Hedge fund journal

Sometimes even the best laid plans can require many years before they germinate into something actual and real. This is very much the case with FRM Capital Advisors, the hedge fund seeding business launched by Financial Risk Management (FRM), the $10 billion fund of hedge funds group. Founded in 1991, FRM began as a research house for the hedge fund industry and evolved by mid-decade into one of what was then a new breed of funds of hedge funds.Its core business was simple: to get hedge funds out to institutional investors by applying an institutional quality approach. In many ways, this still defines the firm’s focus. But with a near-15 year investment track record and a presence that spans the US, Europe and Asia, FRM clearly has the vision and resources to nurture a full scale seeding business. The timing of the foray into seeding is particularly noteworthy given how many other seeders have either shut up shop or have scaled back in making commitments to new and emerging hedge fund managers. With this in mind, The Hedge Fund Journal visited FRM Capital Advisors and met visionary FRM founder and chairman Blaine Tomlinson at the firm’s John Adam Street headquarters just off the Strand in London’s West End.We began by discussing how FRM came to establish a seeding business after so many years of investing successfully in hedge funds. Tomlinson characterises the move into seeding as evolutionary rather than being the product of a sudden decision. “When FRM began investing

Market conditions was “directional trading”.The public pension fund managers we spoke to in particular said they wanted to blend a larger share of their equity portfolio allocation with directional hedge fund managers, particularly equity long/short-focused hedge fund managers. Employing this strategy was seen as offering the investors a way to reduce their portfolio volatility while maintaining their returns.Many of the respondents also said theywere allocating to macro-focused hedge funds, a refection of the strong performance of such funds over the past five years. Non-directional hedge fund strategies such as relative value strategies (distressed strategies, event driven strategies, and convertible/fixed income arbitrage) were also popular among the investors. Allocations to these hedge fund strategies have become more common in the past year, with assistance being provided to the allocator via the use of a fund of hedge funds and/or investment consultant. Indeed, the use of funds of hedge funds has come to the fore, providing access to other hedge fund strategies previously not considered by the institutional investor. The majority of our respondents said they preferred to invest through the traditional commingled hedge fund product, as most investors ideally prefer to be invested in the flagship fund of the hedge fund manager (where, generally speaking, the principal has made its investment).Benefits to investorsAfter an extended period of poor returns in equity markets, hedge fund performance remains an important factor in these investment decisions. Many of the respondents to our survey identified outperformance based on a manager’s skill as still being very

And the first allocation was approved in 2011. In this way, we were able to learn the lessons from the crisis.”“We have benefited from what happened in 2008,” said another large US investor. “Transparency and fund lock-ups are so much better.”Not all of the respondents said they had a dedicated hedge fund allocation. “We do not view hedge funds as a separate asset class,” said a US public pension fund, “and thus do not have a set hedge fund allocation. We view hedge funds as a structure to access talent and opportunities.”Another pension fund said: “I believe hedge funds serve the following purposes: to provide diversification to long only strategies,to provide access to hard to access strategies/deals, and to provide access to strategies that require leverage. I do not believe that hedge funds should be viewed as an asset class.A UK-based pension fund made a similar point: “There is no specific allocation to hedge funds within the overall asset allocation. We do not consider hedge funds to be an asset class per se, as they cover a variety of strategies, many of which are highly correlated (such as equity long short) to other assets in the fund. Where they do exist in the alternatives portfolio, hedge funds represent an opportunistic investment.”Choice of strategyAny allocation to hedge fund strategies needs to be taken in the context of the risk/return preference of the respective investor. Across the responses we received, the most popular hedge fund investment strategy being employed against the current