Managing To Stay On Top

How Top Hedge Fund Managers Persevered in the Crisis

The economic events of 2008 (and subsequent spillover in 2009) created massive dislocation in the hedge fund industry and perhaps, permanently changed the landscape on which alternative investments fund managers, the impact of these events has been enormous as abysmal performance, increased redemption requests, and inability to raise new capital has paralyzed operations. Some top hedge fund managers, however, were able to persevere in this environment despite the challenges presented by the market and in fact, had positive performance and increased assets under management (“AUM”). Furthermore, the managers were able to capitalize on opportunities created by the crisis and capture new talent, purchase distressed portfolios, and even acquire other smaller hedge fund managers. are viewed. For some

How were these top managers able to accomplish this? It ultimately comes down to choices. Being able to make the right strategic and operational choices enabled managers to remain competitive in this new economic landscape. For instance, top managers were quick to recognize that complying to investor demands was key to stabilizing redemptions requests and keeping the door open for raising new capital. Some of these demands included increased transparency as it pertained to investment strategy, performance, valuation, financial statement disclosure, and operations. The use of recognized brand name service providers is another key point. Investors feel more comfortable with allocating to funds that use well-known law firms, auditors, fund administration, valuation firms, and prime brokers. After the recent failures within the industry, the costs associated with such services are worth the premium if it helps prevent the risk of major fraud and promotes independence and best practices.

On a similar note, top managers recognize the need to modify traditional hedge fund structures to reflect the economics of today’s capital environment. In the past, a fund’s historic performance may have been the first box to check for investors when determining fund allocations. Now, selecting the optimal fund structure that balances risk/reward in relation to availability of liquidity is crucial. The use of hybrid structures which have longer lock-up periods and private-equity type features are good examples of what successful funds are using to raise new capital.

Aside from structural flexibility, top managers also invest heavily in risk systems and utilize mobile investing strategies which identify challenges before they arise and help mitigate significant downturns. This visionary leadership is important, and often times can be the difference between continued success and unrecoverable losses that can ultimately put the fund out of business.
When opportunity knocks at your door, you must be prepared to open the door and take advantage of the benefit that is available.

History has shown that in challenging times, certain players have succeeded by identifying and acting on weaknesses in the market. This is no more evident than with top hedge fund managers who have successfully navigated through the credit crisis and have taken advantage of opportunities in the market that otherwise would not exist. For example, either in the form of an M&A deal or management lift-out, opportunistic managers who have increased product availability are able to leverage their existing distribution channels to attract talented managers with portable track records. In addition, with the introduction of government programs such as TALF and PPIP, fund managers have capitalized on favorable financing terms and added attractiveness to outside investors through association with the U.S. Government. Lastly, funds which are being forced to wind-down due to investors demanding liquidity are presenting the market place with a great deal of performing assets at distressed prices.

There is no doubt that we are entering a new age in the hedge fund industry. Even though more hedge funds have closed, and those remaining are performing in aggregate better in 2009, there are questions as to whether that performance will be able to be sustained through the end of the year. Furthermore, will performance alone be enough to attract fresh capital in this new world order that is demanding transparency, independence, liquidity, and accountability? The top hedge fund managers are not burdened by these demands as they already addressed those issues in 2008 and will continue to be first in line when it comes to these opportunities and others.

About the Author

Karl D'Cunha is a Senior Managing Director at Houlihan Smith where his primary responsibilities as part the firm’s financial advisory practice include providing financial opinions including valuations, fairness opinions, and structured finance advisory. He is co-head of the firm’s Hedge Fund Advisory services group and a team leader of the firm’s Technical Standards Committee. Mr. D’Cunha has over 12 years experience in the alternative investments industry, including working with some the largest hedge funds globally on valuation, accounting and compliance issues.

Mr. D’Cunha has been actively involved in investment company related services since 1997 and has prepared, supervised, or consulted upon assignments covering most facets of valuation and accounting relating to US and International private equity, venture capital and hedge funds, investment advisors, mutual funds and other entities. Mr. D'Cunha was previously an audit manager at Ernst & Young, LLP and PricewaterhouseCoopers, LLP with 8 years experience in the Investment Management industry group.

Mr. D'Cunha holds a B.A. in Finance and Economics from University of Western Ontario and a Graduate Diploma in Accounting from McGill University. Mr. D'Cunha is a Chartered Accountant, a level III candidate in the Chartered Financial Analyst program. Mr. D’Cunha is a member of the following organizations: New York Hedge Fund Roundtable, Hedge Fund Association, Canadian Institute of Chartered Accountants, CFA Society of Chicago, CFA Institute, Association of Chartered Accountants in the United States, Appraisal Issues Task Force, Association of Latino Professionals in Finance and Accounting (ALPFA), Arts and Business Council and American MENSA, Ltd.

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