Hedge fund managers
moving on can be a hazard for investors, but what should they
do if the person to whom they entrusted their cash suddenly
This is very much a caveat emptor market, and hedge fund
managers can be a restless bunch. Like nomads they seek greener
grazing grounds. For the vast majority of hedge fund investors,
the light regulations on this largely private business mean
there is little comfort to be had from the official watchdogs.
Equipped with investment skills, the entrepreneurial spirit
and egos to match, successful managers are quick to shift
to new houses which offer better rewards, or set up their
own boutiques. But whatever satisfaction the shifts might
bring to the manager; these changes leave investors without
any guarantee that the successor has the same abilities which
originally attracted them to the fund.
Hong Kong is one of the only fund management centres in Asia
which can provide some regulatory assurances of continuity,
but only for funds which are authorised for sale to the retail
As there are just three of those so far, the level of protection
remains sparse, but the guidelines set out by the Hong Kong
regulatory agency, Securities and Futures Commission (SFC),
do set a benchmark which could be followed in other jurisdictions.
The rules were tested much sooner than could have been expected
when Roger Ellis, chief investment officer of JF Asset Management,
and manager of the hedge fund JF Asia Absolute Return Fund
(AARF) resigned in early February, only weeks after the fund
was authorised under Hong Kong's pioneering rules that allow
general marketing of hedge funds. Ellis' skill and experience
in the region's tricky markets were a major selling point
of the fund.
For investors in the AARF it could have been a plunge into
the unknown. His departure raised serous questions about its
future direction and strategy, but JF was able to point to
the promotion of Miles Geldard as the fund's manager, and
his long time experience helping to run AARF with Ellis.
This fitted in with the SFC's insistence on experienced personnel
running hedge funds:
"Our guidelines on hedge funds make it very clear that
a fund company must have at least two key investment personnel,
if it is to fulfil the requirements, and each must have at
least five years experience in hedge funds, and two years
in the type of fund in question," explained Sandra Mak,
associate director at the SFC.
Commission officials were satisfied that JF's back-up system
met their requirements, but Ms Mak admitted that there was
little that the SFC could do about the wanderlust that occasionally
"We can't regulate how long people stay with a particular
firm, but we would insist that when someone leaves a firm
that it has a sufficiently experienced back-up person. Investors
should have the comfort that as long as the fund remained
authorised it would remain in the hands of qualified people,"
In November last year the SFC also beefed up its guidelines,
stipulating that all funds must disclose changes of key personnel
in quarterly reports - although industry insiders say that
no reputable fund would wait that long. "If management
changes appear to be altering the nature of the fund, the
directors would be called in to discuss how the changes should
be disclosed," said Ms Mak.
Ellis' departure in Hong Kong caused nothing compared to
the brouhaha when seven managers quit the hedge fund unit
of Lazard Asset Management in New York. The walkout - led
by rising hedge fund star William von Mueffling, has been
portrayed as simple case of greed.
Von Mueffling, it was alleged, wanted too much in return
for having built up LAM's hedge fund operation into a US$4
billion business in five years. On the way he also rewarded
investors with a compound return of 57%.
Supporters of Von Meuffling say the $40 million he was looking
for was nothing more than he deserved for putting LAM onto
the hedge fund map. He is now expected to open his own boutique
business - but should those investors who benefited from his
skills at Lazard follow him? That would seem the obvious solution,
but first they should ask themselves the key questions which
any investor must address when faced with management changes:
1) The departing manager may have plans for a new fund, but
how long before it is up and running?
2) Will the new fund be following a similar strategy? And
how much of the performance came from a team effort if the
fund was part of a bigger institution?
3) Was the fund run on a discretionary basis, which gave
the manager great freedom, or was it a computer generated,
4) Who takes over? Are the new manger's qualifications and
experience sufficient to ensure continuity?
5) Are there penalties for early redemption? If so, are they
waved in cases like the manager's departure?
6) Will a new boutique fund have the same cost and charging
structure as one which is part of a bigger group?
7) What were the reasons for the manager leaving? Are there
concerns about internal disagreements on strategy? Is this
an isolated incident, or have there been a number of resignations?
If so, why?
8) If a manager has left a heavily institutionalised fund,
will the new venture have similar, or at least, sufficient,
Talking to the departing manager can reveal much regarding
the real reasons for leaving. Investors in mutual funds rarely
have sufficient cash invested to make it worthwhile carrying
out the necessary due diligence in the event of a management
change. Hedge fund investors usually have a much larger commitment
so can, and should, demand more information.