EELure nes Who’s ahead in the race to build a brand? So far no fund has created the definitive sign of durability and quality, but some are getting close writes Barry Cohen t although many are searching for this holy grail after ends of the industry like Tiger, Steinhardt and Bowman simply lish a brand, it will help them build a lasting and ing’a durable brand name in the hedge fund industry has proved an elusive task. No one has yet managed it ‘watching le disappear. They know tha, ifthey ultimately saleable business. ‘The suspicion among everyone, from investors to brand consultants and even the managers themselves, i that hedge funds are like rock stars who make a fortune when theirmusicisin fashion, but are dropped by their fickle fans as soon as tastes change. Some of these skepties even argue that itis undesirable for hedge fund managers to establish a brand identity, Yet, lke it or not, there are signs that hedge funds may be starting to see the merits in creating a business with a real brand identity. Many are quietly scrambling to change their business model to ensure that the group survives the departure or underperformance of their principals. Many, like Andor, are openly talking about creating a sustainable tonal’ brand. So far, most of them will admit that they haven't made much headway in ch nging perceptions. Many are still far too closely Tinked to the personality of their dominant founder. Think of Moore Capital and you picture Louis Bacon making huge macro bets. Think of SAC and you see Steve Cohen trading like a dervish. Think of Citadel and you imag over the next arbitrage trade ‘These images, however, are increasingly adrift from realty. Many of these groups have taken big strides to reduce their reliance on the founding general partner. Bacon, Cohen, Griffin and, particulary, Bruce Koyner at Caxton make an increasingly small contribution tothe trading profits oftheir firms. Bach are trying to show that they are running a business 1e Ken Griffin pzthat goes well beyond their own trading. skis, Healge fund groups are also searching for the right business model that will tenable them to attract and hold staff as well as establishing processes that are durable and repeatable. Some are turning to multistrategy products to diversify their returns, Others are launching a ite of funds, And some are combining both approaches. ‘What they all have in common is a realization that unless they evolve and embrace the concept of building a financial services brand, allt wll take is Ross Elis, SEI Investments ‘one small slip and their reputations will count for nothing. They saw the fate that befell Michael Steinhardt or Julian Robertson and know how quickly a painstakingly constructed reputation can vanish. Implicit in their search for a sustainable business model isthe creation of a brand name, Look how Fidelity’s giant Magellan fund survived the departure of Jeffrey Vinik. He was crucial to the running of Magellan, the giant $75 billion mutual fund, but Fidelity was bigger than Vinik. It had a bigger brand, But would Caxton survive the departure of Kowner? Would Moore survive the departure of Bacon? eryone knows that establishing a hedge fund brand is an uphill struggle. A combination of capacity constraints, SE th secrecy are some of the factors that few other industries have to ‘cope with. Given the widespread allergy to publicity and a general restrictions on advertising and promotion and an obsession lack of transparency, the very concept of hedge fund brands is somewhat bizarre. Yet, despite all the handicaps in creating a hedge fund brand, a handful of players are starting to believe that a small number of hedge funds will succeed at creating brands and that some are already part way there. They include a familiar cast of characters such as Caxton, Andor, Tiger, Citadel, Tudor, Moore, Pequot and Soros. What distinguishes these candidates are longevity, size, and frequently, and this is also a weakness, a ‘marquee’ manager at the helm. Ross Ellis, responsible for product development at SEI Investments, says: inthe mutual fund world, brand is more of a corporate identity or Jogo. In the hedge fund business, i’ ted into who the manager By creating a brand, a hedge fund can go along way towards providing investors with the comfort factor of quality assurance while providing the firm with enhanced exit value. After all, a brand implies integrity trust and a longterm performance track record. None of these qualities sit easily alongside the concept of hedge funds, which are seen as dangerous, volatile products with shortterm track records by the majority of retail and even many big pension fund trustees In an industry where funds with a fiveyear track record are almost considered veterans, longevity is a crucial contributor to brand awareness. So legends like Paul Tudor Jones, Soros and Julian Robertson, who were pioneers in the business jeonge ‘Absolute Return spoke to a number of investors with a deep knowledge of the industry to gauge thelr views on the 10 biggest U.S. firms that appeared in our May 2003 survey of the top 100 U.S. hedge fund groups. Caxton consistently generates a high rating backed by ‘comments such as “a solid firm with solid results”, “very {good reputation”, “highly diversified”, and “comes close to being a brand name which gives them the ability to roll out new funds”. ‘Andor inspires more mixed responses. Some critical investor comments included: “there is a question as to whether all the Andor funds achieve the same brand quality’, have added a hodge podge of funds which dilutes the focus from what they have succeeded with in the past”, “trying very hard to create a brand name”, “very volatile” and “taking big bets with their portfolio”. On a more positive note, other investors say that “few have come ‘lose to their track record’, “one of the smartest ‘technology shops in the business” and “takes guts to go What investors say about the brands of the short in tech stocks” Cerberus is described as “high quality", “consistent retums”, “Steve Feinberg sticks to his knitting”, “one of the ‘most talented distressed managers”, “done a good job of building a big business” and “is defintely a brand name’ (On the other hand, some investors comment: “they may have grown too large” and “don't offer any perceived advantage Citadel is seen as one of the best names in the business, having created a phenomenal set of retums. The doubts about the durability of the firm hinge on whether Ken Griffin has managed to convince irvestors that the firm Is more than him, Recent moves to graft on equity funds has helped, but recent staff turnover has somewhat negated the efforts to round out the product base. ‘Angelo Gordon also generates contradictory views. Supporters claim it “qualifies for brand status”, “has an ability to attract talent”, “avoided disasters by playing it safe”, “stayed close to Its core strategy of being a value 26 ansowre return serrewoce 2003,‘nd have generated a cult of personality, inevitably bring a high degree of recognition to their products, ‘According to Jim Hedges, president of the advisory firm LJH Global Investments: "Some of these companies have a brand but don't want it, such as Moore Capital, which purportedly wants to fly under the radar screen. Other organizations have become brands by default, because of their star personalities. By comparison, Clinton is very consciously trying to brand itself because they are taking outside investors into lots of different products and trying to reach many different client segments.” Longevity combined with a degree of respectable performance also breeds scalability. Many of the betterknown firms, after many years of successful asset gathering, boast substantial assets ranging from $5 billion (Clinton) to $10 billion (Caxton). Their size and visibility also attracts consultants and big stitutional investors who believe that by investing with the largest players, they will mitigate the threat of ‘career risk’. After all, unlike smaller startup funds, these behemoths are unlikely to 20 out of business, ‘This is backed by our analysis of the study conducted by the National Association of College and University Business Officers (NACUBO) in 2002, which identifies the hedge funds in which ‘university endowments are investing. The most frequently named firms include Ock-Ziff, Maverick, Farallon, Chilton, Pequot, Cerberus, Standard Pacific, Perry, Andor and Angelo Gordon. Further research by Northern ‘Trust has revealed that about 65% of the underlying funds in institutional funds of hedge funds comprise the usual suspects ‘Unlike mutual funds, however, hedge funds have to deal with the issue of capacity. Whereas mutual funds strive for greater volumes of assets, successful hedge funds ironically are BRAND BUILDING frequently closed to new investors. With only 100 or 500 slots available to investors, their maximum numbers intrinsically are restricted. Yet, such is their ongoing appeal that a secondary ‘market in available capacity has recently emerged. The website, hedgebay.com, provides a forum for investors to trade hedge licates just how much value is placed on certain Given the growing institutionalization of many hedge fund firms, an often overlooked ingredient in the recipe for a successful brand is the strength of the organization's business model. Not only does it indicate the likelihood of a well run and, therefore, stable structure, but it also increases the potential market value of the firm itself, As Joe Hirschberger, managing director of the investment bank Putnam Lovell, which handled the ‘Oppenheimer purchase of ‘Tremont Advisors, points out: “If you sive your money toa company, you want to be sure that a talented team will consistently manage the funds over a long period of time without any real disruption in the performance due to changes in the portiolio team.” Mutual funds have generally proven to be better in managing the fallout stemming from the departure ofa star manager: When Vinik left Fidelity’ flagship fund, Magellan in the late 1990s, the firm had to move quickly to ensure that investors did not desert the $75 billion fund which represented 10% of Fideliy’s total assets. It immediately launched a campaign which employed careful media management and investor communications. As Jeff Keil, vice president of the Global Fiduciary Review at Lipper, says: “Fidelity downplayed the role of the top manager. ‘The approach they took was to explain that the Fidelity organization had hundreds of analysts working for this fund and that Vinik’s replacement would have the same level of support. Absolute Return top ten from our ‘Top 100 funds’ buyer” and “achieved a high degree of diversification”. However, the term consistently used by critics to describe the firm is “mediocre”. ‘Moore, many investors think that the firm is stil largely dependent on Louis Bacon, the firm's founder. He is typically described as “very driven” and “very much the focus of the. firm’. Other investors worry about “the high level of manager turnover" but say that Bacon is adding in new talent and tuming the focus away from himself. Farallon, more than any other firm, elicits uniform Positive comments. Typically, they include “tight culture”, “smart people with a good reputation”, "goes where others won't”, “Tom Steyer has turned the name into a brand”, “has probably done the best job of growing a business with large assets” and “has leveraged their skill sets into different areas where they can make good use of them”. Maverick also scores highly with investors. Much of the credit is given to Lee Ainslie who “remains highly focused”, “one of the few people able to maintain quality in the midst of expansion’, “Lee Ainslie is the firm”, and "has created a Significant team”. However, investors also say that “the firm has seen a lot of departures” and “we have not seen the ower of their brand’. ‘Tudor is also well regarded because “it has achieved gyeat performance”, “is a quality organization”, and “has the ower to allocate capital for seedlings". Nevertheless, “it has name recognition but is not necessarily a brand.” ‘Soros remains an object of bafflement for most investors Who continue to be puzzled about its current status. They ‘generally respond by asking “how involved is George in the firm's activities?”, “are the key people really focused?”, "is, Soros stil a long-term player?” and “can it stl be regarded. ‘as a brand?” Yet, despite references to “an odd agglomeration of assets”, Soros's legendary status appears to be intact for most investors who praise him as “one of, the top traders of all time”, “one of the great pioneers of hedge funds” and “a highly respected intellectual”. ‘StPTEWER 2003 ABSOLUTE RETURN 27‘So, don't put too much store in one crt cog in the Fidelity wheel. Everyone understood that Fidelity had a lot riding ‘on this one particular fund and they were not going to let the brand deteriorate People believed that and most of them stuck it out.” In terms of executive actions, hedge funds can take a leaf out of the mutual fund handbook. When stock markets suffered a severe setback in 1998, John Bogle, senior chairman of Vanguard, penned a letter to investors that frankly described the market difficulties, but urged them fo ake a longterm approach. “Bogle reminded investors that they may to modestly reallocate their assets, rather than jumping out, since most investors were not very good at market timing,” says Jeff Keil of Lipper. For hedge funds, its even more critical to pay attention to good investor communications because with far fewer investors holding much larger chunks of money, it can be quite significant if you alienate just 20% of them.” ‘A good business plan must also take into account the question of succession, or the ‘key person risk’. With so much often riding ‘on a star manager at the top of the pyramid, his death or departure can cause havoc for the firm and devastation for the brand. “Nine out of ten times, when the main person at the top goes, the firm will be liquidated,” says Bob ‘White, head of research at Investor Select Advisors, In contrast, many mutual funds have sailed through the process of adapting to new management. When Franklin bought the big value player Mutual Series funds, run by Michael Price, he signed an employment contract that would ensure his involvement in the organization for a number of years. Price, who had been instrumental in bu forthe firm. Because pedigree brand names have great resonance, spin: offs from these operations carry alo of cachet and can transform a new fund into an instantaneous hot startup. One investment ‘manager at an Ivy League endowment fund goes so far as to say: “Some of these new funds become brand names at inception because of their previous associations. Viking, a spinoff from ‘Tiger, is a great example. You could even call Tiger cubs’ a brand Diversifying a firm's product line can play a significant role in branding. A company may be ambitious from the outset by building a multiproduct platform and attracting the necessary talent. However, George Hall started Clinton, inthe early 199%, with a more conservative approach to building a brand by faunel the funds, constituted an enormous asset ng a mortyage-backed securities fund; since then, he has Jef Keil, VP ~ Global Fiduciary Review, Lipper Nine out of ten times, when the main person at the top goes, the firm will be liquidated BRAND BUILDING added five arbitrage and four CBO funds ‘The financial stability ofa hedge fund is far more difficult to gauge than that of a mutual fund, A lack of transparency, on the part of so many firms, has deterred the growth of industry-wide ratings. So far, Standard & Poor's has only conducted credit anal companies. The lone public rating was done in 200 for Citadet'stwo sister multi- strategy funds - Citadel Kensington Global Strategies (offshore) and Citadel Wellington Partners LP (onshore) for four which received a ‘Triple B investment ‘grade rating Although it would appear that a good credit rating would help to create a brand name, hedge funds are showing litle interest. Jonathan Ukeiley, director in the financial services group at S&P, believes there is an additional personal factor involved. “There are a lot of egosin the business, and ifthey can't geta high rating, they would probably prefer not to have any rating.” Since retail products are, by definition, sold largely on the strength of a brand name, big institutional names will gain prominence in promoting the growing number of SECregistered product ‘market. The big players can provide the necessary distribution through broker/dealers to reach a wider clientele, and also investors that while the product may be new, the frm is a trusted brand tment world. “The lower downstream you go, the more branding becomes important,” says Ross Elis of SEL For now, hedge funds can take action by working on improving their presentation materials and websites, engage more with the trade media, and seize the opportunity to speak at public events. “A brand is also a feeling.” says marketing consultant Tom Walek of Walek Associates. “The point we try to get across to our hedlge fund clients is that you have to represent ‘more than a product. you don't embody: view of the world and how you stand apart for the mass affluent name in the ision of yourselt, of a the market, then cents are not going to have that feeling for you.” ‘And, if cients don't have a feeling of the vision that your firm represents, its far easier for them to jump ship when things start to go wrong or when key managers leave. All of which suggests there isa strong vested interest for the hedge fund community to Start focus on building brands rather than simply running products. It is crucial to enabling firms to ride the evitable downturns in performance and the frequent departures of key staff and it n manager becomes something more than a rock star who is only as good as his last album in a world of fickle tastes. yy mean that the hedge fu ‘SEPTEMBER 2003 aBsoWUTE RETURN 29