Five years ago, the world had yet to experience the aftershocks of Lehman’s demise, the global credit crunch and, of course, the Madoff affair. Since then, 28 FoHF groups have fallen below the $1bn level, with a further 28 considered completely defunct, most in the wake of Bernard Madoff’s antics.
The more interesting story, five years later, is which FoHFs have not only survived but also managed to grow. On 30 June 2007, there were 147 FoHFs in the InvestHedge Billion Dollar Club managing $956bn; today, only 78 of those are left and they run $538bn. This universe of 78 funds managed $718bn five years ago and has since lost 25% of its assets.
Five years ago, the top 10 players included UBS, Permal, HSBC, Man and Grosvenor, all of which are still in the top 10 today. Meanwhile, Union Bancaire Privée, GAM, Credit Suisse, Amundi and Lyxor have fallen out.
The top 10 largest firms of June 2007 collectively manage $161bn today, but have seen a loss of 2.3% in their assets in the first six months of 2012 and a stellar 49% drop in assets over a five-year period.
What is clear is that the after-effects of the last five years have left the once $1.1 trillion industry dazed and confused about the best way forward.
The number of FoHFs is shrinking as a result of both poor absolute and relative performance as well as consolidation. Some 24% of the respondents of the now $600bn industry are looking at acquisitions as a route to grow their business. Others believe that the way forward is through creating bespoke portfolios.
Of those that believe M&A is the way to survive only 37% saw their assets grow in the first half of 2012. But firms need to realise that if they fail to attract net new inflows and/or demonstrate lacklustre performance, they are going to shrink and will therefore have no choice but to either acquire or be acquired to survive.
For this reason, M&A is likely to dominate the 2012 stage. At least seven FoHF deals have been completed or announced this year, including the landmark sale of Financial Risk Management – which managed $8.7bn at the end of 2011 – to the Man Group that already owns the multi-manager businesses of GLG, RMF and Glenwood. This deal has propelled FRM back into the top 10 with assets of $19.5bn; FRM had been languishing in 21st place.
Union Bancaire Privée, which currently runs $13.1bn, has completed its own transformation – post the purchase of Nexar Capital Group – by renaming the firm UBP Alternative Investments. Despite also buying Allianz Alternative Asset Management and Ermitage, UBP has lost 71.5% of its FoHF assets, equivalent to $32.7bn, over the last five years.
On the cards are Kenmar Group and Olympia Capital Management that have agreed to merge, as have Rothschild & Cie Gestion and Paris-based HDF Finance. Meanwhile, Crestline Investors in Texas continues to pursue its strategy of acquiring relevant distressed assets. Crestline saw its assets grow by 13.6% in the first half of the year, boosted by around $300m of assets from Lyster Watson’s legacy FoHFs business. In 2009, the firm acquired various assets relating to Northwater Capital Management.
Nevertheless, M&A is not the only way FoHFs can grow. Firms, including ABS Investment Management, have joined investment banking advisory firms, such as Evercore, while Prisma Capital Partners has taken the private equity route by teaming up with KKR. Prisma saw its assets grow by 1.6% in the first half of 2012 and 106% over the five years ending 30 June 2012.
M&A aside, the next five years is about staying relevant: sourcing new managers, mixing tailored portfolios and finding ways to offer what clients need. In addition to consolidation, many of the survey respondents believe that to survive FoHFs will need to specialise, while nearly 45% of the universe believe that customisation is the main way forward, especially if the lines between FoHFs and consultants continue to blur. Fee compression will be inevitable as managers and consultants fight for advisory business.
Blackstone Alternative Asset Management, which has retained its title as the largest FoHF in the world with $41bn in assets, is all about evolution and adaptation. In the first half of the year, the New York-based firm grew by 5.36% and, over five years, it has seen its assets grow by nearly 96% due to its evolving cocktail of bespoke, advisory, seeding as well as commingled offerings.
FoHFs that want to survive the next five years will need to perform. The overall performance for 2012 to the end of July was 1.33% but down 6.8% over the last five years, according to the InvestHedge Global FoHF Composite.
For now, however, the exodus of assets that has defined the last five years has stopped. In the first six months of 2012, the asset growth of the InvestHedge Billion Dollar FoHF Club was flat and it appears that the assets under management have been stable around the $600bn mark since June 2009.
For the first half of 2012, 53 firms, which had $293.4bn under management, had either flat or positive growth rates and collectively saw their assets grow by 9.5%, while 50 firms with $306.3bn under management saw their assets fall by 7.7%.
Ranked by assets, the top 10 largest firms that manage $230bn have seen these assets grow by 1.5% during the last six months. Over five years, this universe has lost 8.9% of its assets.
The next step in the evolution of the FoHFs business will be a resolution of the conflicts between consultants and FoHFs, which is resulting in pension funds taking advantage of the increasingly blurred lines of the growing advisory space to get quasi-free services.
The key for success in hedge fund investing, whatever the route taken, will be to know how to ask the right questions of their providers and advisers because what has become clear is that advice at either low or no fees, in a bid to regain market share, is a zero sum game where the investors will get what they pay for during the next crisis.