Tomorrow’s Titans (2012)


Originally published in the June 2012 issue

Spotting the talent of tomorrow is not a voluntary entertainment. It is a constant bane of the life of the allocator, because yesterday’s star managers become inaccessible, either due to hard closing or voluntarily returning capital to investors, in many cases after delivering excellent returns to their investors. Many others are either soft closed or hard closed, which generally makes them hard to access in the substantial size that pension funds – key sources of inflows – require. Some managers have also fallen by the wayside due to lacklustre numbers.

Sourcing our 2012 names
Aside from our own research, buy side and sell side alike contributed nominations to the survey. The prime brokerage capital introduction networks are naturally a strong source of market intelligence. So too are some funds of funds, although increasingly institutional allocators are dealing direct, making it imperative for us to talk to pension funds, insurance companies, family offices, endowments and foundations.

Investment banks supply a number of the nominations, accelerated by new regulations in the US and in Europe that are hastening the banks’ withdrawal from proprietary trading activities. If the Volcker rule, embodied in the Dodd-Frank legislation, is critical in the United States, then it may be that higher capital requirements ushered in by Basel III will impact in Europe. The GSPS (Goldman Sachs Principal Strategies) group seems to be a perennial source of new managers, while it lasts!

As banks retreat from trading activities the seeding community are unveiling a growing number of new fund launches. This nucleus of activity is widely dispersed. Big names such as Blackstone and Larch Lane in the United States are active, whilst giant US pension funds such as CALPERS have delegated the task to funds of funds such as 47 Degrees of Zurich, or Rock Creek of Washington DC. In Europe, Sweden’s Brummer and Partners has written some of the largest tickets, with local bank SEB also growing its influence. London’s FRM Capital Advisers has also been a serial seeder that has secured names both in this survey and in our 2010 survey. Meanwhile Amsterdam based IMQubator and Paris based New Alpha continue to seed a steady stream of promising new managers. Some pension funds, such as the UK’s Universities Superannuation Scheme, have expressed a possible interest in seed deals although pension fund seed deals have not made any real appearance yet. Over in Asia, Eliza Lau’s Synergy group is perceived as being at the forefront of early stage hedge fund investments in that dynamic region.

Of course the very biggest seed tickets have always come from, and perhaps will always come from, the large hedge funds. Louis Bacon’s Moore Capital; David Tepper’s Appaloosa; Chris Shumway’s eponymous one; Paul Tudor Jones’ Tudor Investments and Donald Sussman’s Paloma Partners are all adept at identifying star hedge fund managers, and giving them a helping hand.

At the same time, many new funds emanate from the giants, without the financial blessing of their erstwhile employers. Steve Cohen’s SAC, for instance, continues to spawn more than its fair share of new hedge funds, but is not publicly disclosed as having invested in them.

The nominations were dominated by classic or traditional hedge fund strategies: macro, event driven, credit and long short equity. “Alternatives to alternatives” may be starting to make its presence felt, at least in the form of two direct lending managers that made it into the final list. Their success is likely a symptom of the banks stashing cash at central banks and shying away from making real loans to the real economy. This is clearly an area where hedge funds are filling a crucial gap in the wake of the hangover after the credit crisis.

Reflecting the geographic split of hedge fund assets, it is predictable that New York and London dominate the office locations. Equally within Europe it is possible to discern something of a growing trend towards more tax friendly locations, with two managers in this survey now located in the exquisite enclave of Monaco, wedged between France and Italy. Asia has raised its game to the tune of one or two extra names, simply because the Asia Pacific region now numbers an expanding tally of multi-billion dollar managers. Notably some individuals who were global heads of core functions at investment banks have chosen to locate their new funds in Asia, with Hong Kong and Singapore so far the financial centres of choice.

Manager locations
At the final count the geographic distribution of the 40 names reveals 20 in the US, 14 in Europe and 6 in Asia including 1 in Australia. The 40 have been grouped by region, but are arranged alphabetically within each region.

Performance bias
Performance track records from current or former employers, from funds or prop desks, do feed into the selection process. But there is no hard and fast formula, not least since the vagaries of translating proprietary trading records into hypothetical hedge fund records cannot easily be codified into any formula. Touch wood, nobody’s assets have evaporated since the survey was published.

The hedge fund industry is a constantly evolving pool of talent with thousands of funds employing tens of thousands of investment professionals. We cannot conceive that our nominations could ever come close to being comprehensive, let alone that our final choices could leave any gem undiscovered. The search for new sources of diversification and talent is never ending, and we look forward to hearing about managers we have never heard of in future surveys.

In conclusion, we wish to express sincere gratitude to Ernst and Young for sponsoring the survey.

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Ernst & Young, a leading global organization of service providers for start-ups and established hedge funds for over 25 years is proud to sponsor this report for the second year. We congratulate the talented industry leaders chosen by The Hedge Fund Journal as Tomorrow’s Titans. In today’s challenging economic and financial environment, it is all-the-more important to recognize some of the gifted hedge fund managers who are helping to shape the industry. That these managers have found so much success in these challenging times is a testament to their aptitude and professionalism.

For over two decades, Ernst & Young has helped many hedge fund firms grow from start-ups to become some of the leading global organizations. We are proud that we currently audit approximately 40% of the top 100 Global Billion Dollar Club hedge funds and provide tax services to about half of them. We audit more than 50% of the top 19 European funds and top 25 Asian funds by assets.

We are especially pleased to see The Hedge Fund Journal highlight the role that some of the funds managed by Tomorrow’s Titans are playing in the so-called “real economy.” At Ernst & Young, we help enable fund managers to take their rightful place as not only leaders in the hedge fund industry, but also as fully fledged participants in the global capital markets. Today we are particularly focused on providing practical advice to funds as they mature and “institutionalize” their operations so that they are ready to participate in the “real economy” as key financial intermediaries. We wish them much success and look forward to continuing to collaborate closely with them and their colleagues for many years to come.

Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited.