Fund Management Performance (20 Years)

This research note is a preliminary study of listed asset management companies (Amcos). The ultimate aim is a process of selection for “FPM Amco Long/Short Recommendations”. An opportunity to get direct equity exposure to asset management companies (Amcos) during this general market correction in many global equity capital markets, particularly with S+P 500 at 6-month lows is the market timing under consideration. Also, we discuss the costs and benefits of investing in select FPM Amco stocks.

We believe record levels for equity benchmarks such as the S+P 500 closing above 2000 for the first time ever in August, augurs continued economic stability which was initiated by concerted global government stimulus. FPM analysis indicate ‘animal spirits’ will only be slowly painstakingly and enduringly restored. Whether that is a lull in perception about stagnant tepid global economies or an opportunity to exploit the trading volatility, we advise the real-money investors in deciding overall allocation strategies.

FPM’s repeated macro economic view is that we are in a “pause for breath” amid fundamental structural changes in social-ecological political and other spheres (listed in “FPM Risk Assessment Matrix” and also in our “Accumulating Risk Trends – ARTs”); and ultimately in financial landscape, not just regionally but also globally.

”FPM certainly believes in this probability of ‘multiple-dip recession’ cycle started in 2007-08.” From  FPM Jan’13: Investment Sector Outlook for 2013: “Credit is a Lover on the Re-bound?”

The State-driven economic policy and resultant macro fundamentals which have flummoxed many institutional investors (no less the famed and topical Bill Gross of Pimco Advisors!) in their prediction and interpretation ever since the “game-changer financial crisis”. Indicatively we may expect to know what the next seven years are likely to herald from the “easing off” of credit-injection reflation policy; excepting the chaos scenario outcome from extended and unprecedented national debt and global debt accumulation! This is the key to macro economic scenario analysis today. In regards financial capital, as FPM have propounded since July 2009, that we are in an era of equity markets characterised by side-ways trending benchmarks with bouts of volatility and a tentative secular uptrend. Given geopolitical risk considerations, policy manipulated markets, and other downside risks (See FPM Risk Assessment Matrix), FPM believe there is not enough market impetus or volume to send us off a precipice to a lower low in the capital markets benchmark, anytime soon, despite increased uncertainty in high volatility periods.

Before we pick the Amcos for the FPM Amco Portfolio we believe the general partner exposure is as valid as an investment in their underlying limited partner (LP) funds. Selecting appropriate sectors to allocate capital for speculative or investment purposes is shown in empirical research to be paramount to portfolio performance. So we have produced a select ETF constituent proxy of various asset class performances.

Amcos As Investment Fund Proxies

For all the greater transparency mandated by SEC regulation (such as expanded Form ADV and the exhaustive Form PF); yet NAV i.e. price history, particularly of alternative investment funds (AIFs) such as hedge funds and private equity funds, remain opaque. As might be expected for essentially still an over-the-counter OTC product structure, as compared with the long established staple of 401(k) pensions plans, the humble mutual fund. Aside of AIFs’ price-discovery issues, mutual fund prices do have greater price visibility and accessed via their ticker / monikers from public websites such as Yahoo Finance and Nasdaq.

For FPM’s 3-fold enterprise manifestation[1] agenda, we decided to take a proxy for the gamut of investment funds through their listed management companies – for which there is access to financial accounts and statements, as well as database of price history for research analysis.  While AMCOs maybe categorised as either predominantly applying “passive” or “active” management for the sake of broad distinguished identity. FPM enunciates the “convergence’ force as powerful. Then into further meaningful assessment of whether the management company is considered primarily as “traditional long-only”, “alternative investments” and / or “index trackers”  

1) Long Term (Established Amco) - Hold / Buy

For this ‘top-down’ recommendation analysis of the listed AMCOs for buy-and-hold portfolios we selected those with pre-2000 vintage (i.e. those managers publically trading before and after Asian Financial Crisis of 1997-98 and TMT-Bubble of 2000).

Fund Management Performance (20 Years or Inception History)	Compound Return %	Annual Return %
Eaton Vance Corp. (EV) (Oct 1994)	3094.8%	18.9%
Aberdeen Asset Management PLC (ADN.L) (Oct 1994)	2969.1%	18.7%
T. Rowe Price Group, Inc. (TROW) (Oct 1994)	2443.9%	17.6%
Franklin Resources, Inc. (BEN) (Oct 1994)	1430.2%	14.6%
Legg Mason, Inc. (LM) (Oct 1994)	1119.4%	13.3%

2) Long Term (Established Amco) – Watch List

AllianceBernstein Holding L.P. (AB) (Oct 1994)	787.2%	11.5%
Invesco Ltd. (IVZ) (Aug 1995)	753.4%	11.8%
BlackRock Inc. (BLK)	See Full Research	See Full Research

3) Specialist Strategies (Noveau Aimco) – Hold / Buy

Fund Management Performance (20 Years or Inception)	Compound Return %	Annual Return %
Virtus Investment Partners, Inc. (VRTS) (Jan 2009)	2694.9%	78.5%
Affiliated Managers Group, Inc. (AMG) (Nov 1997)	1072.2%	15.7%
Gamco Investors Inc (GBL) (Feb 1999)	534.8%	12.5%

4) Established and Noveau Amco - Watch / Sell

For the ‘all-in’ SELL list we selected only those poor performing managers with over 5-years’ listed-price record. Again here we stress that this preliminary work is only intended as a top-down recommendation. Noticeably and unspectacularly the resulting list includes those managers specialised as alternative investment management companies - “AIMCOs”. The reasonable explanation for most of these alternative managers’ underperformance perhaps stems from the partial public listing e.g. Blackstone Group have only a 10% public float. This is in “FPM Alt Kind - M&A” terms due to distribution rights priority of founding managing partners over shareholder distributions on operating profits.

Fund Management Performance (20 Years or Inception)	Compound Return %	Annual Return %
Fortress Investment Group LLC (FIG) (Feb 2007)	-73.4%	-15.9%
Man Group plc (EMG.L) (Oct 1994)	-77.2%	-7.1%
Och-Ziff Capital Management Group (OZM) (Nov 2007)	-29.0%	-4.8%
Calamos Asset Management (CLMS) (Oct 2004)	-24.5%	-2.8%
Blackstone Group, L.P. (The) (BX) (Jun 2007)	55.9%	6.2%

A prudent investor may suggest theses me-too newcomer ‘alternative’ listings are mainly a strategic phase acting mainly as an opportunity for the founders to cash-in a stake in their company via the initial public offering - IPO (and often a subsequent phase after a private stake sale for price discovery and market valuation purposes).

So the eventual or initial market price trading history having little reflection to overall book value or performance expectations of the firm. In fact, Blackstone Alternative Asset Management (BAAM), the division of the Blackstone Group (BX) which manufacture hedge fund investments confirm in their February 2014 presentation that “Valuations for hedge fund GPs do not reflect long‐term value”. This can be interpreted in two-ways: 1) no long-term value in investing in a hedge fund Aimco or 2) Markets’s valuation of Aimcos doesn’t reflect future expectations.

For Further Qualitative And Bottom-up Analysis:

Conclusion of our quant based preliminary ‘top-down’ recommendation of a select asset management companies and their fortunes for an investor in them.

FPM brand of fund analysis shows that an investment in traditional long-only asset management companies (Eaton Vance Corp. et al.) outperform those of relatively newly listed ‘alternative vintage’ of Och-Ziff Capital Management Group (publically est. 2007) and their brethren over the long term. Listed alternative investment management companies (“Aimcos”) are the relatively poor performing subset in the asset management industry. Och Ziff (OZM) is down 29% in dividend and split adjusted price terms from its public inception. While Eaton Vance (EV) is annualising comparable returns of 19% over the past 20 years.

“Public Inception” of an Amco is of grave strategic concern when essentially boutique businesses seek that trepidation of growth-obsessed to institutionalise. These concerns in considered the FPM’s Product Convergence Story (a.k.a. “Product Convergence or Incestuous Orgy in Alternatives”). When the premise of something changes one should change their opinion about it in equal measure!

Since not all breeds are made equal, of the Aimcos we noticed from our preliminary ‘top down’ survey of their quantitative metrics, we researched anew Virtus Investment Partners, Inc. (VRTS). This new Amco, which only publically listed in January 2009, had unbelievable (‘Green for Go’ Highlighted) total returns with dividend re-investment of 2,695% or 78.5% annualised. This naturally seemed bizarre when compared to other definitive Aimcos in that table above returning 15.7% and 12.5%, such as Affiliated Managers Group - listed Nov 1997, and “Gabelli”.

FPM already had coverage knowledge of Affiliated Managers Group and Gamco Investors Inc (GBL) (Listed Feb 1999).

Virtus Investment Partners, yet without the veritable ‘VIP’ ticker! is new on FPM coverage radar as a vivid example of how relevant bottom-up understanding complements top-down quant estimation. Virtus was founded in 1988, perhaps a phoenix rising out of the Black Monday Market Crash of 1987, but like Affiliated Managers Group, they maybe considered ‘Amco’ management company not unlike a multi-manager but with general partner relationships i.e. a platform for other affiliated managers under an umbrella label. For our full research report we reveal if Virtus are a business development company (BDC) category; like the coverage we initiated on Ares Management L.P. (ARES) of Ares Capital Corporation (ARCC)…

In FPM humongous SELL Recommendation[2] of Aimcos headed “Specialist Strategies (Noveau Aimco) – Switch / Sell”, we targeted Blackstone Group due to FPM coverage of their reputation risk from investor association with ‘guilty verdict’ institutions such as insider-trading Steven A. Cohen’s firm S.A.C. Capital (since re-branding as a family office renamed Point72 Asset Management).

  

“We were concerned that Blackstone, now an AIM category behemoth and industry bellwether, is not adhering to its founding reputation risk principles. A seemingly ardent principle to the partnership co-founder Stephen A. Schwarzman, from the days of his office-next-door association with Dennis Levine; a former Lehman Brother’s colleague who was central to the mid-1980’s insider trading crackdown. “Blackstone is sensitive to reputation”, was recited as a holy mantra to the author of this investigative research during a due diligence meeting in 2007 with the then head of asset allocation.” (Source: FPM’s No Smoke Without Fire! 22 April 2013)

Also, we were less than impressed with Blackstone’s total returns figures, up 55.9% since public inception in June 2007 or only 6.2% annually. Despite Blackstone’s division Hedge Fund Solutions or BAAM (mentioned above), reporting in their February presentation in Florida of 22% CAGR in economic income; we believe the predominantly private equity advisory business is reeling from low transactional flow, perhaps hampered by easy money preventing corporations from needing their buyout contravention…

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[1] 3-fold manifestation: No Smoke Without Fire – Reputation Risk, M&A of the Alt Kind and Alternative-Mutual Convergence 

[2] An analysis based cautiously on preliminary top-down quant observation of a select Amcos

Product Convergence or Incestuous Orgy in Alternatives - A Review

An FPM principal noticed this headline today 10^th March 2014: “Carlyle commodity fund Vermillion's assets halved to below $1 billion” on Reuters. One may be forgiven for thinking that another hedge fund losing money in a zero-sum game – no great news! Once again, FPM reading between the lines and emphasizing joined-up thinking scored a humble bullseye in our outlook perspectives.

Here’s why we hit the bullseye on the investment-dartboard, and not just on paper: In our 2012 risk assessments entitled “Product Convergence or Incestuous Orgy in Alternatives”, published  in two parts (Part 1 & Part 2 here), we highlighted specific and broad risks in the alternative investment industry infrastructure.

Serving as a review of our rambling blogs and demonstrating understanding of risk trends we show excerpts published from the June and September 2012 about orgies in alternatives:

Excerpt 1:

“In literary terms we think The Carlyle Group’s [CG] activity represents Jacob Marley’s ghosts showing Ebenezer Scrooge things that have been in the past, are currently and will come to pass. Carlyle’s activity in asset management deals are complex if not opaque beyond the reported details…” (Source: Orgy Part 2 published 19 September 2012)

To appreciate the extent to which FPM have highlighted the evolution of risks in alternative investment industry - an industry aligned as “shadow banking” - please DO read Orgy Part 2. In that blog presentation, FPM describe the industry’s evolutionary risks through its operational infrastructure as “Accumulating Risk Trends – ARTs in Alternative Investments”’ We cited “Commodity and leveraged loan products risk – a time bomb!” as one of ARTs (Accumulating Risk Trends) in Orgy Part 2. Today’s headline about Vermillion Asset Management is the latest in a string of commodities strategies that experience hot-money flows. Current Citigroup research shows that commodity products as a sector, saw a record net outflow of $50 bn in 2013 alone.

FMT Proposal Bullseye about dynamic creative-destruction has irrefutably and evidently seen many commodities operators losing money though a difficult leveraged strategy (i.e. that of using futures and options) and in a challenging global financial environment. Challenging, not least due to effects of the finally acknowledged onset of climate change, but also in-play factors like the policy-driven macro environment. We have identified ARTs contributing to the end of wild-west commodities investing. FPM have documented these hedge fund strategy risks in exclusive subscription research called “Impending Commodities Crash and Amaranth x 10”. Also, FPM have been monitoring and disseminating this strategy’s risk trends since beginning of October 2012. The examples of difficulties faced by commodity-focused hedge funds are numerous, but our first observation and subsequent monitoring was based on an uncompleted transaction i.e. FMT proposal on Touradji Capital Management LP.   

Where FPM missed the Bullseye (i.e. not biased and only indulging in self-praise) was in calling for completion of Carlyle’s strategic acquisition-interest in K2 Advisors. K2 is a prestigious fund of hedge funds operator managing US$9.3 bn in assets then, and who was part-owned by another private equity investor TA Associates, as well as the founding partnership. K2 was majority-acquired by Franklin Resources Inc [BEN], a deal announced in November 2012. Franklin Resources’s long-only investment management arm, in the traditional asset management mould, is called Franklin Templeton Investments with AuM US$731 bn at the time. From industry sources FPM tentatively understands that Carlyle walked away from the K2 bid-deal, due to high price asked by its private-equity owner, and Carlyle balking at taking on K2’s debt obligation.  TA’s sale price and deal term with Franklin Resources were not published.

Excerpt 2:

“We believe the creative-destruction cycles are quicker in the alternatives space. The relative rate of growth of assets in hedge funds versus it procreator or predecessor, closed-end mutual funds, is a stark statistic FPM possesses. Remember, closed-end long-only funds were the origins of hedge funds, ETFs and multitude other pooled-assets vehicles. The first such collective investment scheme in the world is Foreign and Colonial Investment Trust, started in 1868. Coincidentally, the first fund of hedge funds is known to have started almost 100 years later in 1969…” (Source: Orgy Part 1 published 27 June 2012)

In our Fund Manager Transactions - FMT investment proposals we had been recommending the vestige brand-value and other corporate existentialism embodied in F&C Asset Management Plc [FCAM]. FPM have profitably held the London-listed asset manager in our wealth management portfolio. Significantly, F&C traces its history to 1868 with the founding of “Foreign and Colonial Investment Trust”, the world’s first publicly listed investment pool. 

FMT Proposal Bullseye was evidenced when in January 2014, BMO Financial Group [BMO], the parent company announced the acquisition of F&C for £708 mn / US$1.2 bn. Notice that BMO (short for Bank of Montreal) is Canada’s oldest bank, established in 1817 and operating in Britain since 1870. The bank employs about 45,000 staff globally and has divisions focusing on retail banking, wealth management and investment banking services.

Other reviews of FPM activities and transactions available on request to Kristian via kks@FundPortfolioManagement.com. FPM does not represent itself on websites other than this blog site. Please email us for further information.

Product Convergence or Incestuous Orgy in Alternatives - Part 2

The growth spurt in alternatives partly reflects the flow in capital to alternative managers from traditional ones, for various reasons diacussed below. Accepting plutocratic model of society, traditional manager’s time-vested and relationship-nested model of conducting a socio-politico driven economy is perhaps on the wane in its creative-destruction cycle. As an example, I am thinking of Fidelity Investment’s non-vogue long-only-securities investing since starting in 1946. Yet Fidelity is still the second largest mutual fund company in the US. In Europe, “Foreign and Colonial” a.k.a. F&C Asset Management plc, the world’s oldest manager of mutual funds, has seen its listed share price fall to a quarter of its value in 2000.   FPM believe innovation in the securities management industry with the newer mutual-fund models of Vanguard Group established in 1976, and the best of breed alternative-managers like Bridgewater, formed in 1975, are bellwethers. Additionally, lets not forget that the traditional brokers and manager’s spawned or trans-mutated into hedge funds and private equity. The ‘hedgies’ tended to be from the broking and agency or prop-trading side (secondary markets), while the corporate finance or investment bank teams did the transactions (primary markets), akin to PE-model. The closing yet untenable link between PE and hedge funds via their cross-holding ownership yet again inexorably questions Chinese walls issues. Our premise that creative-destruction via alternative assets is foreboding or to be emphatic, ill-auguring; and ultimately beneficial for FMTs.

By sampling the Carlyle Group's fund manager transactions, as one of the world's largest connected private equity investors, FPM believes their deals serve as a case study of ‘alternatives’ trends and consequences.   

Double Click to Enlarge Image

In literary terms we think The Carlyle Group’s [CG] activity represents Jacob Marley’s ghosts showing Ebenezer Scrooge things that have been in the past, are currently and will come to pass. Carlyle’s activity in asset management deals are complex if not opaque beyond the reported details. For instance, it is difficult to distinguish between their strategic and financial investment rationale for partnerships, despite rules of thumb about <20 being="being" financial="financial">30% being strategic investments.

Also weaving an entangled web to the already complex association of cross-holdings between asset managers, is through investments in the hedge fund and/or private equity fund (i.e. via LP shares of the fund). So we are now doubled up on exposure to GP stake and LP stake. For example, as cited in Carlyle’s activity table above, the sovereign fund of Abu Dhabi’s Mubadala Development Company also committed $500 mn to an investment fund managed by Carlyle. While the US$1.85 bn of capital involved in this particular investment is not suggestive of absolute catastrophe to Mubadala, yet considering the aggregated capital investment of other petro-dollar earning countries in the Middle-East region in global financial services, the impact maybe significant wealth destruction! The prototype for which has been set since the 2008 financial crisis. The illustrious manager of Pimco’s bonds funds, Mr William Gross, stated that on a long-term basis, governments are likely to use financial repression, where the rate of inflation is higher than bond yields, to erode the value of sovereign debt over time. The late great Barton Biggs also stated in Mid-2011 that debt devaluation via inflation is less painful than capital destruction as a long-term course. (A prophetic Barton Biggs interview)

 

The cross-holding in financial services, which is rhetorically seen as diversification benefits (and realistically, recycling of petro-dollar revenues etc) can insidiously become risky over-concentration in a financial assets. For example, the overall leverage Company A states on its books can multiply if its cross-held affiliate Company B takes a nose-dive due to its own leverage situation. Company A’s balance sheet asset takes a knock-on hit and deleveraging may be enforced. Remember that in financial services and corporate treasuries assets usually have a charge or liability against them. By putting an asset or capital to intensive use there is less cushioning from the negative domino or chain-reaction effects created by the weakest link in the chain.

Hence why every time there is a financial crisis, after the horse has bolted, so to speak, Basel regulatory capital reserve requirements convene special discussions. And After the financial crisis which unfolded in summer 2007, regulators and bankers from 27 countries gathered yet again in September 2010 to agree on the Basel III accord.

Evidence of a cross-holding implosion scenario: by cutting financing to hedge funds and raising ‘repo haircuts’ (basically ransoming the fund-firms to put up more assets / collateral to back their borrowing / leverage) prime brokers chain-reacted in the ensuing securitised mortgage crisis of 2007.  Amid systemic crisis this credit-squeeze also caused a series of hedge fund blowups, including Carlyle Capital, an affiliate of the Carlyle Group! Also see the case of Anger at Goldman Still Simmers.

Carlyle Capital Corporation, a publicly traded fund which at the time held US$21.7 bn of securities (though it had only raised $300 mn equity through the fund IPO and listing on Amsterdam Euronext exchange!), was served with a default notice from one of its prime brokers after it failed to meet initial demands for just $60m of margin calls in March 2008. This case and FPM’s database shows how hedge fund firms and their funds can blow-up even though they have a large and powerful affiliate. Carlyle Group which had assets of US$75 bn at the time provided only a $150 mn credit line to the fund, which was the limits of its exposure.

FPM reiterates a yellow-flag warning on the prospect of "distressed domino-effect sellers" of hedge fund and manager allocations. The author suggests a growing ‘secondaries’ in alternative manager and fund stakes.  The systemic-effect concern stems from numerous potential risk scenarios according to developments in hedge funds and the tectonic shift in financial services, which FPM monitors as Accumulating Risk Trends (ARTs). Some of these ARTs we follow at FPM are listed at the foot of this article. For example, the development of buyout firms buying stakes in the managers of hedge funds or other affiliations by varying degrees of investment poses threats. The author of this FPM alert experienced first-hand the UK split-capital investment trusts implosion (British version of mutual funds with preferential and other share-classes). Eventually these regulatory body authorised trusts, which were meant to be safe, were investigated and fined for mis-selling despite their hindsight-evident concomitant risks. A fiasco that ensued once cross-holdings multiplied the effect of leverage, leading to debt covenant breaches and fund closures at the height of a general market de-leveraging cycle of 2001-2003.

In extrapolating split capital investment trust experience, FPM foresees a scenario of hedge fund cross-holdings, especially between implicitly leveraged credit management units, turning sour! A domino effect of tumbling hedge- and private equity funds valuation, through LP-share redemptions or private market value (PMV) deterioration in the buy-and-hold GP stakes, would shake the foundations of alternatives if Carlyle experienced capital-flight for “whatever!” As a reminder, the tangled web-effects of Lehman’s cross-holding and counterparty relationships are still reverberating. As with Amaranth blow-up, long-term fund investors and GP stake-holders in it would have ended by receiving little residual value. In FPM research-integrity, we do not understate that Amaranth’s demise benefited the other sides of its failed trades, in the zero sum game.

To really get a domino-effect or contagion from a credit hedge fund blow-up scenario, a bubble first needs to blown. Last wave of fear was triggered in subprime mortage loans, could the next economic impalement come from leveraged loans tied to buyout activity in corporations souring! So noticeable that other large private-equity firms are inevitably buying CLO funds / contracts in a bid to capitalize on a recovery in loan prices (which we at FPM benchmark with S&P/LSTA US Leveraged Loan 100 Index). Carlyle joins Blackstone Group via its credit-arm GSO Capital Partners, and a host of other managers like Deerfield Capital Corporation, in acquiring investment firms or debt funds recently. Also, in June'12, in unison with other PE managers who have opportunistically expanded into traditional and alternative assets, Kohlberg Kravis Roberts, one of the oldest PE business models, purchased an existentialism-hit fund of hedge funds player Prisma Capital Partners. For Carlyle, this trend of PE diversification by adding alternative managers was envisioned and initially developed in 2008. However this attempt to add hedge funds failed when the firm liquidated a pool hurt by investments in mortgage securities as property prices declined and credit markets froze at the onset of the financial crisis. Highlighting such waves of consolidation in alternatives and considering their impact is this premise of this note, and consultancy service that FPM is embarked on. 

A large credit hedge fund blow-up may not cause economic waves but will have ripple-effects on already dented investment portfolios at pension managers, treasuries and other pooled financial savings. Needless to remind industry main-stayers of the widespread panic from LTCM-collapse ensuing from Russian debt debacle of Autumn 1998; similarly Lehman and Bear Stearns collapse from mortgage loans should loom large in memories still! These last two were larger interweaved entities that arguably should not have been allowed to founder by the authorities. While those and MF Global’s bankruptcy reach financial media headlines there are numerous others that will not be heard-of by busy investors. Hedge funds are not only getting larger in assets managed, but also in terms of their numbers, as the sub-text premise of this note indicates. So it stands to reason that some AI managers will become behemoths and others will launch with a strategic partner/s then strive to stay afloat or destruct on stormy / rainy investment days, with or without affiliate’s help.

And as if on cue to validate FPM visionaries: STOP PRESS! Stark & Roth LLC is winding down its multistrategy hedge fund. The firm better known as Stark Investments announced this in a filing with the state authorities in 6^th July ’12 Friday. Also, read about related impact of shareholders of the crisis at broker Knight Capital Group. This thought-paper blogged at end-June!

One of the earliest observation of this cross-holding, in particular via FOFs in-play-transaction trend was in 2007 when TA Associates, a significant specialist player in financial services transactions / deals bought a minority stake in K2 Advisors, which was then a UDS$5.5 bn AuM FoFs. Which had been transformed into a US$10 bn AuM firm by mid-2011. TA Associates was not only acquiring steady and diversified revenue streams but also significant client relationships. Relationships that FPM understand will help identify single-manager hedge funds to be in distress or otherwise put into play as a fund manager transactions. Other positives that FPM notes from cross-holdings, since transactions have myriad and opaque motives would be in the interest of acting as a cabal, coterie or cadre. For example, affiliated M&A arbitrage hedge funds discretely cooperating can effect board changes without breaching “ownership-percent-threshold” and triggering ‘posion pills’ (which more than 2/3rd of S&P 500 companies have as defences against hostile takeovers). 

Finally, as a self-fulfilling flow to FMTs, we consider whether Carlyle will turn their 2011 interest in K2 Advisors fund of hedge funds into a financial or strategic buy from TA Associate and K2 management. Deal terms and intangibles willing.

Accumulating Risk Trends – ARTs in Alternative Investments:

Stability of repo financing arrangements

Limits of advisor / management’s exposure for losses

Effectiveness of reassurance about undrawn credit lines

Chinese wall issues between PE and hedge fund activities

Opaqueness of leverage levels from multiple prime broker use

Heightened government and regulatory environment e.g. new whistle-blower rules

Capacity constraints on performance of larger managers and ‘style drift’

Sub-critical mass of small to midsize management firms

Degrees of manager connectivity in fraud, insider dealing and other breaches

Loan servicing and refinancing difficulties in high interest rate environment

Commodity and leveraged loan products risk – a time bomb!

Mass wealth destruction in assets e.g. bonds via higher dispersed-inflation