Infovest21 compared the asset allocations for a sampling of select large endowments (those with assets over $1 billion) which provided detailed data on absolute returns. The average allocation to absolute returns/marketable alternative equity for the 17 endowments examined was 23.2% in FY2010 versus 22.2% in FY 2009.

Lois Peltz, president of Infovest21, commented that Boston College and University of Chicago were among those with the largest allocations to absolute return strategies at 36% and 30% respectively.  Columbia University and MIT each allocated 28% to absolute returns while University of California allocated 27%.

 In FY2010, the large endowments also allocated an average 27.8% to equities, 12.9% to fixed income, 18.4% to private equity, 12.8% to real assets, 1.3% to natural resources and 6.8% to other.

Details of specific endowments and historical comparisons can be found in Infovest21’s just-released endowment asset allocation study.

 According to preliminary data for National College and University Business Officers, the average endowment with assets over $1 billion allocated 58% to alternatives in fiscal year 2011. Meanwhile institutions with assets under $25 million had an average alternative investment allocation of 9%.

Freeman & Co predicts the number of alternative manager deals will outpace those of traditional manager deals in 2010 for the first time as firms consolidate, are acquired by larger strategic firms or are spun out by banks facing regulatory issues. Smaller asset managers are being acquired by larger alternative managers and other traditional managers/financial institutions that have the benefit of distribution, brand name and/or size and scale.

Through June 30, 2010, alternative asset management deals were up 108% to 52 transactions year-to-date compared with 25 transactions for the same time a year ago. Freeman projects that alternative manager deals should exceed 100 this year with acceleration in the second half of the year due to pressure from the Volcker Rule and other international regulatory initiatives.

In comparison, traditional manager deals totaled 31 in the first half of 2010 and may only reach 70-75 for the year.

For hedge fund managers, acquisitions of minority stakes is the most likely expected approach going forward. In the fund of funds community, mergers between small funds of funds is expected, say investment bankers.

<b>High profile transactions</b>

This year, three high profile transactions were Man’s purchase of GLG, RBC’s acquisition of BlueBay and Credit Suisse’s minority stake of York Capital. Man’s offer price was 55% higher than GLG’s share price, Man paid 12.5x GLG’s 2010 EBITDA.  RBC paid a 29.3% premium for BlueBay.

Buyers are prepared to pay up for growth opportunities. If you look at multiples, recent transactions suggest 10-12x EBITDA versus EBITDA’s long term range which has been 9-11x. Distressed deals during the crisis were at 5x EBITDA, says Manuel Arrive at Fitch Rating.

Investment bankers emphasize that each transaction needs to be examined on a case-by-case basis. EBITDA/multiples can’t be extrapolated from these large transactions to other hedge funds due to the size and scale. “None of them are the same size or scale as Man/GLG. Man gained access to all of GLG products and clients and can cross-sell their products. Many reasons exist to why that value was what it was but it doesn’t fit conventional thinking of just putting a multiple on it,” says one boutique investment banker.

Public stock prices of hedge funds are a good background reference to start with.  Asset size, stickiness of assets, number of clients, performance, number of distribution channels and geographic range are some of the factors to consider in evaluating each case, says Eric Weber of Freeman & Co.

Excerpt from <a href=”http://www.infovest21.com/”>Infovest21</a> Special Research Report – M&A/Consolidation in the Hedge Fund Community

Many institutional investors are more attracted to a firm’s sustainable infrastructure rather than a high rate of return. Branding is relevant to any size manager. Smaller managers have a greater need for branding than larger managers. Part of branding will be achieved by educating investors about a strategy or sector. The manager can become a go-to resource for that specific niche. As hedge fund managers attempt to build their stature as institutional asset managers, they often focus upon their perceived branding in the marketplace and how it enhances their overall acceptance to larger investors. Analyzing their branding forces hedge fund managers to review a wide range of issues: from their company name to their mission statement to their investment objectives to the associations they have built in their service providers.

Marketing and public relations experts say a number of activities should be taken.

Branding includes everything from how they answer the phone to marketing materials to the website to corporate personality. Branding is making the name of your company stand for something that is positive in the client’s mind. It includes the name, logo, tagline, website, core message, road show, and what people write about the company. It is not just the products and deliverables. That message needs to be linear and concise and clearly articulate the differential advantages of the hedge fund across the various factors used to analyze hedge funds. Some point to the mutual fund industry as a model as it has a longer history. “It used to sell performance. Then in the late 1990s, everyone wanted to know what Peter Lynch of Fidelity thought. Now, they no longer sell individuals and sell performance less. They sell an institutional name. Who knows who manages the individual mutual funds? It is the brand, more than the individual manager. People want the brand of trust.”

Other thoughts on branding

Brand is different than the actual quality. Hopefully, they are the same but there are a lot of good firms that don’t do a good job of articulating what they do and their brand in the market place is below the quality of the fund they offer. Other firms have a very good brand but the underlying product isn’t at the same level as people’s perception of that firm. This may be true for many of the largest managers. A brand can also be negative. For example, accusations of insider trading or other negative press reduces high quality perception that a firm wants to have. Some marketers take a contrarian view and say there are no hedge fund brands. They say hedge funds grow because they are institutional and generate superior performance. They argue that a hedge fund can try to brand, but without performance it will eventually lose assets regardless of the customer’s identification with the fund. Rather than branding, they focus on differentiation. Building a brand is a slow process. A consistent high quality message needs to be heard over time. If the manager delivers what he says, over time, the brand will develop.

In its special report, Infovest21 provides a number of case studies that illustrate how managers, in different circumstances, achieved their specific branding goals. While the report focuses primarily on hedge fund managers, a section is provided on branding as it relates to service providers.

What investors should look at in selecting a seeding platform

About 25-30 seeding platforms are active today, say a number of seeders. This is down from about 50-90 between 2006 and 2008.

Investors should look at the seeder’s experience – that is the key factor, says Robert Discolo of PineBridge Investments. “You need people who’ve been doing this for a long time and during different cycles. They have to have a lot of relationships and experience. Due diligence of emerging managers is very different from due diligence on regular funds because you have limited data to work with.”

He says investors should also look at prior seeds’ experience and performance. Investors also need to look at the worse-case scenarios – how many problems and how many blow-ups have there been. Also look at risk controls the seeders have in place and how they monitor it.

Seeders provide their IRR which is a construct from the private equity world.  It is an indicator of the investor’s economic return; it is based on cash flow. “…if a seeder gives money to a manager and then pulls it back after three or four years, the seeder still has a revenue share. The IRR can’t go down because there is no money at risk. The additional increases in IRR are based on the profit share for each individual manager,” adds Discolo.

Another veteran seeder suggests that other metrics be examined besides IRR such as gross return, net return, cumulative draw down, the amount of assets distributed, unrealized value and total value. Fee income is another important metric which reflects the manager’s ability to gather assets i.e. distributions relative to paid-in capital.

Institutions and seeding

Institutions are increasingly looking at seeding arrangements.

In the summer of 2010,  Rock Creek won a mandate from New York State Common Retirement Fund to manage the first installment of the pension’s new emerging manager program. Rock Creek is playing a key role in developing the emerging manager hedge fund portfolio, focusing on newer firms, firms with assets totaling less than $500 million, and women- and minority-owned fund management companies.

At that time, the $132.6 billion pension fund has about $5 billion committed to emerging managers. Of that, about $2 billion was in private equities and $3 billion in public equities. The pension is now developing a similar program in its real estate portfolio.

Other pensions with emerging manager programs include New York City Retirement System, California State Teachers Retirement System and California Public Employees’ Retirement System.

As of September 30, 2010, CalPERS had $1.3 billion in its MDP programs, close to $600 million in the emerging manager funds of funds program (which is part of the external manager program via FIS and Leading Edge), about $539 million in the fund of emerging hedge fund program (which is part of the Risk Managed Absolute Returns Strategies program). In the latter program,  CalPERS had about $143 million with PAAMCO’s fund of emerging funds, $201 million with Rock Creek fund of emerging funds and $194 million with 47 Degrees North.^.

CalPERS’ Performance – Emerging Manager Fund of Funds

Source: CalPERS Global Equity Program Review, Oct 18, 2010

In its just-released issue  of Investor Focus, Infovest21 interviews:

Ø  FRM Capital Advisors

Ø  MD Sass

Ø  Northern Lights

Issue also contains a sampling of Who’s Who in Seeding and Investor Sentiment Indicator

For additional information, call:

Lois Peltz
Infovest21
212 686 6440

Lois Peltz
Infovest21
267 Fifth Avenue
Suite 104B
New York, NY 10016
P 212 686 6440

InfoVest21 Seeding Activity.

Funds of funds, as important sources of seed capital to emerging funds, dried up in 2008 and 2009 but is slowly starting to come back, observes George Mazin of Dechert, the law firm.

Many say the environment for hedge fund seeding is the best it has been in many years. Deal terms are favorable to seeders because of the lack of seed capital available. A huge increase in talent exists because of hedge fund and bank stress with the top tier being of very high quality. In addition, the market dislocation has created plentiful investment opportunities. Seeders are increasingly being seen by managers as a partner in their development of their business, notes Reyl Asset Management’s marketing materials.

A number of funds of funds have launched or are in the process of launching funds that focus on seed capital. Blackstone, CYAN Management Group, Larch Lane/PineBridge Investments, Revere Capital, Reyl Asset Management and SkyBridge Capital to name a few.  Not all, however, describe themselves as seeders.

A survey of recent developments include, in alphabetical order:

Blackstone Strategic Alliance

Blackstone launched its second seeding platform in early 2010 which mirrors its first seeding platform, Blackstone Strategic Alliance Fund. The latter launched in May 2007 with $1.1 billion.

Sources say about $500 million has been raised for the second platform while the target may be $1.5 billion. The platform may seed as many as 12 managers over the next two years.

Blackstone reportedly won a mandate from New York State Common Retirement Fund which is preparing a new $500 million hedge fund program focusing on new and emerging managers.

CYAN Management Group

CYAN Management Corp, a recent spin-off of the Investcorp team, has created a multi-product hedge fund platform focused on delivering best-in-class investment talent.

Among other things, CYAN is creating a series of products focusing on individual core hedge fund strategies and single manager funds. Partner managers are practitioners looking to start or restart businesses.

According to its marketing material, CYAN develops products based on the preferences of sophisticated hedge fund investors. Its hedge fund product development process asks, in order: what investment opportunities are of interest now and in the medium term? What are the correct guidelines required to capture the opportunities? What terms, conditions, and structures are best suited for the strategy? What manager is optimally qualified for this mandate?

CYAN plans to develop two to three funds each year for a total of eight to ten funds over four years.

Larch Lane Advisors/PineBridge Investments

Larch Lane Advisors and Pine Bridge Investments have launched a joint venture, Select Plus Fund, which seeds early stage hedge funds. It was launched with $400 million in June 2008, according to its marketing materials. Larch Lane/PineBridge expect to raise another $600 million by year-end, bringing the fund size to $1 billion.

Their objective is to provide early stage hedge funds with critical assets, strategic direction, operational advice and strong institutional sponsorship necessary to help hedge funds attract investors. The plan is to seed 10-15 managers with $50-100 million each and possibly $100 million on a selective basis, according to the fund’s marketing materials.

Select Plus has four existing seed investments with the first distribution expected during the second half of 2011. The four funds seeded so far are Feingold O’Keefe Distressed Loan Master (seeded in May 2008 with $45 million), Stonerise Capital Partners Master Fund (seeded January 2009 with $100 million), Crystal Japan Fund (seeded August 2009 with $75 million) and Sothic Capital European Opportunities Master Fund (seeded September 2009 with $75 million).

Select Plus is targeting over 50% of capital returned three years from the commitment period end with profit interest distribution starting in the second  quarter of 2010.

The commitment period for investors in the fund ends December 31, 2012. Capital distributions for each of the managers is expected within one year of negotiated lock-up, typically three to four years. Any capital not distributed to investors within the one year period can be withdrawn without penalty. It is anticipated that all capital will substantially be returned by the end of 2016.

Select Plus charges a 1.5% management fee plus 25% of profits.The minimum commitment is $5 million.

Revere Capital Advisors

Since its inception in September 2008, Revere has seeded four managers, using a single manager platform. The four founding partners, former Man executives, are using their proprietary capital. Revere is looking to add partners to the platform – investors who want to provide capital to fund additional managers.

Revere Capital’s Andrew Godfrey says flexibility is needed in the use of capital as they may purchase equity interest, provide acceleration capital etc. Revere provides additional functions that can help institutionalize the product such as providing marketing, client service, back office infrastructure, technology, trading – it is a full service approach.

Godfrey says Revere expects to do about two to three full service deals per year, focusing on emerging managers trading liquid strategies who has assets under $100 million.

Reyl Asset Management

Reyl Asset Management launched an Irish-based fund of funds, Reyl Accelerator Fund, in conjunction with FRM on April 1, which specializes in seeding and early stage investments in hedge funds. Reyl is the investment manager of the fund while FRM is the advisor that sources and structures the deals. FRM, which runs a similar structure called the Catalyst Fund, proposes the managers to Reyl. According to Reyl’s marketing materials, the accelerator fund’s allocations range from $20 million to $50 million.

Because Reyl has a private banking client base, its fund has characteristics that are more suitable for private bank clients, says Fabrizio Ladi Bucciolini, Reyl’s head of alternative investments who designed the fund. FRM’s is institutional in nature.

The fund currently has four underlying investments in various strategies including event driven, senior secured lending and Credit and Volatility. FRM has arranged deals with Victory Park Capital, WestSpring Advisors, Isometric Capital Management and JD Capital Management and the Reyl Accelerator Fund has invested alongside FRM.

Bucciolini says the fund differs from most other seeding ventures, and that usually there is no equity participation of the seeder in the seeded managers. There is just a revenue stream share. The returns from the revenue shares are expected to match fund returns over time. Each seed deal has different characteristics.

The Reyl Accelerator Fund also differs from other seeding funds as it is geared toward smaller investors, says Bucciolini. The minimum investment is €250,000 or equivalent. There is a 1.5% management fee and 15% performance fee. Investors’ capital is locked up for one year, and thereafter may be redeemed with semi-annual liquidity.

If you have any questions please contact Infovest21 at (212) 686-6440.