Hedge Fund Managers & Pedigree - Who Knows You?

In the hedge fund industry t is not what you know, it is not who you know. It is who knows you.

MPC Investors is a $3B hedge fund based in London. Last month they raised $900M to launch a pan-European directional long/short fund. This was while a higher than usual number of funds were losing assets or struggling to gain as much progress as they had during first two quarters of 2007. To launch this fund they closed two Asian-based hedge funds that had failed to reach critical mass assets under management(aum) levels and went shopping for the best hedge fund talent they could possibly fine. "I wanted to be able to look our clients in the eye and say this is exceptional," said Peter Harrison currently the Chief Executive Officer of MPC Investors. After hiring them he has also said, "you have to give your portfolio managers the best chance to outperform. That gets lost in many firms where they are trying to do a bit of management but also spending their time on strategy, or beating up their sales team, or the sales team is putting pressure on them to launch new product. Our sales team meet clients so the fund managers don't have to. Our objective is fund performance - it's all that matters."

This $900M was raised for a fund that didn't have a track record yet and it supported a portfolio management team that did not even exist three months ago. MPC Investors didn't have the option of shopping around a three year track record and 20%+ gains since inception.

I am writing about this because it communicates two details about how hedge funds are raising assets. The first is that assets are raised based more off of current relationships than past performance. The investors you are approaching must be familiar with who you are, what you stand for, and what your competitive advantage is. The second is that pedigree and a hedge fund's positioning and story behind its team can trump almost any other asset gathering barrier. Harrison went out to hire the very best of the best and now he has has a structure in place that allows the portfolio management team to focus just on bringing in performance. Some would say this is a cover for bringing in great talent that's not great at speaking with investors but I think the message that portfolio managers should be focused on the market and not sales meetings resonates with many people and it is not the status quo.

If you are a large institutional investor or family office you see more hedge funds approaching you every quarter. How do any of the hedge funds stand out? I think the four ways are past relationships, pedigree of the team, competitive advantages realized through the investment process (could include manager expertise - see pedigree) and performance

I list performance last within the list above because it is really becoming a commodity. There are thousands of firms out there with great performance. It is a given that if a hedge fund is committing a lot of resources to marketing that they probably have great performance. With the exception of a 7 or 10 year plus track record of it, high performance alone does not excite institutional investors, they see it Monday-Friday.