FEATURE INVESTMENT CONSULTANT TOP 10

T
C O N S U LT A N T POWER
BY KIRSTIE BREWER

INVESTMENT

HFMWeek presents its first ever countdown of the largest investment consultants by hedge fund assets advised

10
HF AUA $2.7BN

10 CARDANO
(Breakdown $2.6bn direct, $0.1bn FoHF) Total AuA $62bn HF AuM $3.1bn Total AuM $14bn Inception 2000

Cardano is among the youngest in the top ten, having launched in 2000. Albeit comparatively smaller than its peers, its influence has steadily built in momentum and the firm is well regarded by both the capital introduction teams and hedge fund investor relations personnel HFMWeek spoke to who felt that the quality and experience of team members, a number of whom are former seasoned hedge fund investors, made it easy to build strong partnerships with the firm. It operates across both the UK and the Netherlands Theo Kocken, CEO of Cardano, co-initiated Dutch seeding platform IMQubator. Cardanos clients tend to have an atypically high allocation to hedge funds, at least 30% of delegated client assets and at least 10% exposure on the advisory side. Rolled out in 2008, its delegated management service is the second largest in the rankings and reported a 3.3% gain after fees for 2012 (it is the only UK fiduciary manager to release its performance track record every year).

he cult of the consultant is here to stay. Preqin data suggests that investors of institutional stripe now account for 61% of hedge fund capital, compared with 45% pre-2008, placing growing power into the hands of their intermediaries investment consultants. HFMWeeks inaugural top ten of these gatekeepers gives some insight into just how influential they have become, and will continue to be. The ten firms have an aggregate of nearly $550bn in hedge fund assets under advisory (AuA) across more than 2,500 clients, from pensions and sovereign wealth funds to endowments and foundations. Single managers represent the lions share of the hedge fund assets under these consultants watch, with funds of hedge funds (FoHFs) representing less than 50% in all cases a very different picture to that painted pre-crisis. Cliffwater, Cambridge and Cardano have less than 15% exposure to the FoHF space, Aksia, a very small proportion, while Albourne Partners deals only with single managers. Aon Hewitt, which holds the middle of the table with $30bn in hedge fund AuA, still has a third in FoHF but the firm is continuing to see a strong rotation away from the space and towards more tailored, direct solutions, confirms Guy Saintfiet, UK head of liquid alternatives. Many typical FoHF solutions have fallen short of the mark in terms of their ability to offer not just attractive risk-adjusted returns but also strong diversification properties, he says, reflecting a viewpoint largely held by the other consultants. David McMillan, global head of hedge fund manager research at Mercer, says the firm has witnessed an elevated level of churn in the investor base, as the FoHF industry consolidates and a number of investors have become disenchanted with recent hedge fund performance and reactively reduce or eliminate allocations. On the other hand, he notes that these outflows have been more than offset by large, new entrants into the space, seeking diversified sources of return in a low-yield, low-growth environment, as well as long-standing hedge fund investors proactively increasing allocations in pursuit of the same. While they may no longer be the biggest recipients of institutional inflows, FoHFs are moving into the consultancy space leveraging their expertise and the breadth and depth of their research capabilities. We now find ourselves coming up against the likes of BlackRock, Blackstone and J.P. Morgan on a regular basis, admits a professional at one of the generalist firms featured in the rankings. Placing the day-to-day management and execution of investments directly into the hands of consultants is also a growing phenomenon globally. While the top two consultants, Albourne Partners and Aksia, are strictly advisory, seven of the remaining eight offer fiduciary/delegated management services, representing an aggregate of $18.6bn. For many, it is the most burgeoning part of the business, with global behemoth Russell Investments, one such example, confirms Nick Spencer, the firms alternatives consulting director for Emea. KPMGs 2012 fiduciary management survey highlights that the UK market continues to swell at double digit pace, comprising $35bn of UK pension scheme assets across 174 scheme mandates as of November 2012, and predicted to grow to $156bn by 2015. In terms of the hedge fund industry at large, the outlook among the ten is largely bullish. Some are more cautious than others, but all recognise the continued role hedge funds have to play in a diversified portfolio. Albourne is witnessing a stark bifurcation of the industry into New School and Old School, says David Harmston,
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FEATURE INVESTMENT CONSULTANT TOP 10

9 TOWERS WATSON
(Breakdown $14.7bn direct, $8.3bn FoHF) Total AuA $2trn HF AuM $7bn Total AuM $50bn Inception 1978

HF AUA $23BN

8 NEPC
(Breakdown $14bn direct, $11bn FoHF) Total AuA $700bn HF AuM Not applicable Total AuM Not applicable Inception 1986

HF AUA $25BN

The result of the 2010 merger between US consultants Watson Wyatt and Towers Perrin, Towers Watson has made corporate pension funds its bread and butter. Among them is the $9.6bn Transport for London Pension scheme; a top ten hedge fund allocator in the UK, according to Preqin. The New Yorkheadquartered consultants clients with hedge fund exposure roughly 200 allocated $12bn to the space in 2012. Particularly vocal on decomposing hedge fund returns to seek value for money, hedge funds who arent willing to demonstrate some flexibility on the traditional 2/20 fee structure might find working with Towers Watson a challenge, if not a non-starter. Based on its own extensive research, it argues that only around one third of outperformance based on skill should go to hedge funds as fees. Prove amenable to change, though, and the firm is known to work with its managers to create new vehicles that access untapped opportunities.

Over 60% of this US general consultants client base has exposure to hedge funds (200 out of 315). The Massachusettsheadquartered firm has carved out a place among pension funds, endowments and foundations with a small contingency of high-net-worths to boot. With seven offices across the US, the firms hedge fund research efforts are based in Boston, with dedicated staff also in San Francisco. In terms of manager selection, NEPC produces a best ideas list, featuring the core 10-20 funds for every strategy, and frames that against which strategies are best positioned to do well in the coming year. There is also a long tail of funds that are monitored and highly thought of, explains Timothy Bruce, senior hedge fund consultant. The process is slow by design, we take our time to underwrite funds over a long period of time we want to see a demonstrated history with our clients and with us a year to three years, he tells HFMWeek.

global head of clients. The latter have traditionally considered their opaqueness to be a badge of honour and this stance will necessitate an even greater premium in terms of return to be sustainable, he explains, adding that the New School will be given longer to prove their valueadd. BY NO OF HF CLIENTS Are allocations to hedge funds likely to increase going forward? Albourne un1 Mercer (1,700) dertook an investor survey in Q4 2012 of 2 Cambridge over 100 end investors with more than Associates (329) $120bn in hedge funds, and found that 45% planned to increase their allocations 3 Albourne (229) in 2013, 46% intended to stay the same, 4 NEPC (200) and 19% planned to decrease their expo5 Aon Hewitt (150) sure. Structured credit, Japan long/short equity and global macro are areas Albourne feels particularly optimistic about for 2013. Many segments of the institutional investor space have a very low weighting to alternative strategies and we expect this to increase over the coming years, says Valerie Benard, head of Aksia in Europe, who confirmed that the firm is seeing particular interest in strategies that offer return streams that are differentiated from broad risk assets, ranging from the more complex opportunistic credit strategies to narrow niche strategies opened up by the retreat of bank balance sheets. Better performance in the last six months has left investors feeling more confident and willing to take more risk and gravitate towards strategies with a little more octane, observes Cliffwaters CEO Stephen Nesbitt. Our investors are becoming more sophisticated in defining the role of hedge funds and are beginning to use them in new ways, he

7 MERCER
(Breakdown $18.4bn direct, $8.3bn FoHF) Total AuA $6.6trn HF AuM $2.7bn Total AuM $69.8bn Inception 1945

HF AUA $26.7BN

TOP 5

As a global generalist consultant, Mercer is another mainstay of the public and private defined benefit pension market and also has a leading presence among Australias behemoth superannuation funds, including the largest, the $13bn Government Employees Superannuation Board and the more than $5bn Local Government Superannuation Scheme. Described by one industry veteran who advises hedge funds as the equivalent of a hedge fund head hunter, the firm is willing to consider the entire spectrum of hedge fund managers at the behest of it clients, rather than adopting hard and fast barriers to entry over size and track record. It also gives feedback, a move applauded by the hedge fund managers HFMWeek spoke to. Just over half of Mercers clients invest in hedge funds (1,700 out of 3,300) on the advisory side, and 38% (153 out of 400) across the firms delegated offering, which was established in 2005 and is believed to be the biggest in terms of number of clients.

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6 CAMBRIDGE ASSOCIATES
(Breakdown Not available) Total AuA $112.4bn HF AuM $2.2bn Total AuM $7.5bn Inception 1973

HF AUA $27.6BN

Cambridge Associates is believed to have the lions share of US foundations and endowments and originally grew out of its service to a collection of major US universities 40 years ago. These 12 original clients, including Ivy Leaguers Harvard and Princeton, still leverage the firms breadth of research and peer data today. Regarded by professionals HFMWeek spoke to as the gateway to a meaningful portion of the USs mid-sized investor community, almost 95% of its 349 clients on the advisory side have exposure to hedge funds. Away from investors of institutional stripe, is an ever growing segment of family offices, representing nearly 20% of the firms client base. While an exact breakdown of hedge fund AuA by direct versus fund of hedge funds was not available, the firm estimates that less than 6% constitutes such investors considerably lower than the majority of its peer group, and a fact reflecting its sophisticated core client base.

says, explaining that his clients have been putting credit hedge funds into fixed income asset classes, global macro into real return and equity long/ short into traditional equity portfolios. Timothy Bruce, senior hedge fund consultant for US firm NEPC, also alludes to this shift in investor mentality, away from viewing hedge funds as a separate asset class a trend noted by the other firms too. Clients are starting to think more and more like us, he says, describing a shift in mindset which will see a redistribution of assets. Its great for hedge funds with a strong track record, thoughtful allocation strategy and ability to generate real alpha. But it will be negative for those funds which have been masquerading as beta strategies for the last five years, he warns. Of course, this list is by no means exhaustive. A handful of consultants declined to participate or did so after the deadline for data collection had passed, while other types of firm such as FoHFs that are moving into the advisory space could have also made the cut and will likely do so next year. Consultants worth noting in this respect include Hymans Robertson, bfinance and Allenbridge Investment Solutions. Allenbridge is believed to have around $5bn in hedge fund AuA, while bfinance, which is currently in build mode, according to the firm, has beefed up its hedge fund expertise since 2012 by with hires from Key Asset Management, one of Europes longest-running FoHF firms. On mainland Europe, fiduciary management firm Mn Services, originating from the Netherlands, was also hotly tipped to make waves, while on the other side of the Atlantic, US regional consultants such as Wilshire Associates and Pension Consulting Alliance were among those given recognition. If anything, the debate over this lists constituents only serves to highlight the surveys key finding: that the consultancy space is currently one of the hedge fund industrys TURN OVER FOR most dynamic sectors. Expect next years top ten to THE TOP 3 be similar in vibrancy but not necessarily order.

5 AON HEWITT (HEWITT ENNISKNUPP) HF AUA $30bn

(Breakdown $20bn direct, $10bn FoHF) Total AuA $4.3trn HF AuM $1.5bn Total AuM $35bn Inception 1940
A mainstay general consultant within public pension plans on both sides of the Atlantic, including a number of the 99 which fall under the $150bn UK Local Government Pension Scheme. In the past 12 months it has been making inroads into the world of sovereign wealth funds, via a number of mandate wins in the Middle East, while it has also seen a lot of traction from insurance companies. The firm securely occupies the middle of the table, but only a very modest 7.5% (150) of its 2,000-strong advisory client base has exposure to hedge funds. Besides the larger and midsized plans on the advisory side, the real hedge fund growth, explains Guy Saintfiet, UK head of liquid alternatives, is through the delegated business, where 56% (100 out of 175) of clients invest in hedge funds some of whom may have been too small to allocate to alternatives without this setup.

4 CLIFFWATER
(Breakdown $32bn direct, $4bn FoHF) Total AuA $63.7bn HF AuM $800m Total AuM $840m Inception 2004

HF AUA $36BN

One of the major beneficiaries of the recent trend of US pension funds going direct, California-headquartered Cliffwater Associates has seen its hedge fund AuA surge by $15bn in the past 12 months. The alternatives specialist has a stronghold in the US but plans to open a European office in the near future, with London the likely location. Cliffwaters Hedge Fund Portfolio Solver, an online portfolio construction tool launched in 2011, allows its hedge fund investor clients now up to 29 to build and implement a programme using data compiled by the firm on the top 600 hedge funds. An offering, says Stephen Nesbitt, CEO, designed in recognition of an increasingly sophisticated class of investor. Among a number of big US publics on its books is the $72.8bn New Jersey State Investment Council, the third largest allocator to hedge funds in the US, with around $7bn invested in the space, according to Preqin research.

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FEATURE INVESTMENT CONSULTANT TOP 10

3 RUSSELL INVESTMENTS
(Breakdown $21.8bn direct, $16.8bn FoHF) Total AuA $2.4trn HF AuM $1.2bn Total AuM $162.9bn Inception 1936

HF AUA $38.6BN

2 AKSIA
(Breakdown Not applicable) Total AuA $48bn HF AuM Not applicable Total AuM Not applicable Inception 2006

HF AUA $48BN

The longest-running firm by some stretch, Russell Investments is also the highest-ranking generalist consultant and boasts the largest fiduciary management offering. A global presence, the firm crops up frequently as the consultant of choice within the Japanese pension market, according to Preqin research, with pensions run by large players such as Fuji and Mitsubishi counted among its clients. Investors of this stripe are looking to meaningfully increase their hedge fund allocations, say the capital introduction teams HFMWeek spoke to, and with recent Japanese regulation dictating that pension funds must legally be advised by licensed consultants when making investments, the Washingtonheadquartered firm is the type of gatekeeper that hedge funds would do well to engage with. Amid a low return environment, Russell Investments is bullish on the hedge fund industry, and its most recent investor survey suggested that a third of its client base is looking to increase allocations to the space.

In at number two, Aksia is the only firm in the line-up to focus exclusively on hedge funds, which, it argues, leaves its 70-strong team with no distractions from other business lines or asset classes. With fewer clients (50) than most of its peers, the firm tends to focus on the larger, more sophisticated end of the scale. And in a departure from the majority, the New York-headquartered firm shuns buy-lists and actively sources emerging managers. While reputedly offering minimal feedback to hedge funds after an operational due diligence (ODD) visit, it is the strength of this function which is a real draw for investors, according to a number HFMWeek spoke to, including the New York City Retirement Systems, which hired the firm in 2011. Aksia was hired this month by Swedish pensions behemoth AP3 to carry out its hedge fund ODD an indication of the firms global reach.

1 ALBOURNE
(Breakdown $288bn direct, $0bn FoHF) Total AuA $309bn HF AuM Not applicable Total AuM Not applicable Inception 1994
The runaway leader by some distance, Albourne has grown rapidly in size and stature at a rate which shows no signs of abating. The Londonheadquartered advisory firm, which specialises exclusively in hedge funds, private equity and real assets, has over 90% of its AuA in hedge funds, none of which constitutes FoHFs. Known for taking copious amounts of notes during operational due diligence visits, as one hedge fund interviewee put it, the firms extensive, tell-all database of ODD reports is utilised by a growing number of investor heavyweights throughout the world. As of the end of March, it had 258 client contracts, 89% (229) of which used the firm for its hedge fund expertise which come at a competitive fixed fee rate of $400,000 per year for universal access. Known

HF AUA $288BN

RATIONALE
While the list is intended to be representative of the most influential consultants, it is not exhaustive and HFMWeek acknowledges there are some firms that may have made the top ten by AuA had data been confirmed by the time of going to press. All AuA data has been submitted by firms in question and is accurate as of March 2013. User opinions and sector trends discussed herein are based on interviews with investors, capital introduction teams and third-party marketers.

for its inventive, some might say quirky, persona, Albourne has fostered a hedge fund community, quite literally, with its own online hedge fund village, designed to be a knowledge economy and complete with mayor and pub. With transparency its true modus operandi, Albournes biggest feat is considered to be The Open Protocol Enabling Risk Aggregation template (Opera). Its objective to help standardise hedge fund reporting in the name of greater consistency and accessibility for investors. The hedge fund community is strongly encouraged to get on board. A number of firms have joined the initiative since its launch in August 2011, and the uptake is set to continue to snowball, with the vast majority of managers HFMWeek spoke to either signed up or readying to do so.

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HF AuM $7bn Total AuM $50bn

TOWERS WATSON

ALBOURNE

HF AuA $288bn Total AuA $309bn

HF AuM $3.1bn Total AuM $14bn

MERCER

CARDANO

AKSIA

HF AuM $2.7bn Total AuM $69.8bn

TOP FIVE BY HEDGE FUND ASSETS UNDER MANAGEMENT

TOP FIVE BY HEDGE FUND ASSETS UNDER ADVISORY

HF AuA $48bn Total AuA $48bn

RUSSELL INVESTMENTS

HF AuA $38.6bn Total AuA $2400bn

CAMBRIDGE ASSOC.

HF AuM $2.2bn Total AuM $7.5bn

AON HEWITT/HEWITT ENNISKNUPP AON HEWITT

CLIFFWATER

HF AuA $36bn Total AuA $63.7bn HF AuA $30bn Total AuA $4300bn
CYPRUS GENEVA
ALBOURNE

HF AuM $1.5bn Total AuM $35bn

TORONTO
ALBOURNE; MERCER ALBOURNE

CHICAGO
MERCER

MUNICH
ALBOURNE

FR ANKFURT
MERCER

ILLINOIS

AON HEWITT; TOWERS WATSON

LOCATION OF HEDGE FUND PERSONNEL

TOKYO

ALBOURNE; AKSIA ; RUSSELL INVESTMENTS; TOWERS WATSON

CALIFORNIA

CAMBRIDGE ASSOC; NEPC; ALBOURNE; CLIFFWATER

HONG KONG

NEW YORK

ALBOURNE; AKSIA ; TOWERS WATSON; MERCER

AKSIA ; RUSSELL INVESTMENTS; CLIFFWATER ; AON HEWITT; TOWERS WATSON; MERCER

SINGAPORE

CAMBRIDGE ASSOC; ALBOURNE

MASSACHUSETTS VIRGINIA (ARLINGTON)

CAMBRIDGE ASSOC; NEPC

MISSOURI
MERCER

CAMBRIDGE ASSOC

TEXAS

CAMBRIDGE ASSOC

LONDON

WASHINGTON
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RUSSELL INVESTMENTS

BERMUDA
ALBOURNE

CAMBRIDGE ASSOC; ALBOURNE; AKSIA ; RUSSELL INVESTMENTS; AON HEWITT; CARDANO; TOWERS WATSON; MERCER

SYDNEY BAHR AIN

ALBOURNE

CAMBRIDGE ASSOC; MERCER

MELBOURNE

RUSSELL INVESTMENTS
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