In the online world of Albourne Village, you can hobnob with hedge fund mavens in the local pub, browse at one of the quaint hedge fund merchant shops in the business district (using Albourne green apples as currency) or, if you pay the entrance fee (real money here), get advice on hedge fund investments from the sages who work in the fortress that overlooks the village. Presiding over it all is an online mayor, whose smiling visage pops up to welcome newcomers.
The cartoonish Albourne Village is the public face of a very serious company — the U.K.’s Albourne Partners — that works in the growing business of helping investors buy hedge funds. Increasingly, those investors are cash-rich pension funds, endowments and foundations looking for alternative places to park their riches.
The migration has intensified as institutional managers scramble to offset the punishing equity market decline. Many foundations and endowments now allocate more than a quarter of their investments to hedge funds, and even some of the most conservative public employee pension funds now dabble in hedge funds. These new investors initially helped fuel the growth of funds of funds, which screen and buy baskets of hedge funds.
As foundations and pensions become more sophisticated hedge fund investors, they invariably start moving beyond funds of funds to buy individual hedge funds directly. But fishing in the dark pool of hedge funds is tricky, and the need for guidance has spawned companies like Albourne, which provide research, advice and monitoring, along with software tools to help collect and sort information.
Albourne Partners advises more than 120 investors who have allocated roughly $200 billion to hedge funds, including Hermes Investment Management in the U.K., Japan’s Mitsubishi Corp. Pension Fund and the University of Texas Investment Management Co. With that kind of capital in tow, Albourne has leverage that hedge funds understand. By cooperating with a consultant like Albourne, hedge funds figure they have a better chance of attracting institutions. Albourne, in turn, gets the information it needs to do analysis and make recommendations.
“More hedge funds want money from institutions, and more institutions want to give money to hedge funds,” says David Harmston, head of the U.S. client group at Albourne Partners, based in Rowayton, Connecticut. “It is moving everything to the kind of transparency you get in the long-only market, although it is certainly not there yet.”
Harmston, a 36-year-old Brit, likes to approach the serious task of evaluating hedge funds with a sense of humor. He arrived at U.K.-based Albourne in 2000 after a stint at JPMorgan Investment Management in London, where he worked in equity and derivatives management. His first project at Albourne was to create an online presence that would set the company apart in the staid world of financial consulting. What you see when you call up Albourne Village’s Web site is a view of a quaint English hamlet. Users can click on its buildings to get content. The village now boasts 55,000 residents, who check in for daily news briefings (including stories posted by members), chat with other residents in the “pub” or visit any of the other public “buildings.” Paying customers of Albourne get to enter the castle on the hill, where they can access data and analyst reports on individual hedge funds and managers.
“It is a bit tongue in cheek, with a little bit of English humor around it,” Harmston says of the village. “That, combined with the fact that it is free, has helped. But it has amazing vitality around it. People post information, add ideas. It is a portal on the hedge fund industry.”
It is also a low-level data collection point for Albourne, which has a sort of trapdoor built into the public site that its research team can use to capture information and opinions that flow through the message boards and news postings. The data may ultimately help Albourne analysts track and report on individual hedge funds and managers. Albourne Partners clients pay flat fees of either $240,000 or $400,000, depending on the level of service and the number of funds covered.
A number of other advisers are vying with Albourne for foundation and pension money. One of the largest is Cambridge Associates, a Boston-based general consulting firm. Cambridge maintains 11 researchers who evaluate hedge fund managers and 28 hedge fund consultants who help manage portfolios. In some cases, clients will double up, for example, using Cambridge for overall portfolio construction and Albourne for hedge funds.
Technology plays a key role for institutional investors wanting to track, review, monitor and compare hedge funds. Investment and client management software, long used by funds of funds to help manage their operations, can also be a powerful tool for managing hedge fund portfolios.
“If you are looking at 7,000 funds, say, you need to have an efficient way of doing that,” said Meredith Jones, head of global marketing at New York–based PerTrac Financial Solutions, an investment management software provider. “You have to have a software tool that can actually make sense out of the chaos.”
Founded in 1994, Albourne has a workforce of 140 that tracks about 1,500 hedge funds and produces regular reports on risk, strategy, management, performance and other topics. Albourne also rates hedge funds, giving investors a score sheet to help them pick. Harmston has been the firm’s U.S. face since 2001, when he moved from London to open an office in San Francisco. He subsequently opened the Rowayton office.
Among Albourne’s U.S. clients is the UCLA Foundation, which supports the University of California at Los Angeles with a $1 billion investment fund. Over the past four years, the foundation has upped its stake in hedge funds from 9 percent to more than 25 percent and now invests primarily in individual hedge funds rather than funds of funds.
George Letteney, the foundation’s investment coordinator, says UCLA decided to build its own hedge fund portfolio partly to escape the fees associated with funds of funds. He estimated that investing a quarter of his cash solely with funds of funds would have cost him more than $1 million in annual fees. Instead he pays Albourne $240,000 a year and uses its research to maintain a portfolio of 25 to 30 individual hedge funds.
“The level of information is really extraordinary,” Letteney says. “They do due diligence in eight or nine categories, and they rate funds as well. It tends to be very candid and very straightforward.”
Letteney’s staff includes just four investment managers, so he depends on Albourne for help in selecting and monitoring funds. “Some institutions can do it without a consultant,” he notes, “but you have to have a very sophisticated and large staff to do it.”
Letteney figures he also gains a level of access to hedge fund managers that he couldn’t get on his own, and he has use of Albourne’s library of 5,000 due diligence documents on more than 2,000 funds. Albourne’s analysts meet with more than 1,000 hedge funds each year to review and evaluate performance, and all that data goes into updated reports, including ratings on different funds. Hedge funds are not allowed to see the final reports, which Albourne touts as evidence of its independence from the managers. Daily, monthly and quarterly reports look at how different strategies are faring, how funds are performing within those strategies and how underlying markets might affect them. Albourne also does extensive risk analysis of hedge funds, including best- and worst-case scenarios for individual funds. Funds get overall letter grades from A to E, as well as numerical rankings from 1 to 6 in different categories. For example, in due diligence, Albourne does reference checks, regulatory reviews, financial statement reviews and media coverage.
Reports and data are loaded onto the restricted-access part of the Albourne Village Web site, where clients can download volumes of information with just a few mouse clicks. There are also links to Securities and Exchange Commission filings. UCLA’s Letteney likes the analyst contact that’s available to him. If he sees a report that interests him, he can look up the name of the author and call that person for a chat.
Albourne’s highly developed system for analyzing hedge funds has modest origins. Albourne managing director Simon Ruddick, 47, co-founded the company with Guy Ingram and Sam Lewis after selling his 50 percent stake in the U.K.’s Westminster Equity, a company that managed hedge fund investments for Greenwich, Connecticut–based Paloma Partners. (Ingram and Lewis also worked at Westminster and are still at Albourne.) They set up operations in a cramped office behind a butcher’s shop in a village in Sussex that is not unlike the fictional Albourne Village and managed to land just three clients in the first year — all of which already had hedge fund portfolios. Albourne’s initial work consisted of helping quantify risk exposure across some 30 to 40 funds.
Ruddick was counting on selling the service to pensions, foundations and other institutions as the appetite for hedge fund investing grew. But the institutions weren’t especially interested at first.
“During the ’90s it was a running joke at conferences. Everyone would say, ‘The institutions are coming,’ but they never did,” Ruddick says. “That has completely changed now.”
As institutional investors began moving from funds of funds to direct hedge fund investing, Albourne’s name kept popping up as a reliable source of data and advice. In response to client requests, Albourne added research and advice on due diligence, then manager selection and strategy timing, and finally portfolio construction, hiring analysts with expertise in each new field. As the library of reports grew, Albourne built up its technology base to store, manage and distribute the data online. Albourne became a source of wide-ranging advice and information on hedge funds that clients could customize.
“We have institutional clients who choose to follow our portfolio construction advice exactly,” said Ruddick. “Some use us as a second opinion, and others focus primarily on our ongoing due diligence and risk monitoring as kinds of external controls.”
Albourne’s latest addition is an interactive risk model that lets clients directly access quantitative analytics on hedge funds in a format that can be integrated into a client’s broader portfolio risk analysis. Albourne also recently branched out into new territory, providing research and analysis on private equity funds.
As Albourne’s reach has grown, so too has its standing in the hedge fund community. When Albourne sponsored a two-day charity fundraising event and hedge fund mixer in summer 2006 called Hedgestock (modeled after Woodstock and featuring a performance by the Who), more than 4,000 hedge fund managers, investors and bankers showed up. It was held at a 16th-century manor house in Knebworth, Hertfordshire, about 30 miles south of London.
Hedgestock was another tongue-in-cheek moment for Albourne, but it had a utilitarian side. The hedge fund managers were there not just to have fun but also to get a little face time with the Albourne crew, who have become such crucial gatekeepers to the vaults of institutional investors.
“The key is, we tell clients which funds we think they should get into,” says Harmston, adding, “and which they should get out of.”
