Until recently placing money with a hedge fund manager was predominantly done through small independent companies offering what is known as capital raising or contract marketing. In practice hedge funds lacking the resources to fund their own sales teams employ someone independent. Typically that someone might be Arpad Busson running EIM, Micky St Aldwyn and his International Fund Marketing group or Basil Mavroleon’s Anchor Asset Management. The essence of these third party marketing groups is that they are small and work with a select number of hedge funds, sometimes on an exclusive basis.
In the last couple of years large prime brokers have been fairly aggressive in developing capital raising departments, usually within their prime brokerage services, sometimes separately. Deutsche is the latest in a long line to set up a capital introduction service and, along with Goldman Sachs, remains the most high profile in its marketing. “They have been driven to this by the competitive nature of the prime brokerage marketplace and always seeking to add value for their clients,” says Nicola Meaden, chief executive of TASS Investment Research in London.
There are also nice prime brokerage fees for the assets they bring to their hedge fund clients. That aside, what separates prime brokers and the third parties providing capital introduction is volume. St Aldwyn recommends four hedge funds clients to institutional investors and once one is full, he picks and recommends another. Prime brokers may, for example, have two dozen funds doing European long/short. “They can show the hedge funds to their investors but they are not easily able to show any particular preference to any one of them and they certainly cannot do the follow up work that is required,” says St Aldwyn.
Joining the fray are the investment consultants, many of whom have reacted to increased interest in hedge funds from institutional clients. Stephen Oxley, senior investment partner at Watson Wyatt runs a team of eight who oversee hedge funds. Another difference between the three approaches is who pays whom. Oxley avoids using agents and instead Watson Wyatt does the research and due diligence itself. “We’re in a position where we have no axe to grind,” he says. In this respect the client is billed as if selecting a traditional fund manager. All the large prime brokers claim to provide the service free of charge but, as mentioned, they earn extra prime brokerage fees on the assets they bring to their hedge fund clients. Small independent capital raisers charge a percentage of the performance of assets they introduce to hedge funds.
St Aldwyn says that there is complete impartiality in that he is picking the best managers from the same universe as Watson Wyatt. “I will not represent somebody that I do not think is a quality manager,” he says. There is a difference however, in the angles from which they approach the business. “The consultants’ interest is to represent the investor and pull together an appropriate portfolio. My obligation is to identify quality managers and to introduce them to investors. It is then up to them to decide if they agree with my judgement.”
Since most pension funds are relatively unfamiliar with the hedge fund industry, there remains the question of how they approach investing in the class. Meaden believes they should pay a consultant or an adviser who is able to provide what she calls completely unbiased and independent advice. Many of the fund of hedge fund managers- Glenwood, Ivy, Grosvenor and so on, also act as investment advisers helping pension funds construct diversified portfolios.
“I’m not suggesting for a second that you cannot get very good information out of the contract marketer and the capital raisers but they tend to have their own special relationships with managers and they also get paid by the managers,” she says.
As for the third parties, they have to live on their reputation and ability to pick the top performing managers but St Aldwyn nevertheless says it is daunting having the large prime brokers marketing so heavily. “They obviously charge nothing directly for providing the service and I charge a fee. Despite that I still get quality managers who are kind enough to come after me because they feel I can provide a more specialised service.”
The price war between the prime brokers continues and St Aldwyn is convinced that we are going to see more and more of the capital introduction services coming from them. Meanwhile some pension funds are happy doing their own research- in the Netherlands ABP and KLM both have their own in house-teams to investigate hedge funds investment.

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