Infovest21 Surveys

 

During 2011, funds of funds continued to be challenged by flat performance, large US public pensions increasingly investing directly with hedge funds, some pensions doing their own manager research and due diligence, and a tough asset raising environment. Criticism is heard about their extra layer of fees, overdiversification and lack of transparency.

Various forces at work in the environment include:

 Performance: For the $1 billion+ funds of funds responding to the survey, the average performance for the first half of 2011 was 0.4% compared with 5.9% in the first half of 2010 and 6.8% in the first half of 2009.

55% of the $1 billion+ fund of funds managers are above their high water mark and are collecting performance fees. The other 45% of the funds of funds are below the high water mark. 2011 is the fourth consecutive year of their not receiving performance fees. As a result, some are closing their funds. And in other cases, talent is leaving for firms that will pay higher compensation or they are leaving the industry altogether.

For the first ten months of 2011, the average fund of funds, as represented by the HFRI fund of funds index, lost 4.2%. In comparison, the HFRI hedge fund manager weighted index was down 3.43%. Over the same time period, the S&P500 is down 0.35%.

 Reminders of the Ponzi schemes and frauds from 2008 and 2009 are reinforced as sentencing is occurring for a number of these e.g. Tom Petters. And with the three-year anniversary of Bernard L Madoff Investment Securities bankruptcy filing, the SIPC trustee continues to file lawsuits against the Madoff family, former employees, feeder funds and “net winner” investors as well as negotiate settlements.

The highly publicized Galleon and related insider trading investigations and sentencings may also be causing uncertainty among some investors.

Yet industry veterans generally agree that funds of funds are here to stay. The largest funds of funds continue to be resilient and raise assets. And in an attempt to fill investor needs, some funds of funds have developed specialized niche products while others are providing consulting work or managed account platforms.

Small and medium-sized pensions, foundations and endowments which want access to hedge funds will probably not go direct to hedge funds as it takes extensive resources to research each manager in the portfolio. Some of the recent smaller institutional mandates include Ohio State Highway Patrol Retirement System recently selecting Pinnacle Asset Management for a $10 million fund of funds mandate. The London Borough of Camden pension fund is looking for a fund of funds manager to manage a $64-80 million mandate. It will be the $1.5 billion authority’s first allocation to hedge funds. The mandate is for a specialist multi-strategy fund of funds.

A few new large funds of funds have been launched. One example is Goldman Sachs raising $600 million for a new fund of funds that will seed eight to ten start-ups with each receiving about $75-150 million. The fund is expected to raise about $1 billion.

Other positives have emerged: Some third party marketers say some of the funds of funds’ process is now more transparent and efficient. Others note that some of the smaller and medium-sized funds of funds are using technology to replace people in an effort to run a lean shop.

Consolidations and mergers are another factor in the current environment. A number of funds of funds have recently merged. Examples in 2011 include Athena Capital Advisors acquiring Stonehorse Capital Management, Arden taking over Robeco-Sage, Saguenay acquiring Strathmore, Nexar taking over Ermitage and Richmond Park Capital purchasing Olympia Group.

As we go to press, reports circulate that Geneva-based Union Bancaire Privee is in talks to acquire Nexar. UBP’s funds of funds group, which had been hurt by the Madoff Ponzi scheme and financial crisis, currently has assets of about $11 billion compared with $64 billion in June 2008 and $18.7 billion in 2010.

UBP acquired ABN Amro Bank, the Swiss private banking arm of ABN Amro, in August which added $14.3 billion in assets, 350 people and helped strengthen its wealth management division.

Some of the transactions represent a minority stake that could set the stage for multi-generational ownership. For example, in January, TA Associates announce it had taken a minority stake in Evanston Capital Management. And in November, Evercore Partners agreed to buy a 45% non-controlling interest in ABS Investment Management. In both cases, the fund of funds founders will continue to lead the company, the investment process and day-to-day operations remain unchanged. The founders signed long term employment contracts.

Despite searching various possibilities, some funds of funds have decided to shut their funds. One example is 1794 Commodore Funds, a boutique fund of funds 45% owned by family office William A Burden & Co, 45% by York Capital and 10% by certain employees. It announced in mid-November that it had decided to close. Sources say redemptions gradually eroded assets under management.

 
Compensation highlights

Against this backdrop, Infovest21’s tenth annual compensation survey found:

 In comparing 2011 results with the positions examined in 2007, 2008, 2009 and 2010, the trend in compensation for 2011 is mostly lower. Chief Executive Officer, Senior Analyst, Mid-Level Analyst, Director of Investor Relations, Controller and IT Director were the exceptions, receiving a higher total compensation package in 2011 than in 2010. On the other hand, the Chief Investment Officer, Chief Financial Officer, Portfolio Manager, Junior Analyst, Director of Research, Director of Sales & Marketing, Client Services, Compliance Director, Fund Accountant and Director of Operations had lower compensation this year than in 2010.

 Some similarities existed between the 2011 and 2010 samples:

o 55% of the funds of funds in the 2011 sample were above their high water mark and earning their performance fee compared with 54% in 2010 and 12% in 2009.

o 50% said there had been no change in headcount in 2011 – the same percentage as in 2010 compared with 36% in 2009.

o The average number of employees cut was three in 2011, about the same as in 2010 but considerably less than 34 in 2009. The average number of people added was three in 2011 compared with 6.5 in 2010 and three in 2009. The largest percentage of staff added were operations-oriented while the largest percentage of those fired were marketing and compliance.

o In 2011, 81% of the respondents were stand-alone organizations compared with 81% in 2010 and 64% in 2009.

Major differences between 2011 and 2010 include include:
o The average performance for the first half of the year for the surveyed funds of funds was 0.4% compared with 5.9% last year.

o 40% of the sample was headquartered in the New York area compared to 53% in 2010 and 60% in 2009. Two-thirds said they had more than one office compared to 61% last year.

o Funds of funds are more optimistic about the outlook for compensation.
 60% expect the base salary will increase as a percentage of the total package compared with 15% in 2010 and 28% in 2009.
 20% expect the base compensation will fall as a percentage of the total compensation package.
 Another 10% expect the equity component will decrease as a percentage of the total package compared with 8% in 2010 and 41% in 2009.
 Another 10% expect the equity component to decrease as a percentage of the total package.

Total Compensation
Lois Peltz, president of Infovest21, observed that Chief Executive Officer was the top position, paid in the $5 million+ range. Three positions have total compensation between $600,000 and $999,999. They were Chief Investment Officer, Chief Risk Officer and Portfolio Manager. Five positions – Director of Research, Senior Analyst, Director of Sales & Marketing, Chief Financial Officer and Controller – had total compensations in the $300,000 to $499,000 range. Three positions – Compliance Director, IT Director and Mid Level Analyst – had total compensation between $200,000 and $299,999. Five positions – Director of Investor Relations, Director of Operations, Fund Accountant, Client Services and Junior Analyst – had total compensation between $100,000 and $199,999.