colonial First State, Australia’s biggest asset manager, may seek an alliance with a hedge fund to offer customers a strategy capable of profiting in rising or falling markets.

The manager of about A$130 billion ($103 billion) has A$4 billion of client money in five boutique funds. Sydney-based Colonial started the alliance business in 2002 to broaden the range of strategies offered and has tie-ups with firms such as the Al Gore-backed Generation Investment Management LLP.

“We don’t have anyone who specializes in absolute returns,” Graham Hand, Colonial’s general manager of funding and alliances, said in an interview in Sydney. “If we can get the right idea working, that would compliment what we’re doing. So we’re looking at a few possible deals in that space.”

Hedge funds are looking for partners to provide capital after they fell a record 18 percent on average last year. At the same time, asset managers are looking to broaden the range of investment offerings after global equities slumped 42 percent.

Hand said Colonial is “reasonably advanced” on discussions for a couple of new alliances, though no transactions are imminent. He declined to name the firms or strategies.

Local money managers typically haven’t invested in domestic hedge funds, a process known as seeding, though that may change, said Chris Gosselin, chief executive officer of Australian Fund Monitors. AFM tracks the performance of more than 200 hedge funds managed in Australia.

“There are opportunities now for both the seeder and the fund manager, but there are also greater risks,” Gosselin added. “I think the opportunities outweigh the risks.”

Challenger

Michael Lovett, the general manager of boutique partnerships at Challenger Financial Services Group Ltd., said he’s getting more calls from small managers who are now looking for a “big brother.”

Challenger, the Australian fund manager backed by billionaire James Packer, has about A$1.5 billion invested in six boutique funds, including an Australian small-cap equities fund managed by Kinetic Investment Partners, and Five Oceans Asset Management’s international equity long-short fund.

While Challenger is in “no rush” to do another deal and is focusing on its existing tie-ups, “in the medium term, the area we’d like to get more in is the alternative space,” Lovett said in an interview in Sydney.

A record 180 funds closed in Asia during last year’s global market rout, according to Singapore-based Eurekahedge Pte.

Donald Bradman

Colonial has affiliations with 452 Capital, set up by ex- Perpetual Ltd. portfolio manager Peter Morgan in 2002 and named after the number of runs Donald Bradman scored in a 1930 cricket match. Colonial owns a 30 percent stake, and has distributed a co-branded Australian equities fund since December 2002.

It also offers a co-branded Australian share fund with PM Capital Ltd., founded in 1998 by Paul Moore, a former Bankers Trust Australia investor. It doesn’t own a stake in the company.

Unlike some seed investors who give capital for hedge funds to invest without taking an active role in promotion and distribution, “we don’t work like that,” Hand said.

“We throw the entire resources of Colonial First State behind helping you,” he said. “That means the hurdle of who we are prepared to work with is much higher. It’s not just, ‘there’s the money, go and make it happen.’”

Gore’s Fund

Colonial distributes the Generation Wholesale Global Sustainability Fund, managed by the firm chaired by Gore, the former U.S. vice president and climate campaigner. Generation IM invests in companies that follow socially responsible guidelines in the expectation that they will report better returns.

“What we’re looking for in the next transaction is not just, ‘Oh that looks good, let’s do it,’ but how it compliments what we do,” Hand said.

The fund manager owns 50 percent of Acadian Australia, a local joint venture with Boston-based Acadian Asset Management LLC. Colonial wholly owns Realindex Investments, which offers funds that use analysis of companies rather than their market- size to compile a portfolio of shares in benchmark indexes.

“The other attraction of this is that you actually get to own another business,” Hand said. “You’re not just selling somebody’s funds, you actually own a business which in time could become a very valuable business.”

To contact the reporter on this story: Malcolm Scott in Sydney at Mscott23@bloomberg.net