Business in Danger: Fund of Hedge Fund

Hedge Funds are currently reevaluating their relationships with consultants. One of the biggest hedge funds in the world will begin asking their investment consultants to sign non-disclosure agreements.Pacific Alternative Asset Management has decided to take this route in order to protect its intellectual property. Anne-Gaelle Pouille is a managing director of Paamco. With over $8.2 billion in assets, Pouille says the company is also reviewing all their consultant relationships in an effort to safeguard proprietary information.

These actions are the direct result of rising concerns that consultants might take manager selection ideas and utilize them for their own growing multi-manager product ranges. Unfortunately, prominent consultants like Towers Watson and Mercer are increasingly offering multi-manager products that mirror business model funds of hedge fund.International Asset Management is another major UK based hedge fund that stopped sharing specific information with large consultancy firms. That hedge fund’s CEO, Morten Spenner, has said that the $2.4 billion fund group will focus on small and mid-tier consultants instead. Spenner also expressed concerns that consultants could be channeling large investors to in-house funds. “This is typically what you would describe as a conflict of interest,” he said.

This change in policy arrives at a challenging period for funds of hedge funds. They have suffered a half dozen consecutive years of net outflows. That’s brought assets under management down from its $1.2 trillion peak in 2008 to a current $786 billion. This according to data provided by Preqin, a research and consultancy firm that focuses on alternative asset classes.

Those outflows have mostly been driven by the growing influence of investment consultants. Analysts at Preqin also believe there have been underwhelming performance and a shift among investors towards direct hedge fund investments.

One chief executive at another large fund of funds house was only willing to speak anonymously. He believed consultants “are taking a big risk by [developing fund of fund-style products], but the temptation of higher fees is substantial,” adding that some “consultants have sailed very close to the wind in terms of conflicts of interests, and if regulators were aware of what has happened, it would not sit very well. We have not reviewed our consultant relationships, but perhaps we should.”, according to the Financial Times.

Karen Shackleton is the managing director of AllenBridge Epic, an investment advisory company. Her concerns demonstrate that these consultancy concerns extend beyond funds of hedge funds. Shackleton said, “Most consultants have separated fiduciary services from investment advisory services, but conflicts are still there. Consultants would absolutely deny that there is a problem, but these conflicts sit there.”

In response to the entire matter, a spokesperson for Mercer stated, “We have rigorous processes in place to protect [third-party fund of funds’] intellectual property. Fund of fund strategies are not visible to staff involved in delegated solutions, and neither is Mercer research on fund of funds.”


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