Over the past two years, the Australian financial services market has been innundated by fund managers launching hedge funds, and the signs are there that more will appear.
Currency volatility, the weak Australian dollar and adverse world events have all taken their toll on investors now looking outside the more mainstream equity investments.
According to Tiedermann, the skill in producing a successful hedge fund manager-of-managers involves strict control over the individual investment teams.
“Each investment strategy is run by a different portfolio manager. Personal account trading has to be watched and you have to be vigilant to everything. The biggest problem is the manager’s character, which can change,” he says.
As a result of having multiple personalities feeding into a single process, his company watches its managers closely, but Tiedermann says trying to maintain a brand with nine managers is difficult in the event that communications fail.
“The client wants us to say there is a consistent investment policy. That is the brand problem. You might be a great fund manager, but the individuals are difficult to manage especially if they don’t listen to you,” Tiedermann says.
While problems with managers can arise when a policy is pushed upon them and they may even leave the consortium, Tiedermann says failure to have structures and policies in place instead can result in the loss of clients.
In a bid to ensure both managers and clients stay loyal, Tiedermann operates the TIG business as a joint venture, where the hedge fund manager owns a percentage of every investment manager.
“This means the parent group can support a fund that is not performing and normally between three and four funds at any one time are not performing, and it is always the bottom three that are the concern,” Tiedermann says.
There is another advantage in the cross-ownership structure, he says, in that it produces a team spirit culture.
“There is a lot of cross consulting, with partners tapping other partners’ expertise. It means the teams have a focus to be efficient and highly profitable. It also means the parent entity will be making more money on a consistent basis,” he says.
Giving the teams equity also improves the chances of the manager staying with the consortium. Tiedermann says the individual managers like to work together and trade ideas, but it is important they don’t compete with each other.
“You have got to be sensitive to the managers. If you allow a competing manager to join, the originals will walk out and take their client base with them.”
TIG can take up to an 80 per cent stake in a hedge manager and it gives them $US20 million of seeding money to get the fund started. Normally TIG takes a 40 per cent stake on day one.
“We bear the big risk before we allow the clients to invest with that manager and our name is on the fund, so we don’t take risks,” he says.
Tiedermann says finding new hedge fund managers is not easy, but he looks for a disgruntled person who has worked as a number two for another manager.
“They must have a great track record and be willing to learn shorting. We find a stock-picker can short, but they do get scared,” he says.
Tiedermann admits some managers cannot learn shorting usually results in that person receiving some rapid training or his or her departure from the group.
The reason for this approach is that high demands are in place when establishing a manager with the first $US50 million the hardest to raise.
However, it becomes a little easier when the parent is a global manager and the other managers have good performance records.
Once a fund has almost reached capacity, the manager must close it. Tiedermann says normally a successful fund is attracting considerable inflows and it becomes hard to finally close the fund.
The market for hedge funds is tough. Two out of every five funds die, he says. Clients also want more information today and this increases the workload of client servicing divisions.
TIG sees Australia as a young market for hedge funds and is looking to be a market leader in this country but is aware that it will not be an easy battle, admitting there are a high number of good hedge fund traders in Australia.
“We are looking to be in the forefront of growing the hedge fund market in Australia. We have the teams and the individuals with a big capacity to grow,” he says.
One of the newer players is Investor Select. Based out of New York it has $US250 million in funds under management and is headed by Hans Tiedermann in the role of chair of the group.
Tiedermann is also chairman of an associated hedge fund manager Tiedermann Investment Corporation (TIG), which has $US2.1 billion in funds under management.
TIG is a manager-of-managers operation with nine individual managers offering a variety of hedge funds each being part of the group.
In launching Investor Select into the local market, Tiedermann outlined the group’s background and history.
?? and asked what sets hedge fund managers apart, at a recent meeting of the Alternative Investment Managers Association (AIMA) held in Melbourne.
