Coming to America

Driven by the prevailing threat of an AIFM regulatory clampdown, many European hedge funds are now looking westwards to access the rich institutional investor pickings in the US. But does the land of plenty have enough to go around?

Europeans could learn a lot from their counterparts in the US on how to run a hedge fund business. It is no surprise that the vast majority of the 8,000 hedge funds worldwide operate from the US and of those, most can be found in New York.

Europeans and those in the UK were always quite happy to trust in their home markets when it came to marketing funds. Most recently, GLG Partners’ reverse acquisition of Freedom Acquisition Holdings in the US and listing on the NYSE was an attempt to sell a very British hedge fund to the Americans. It was an open admission that a firm based in England wanted access to the investors in America. But despite the move by GLG and a handful of others, the westward migration of hedge funds has never really taken off.

All of a sudden, that looks to be changing as more and more European and UK hedge fund managers are looking to break into the US and tap into the innumerable opportunities that the country offers.

“We have a lot of European clients asking about opening funds in the US; we have seen an increase in interest from UK managers wanting to launch US feeder funds and have advised on a lot of managers seeking to open offices in the US, particularly New York,” says Josh Dambacher, partner at law firm Schulte, Ross and Zabel in London. “Historically, fund managers in continental Europe avoided the US, but that is definitely changing; equally, many of the UK fund managers that had been happy focusing on Europe are looking across the Atlantic”.

European and in particular, UK managers typically regard the SEC’s approach to regulation as a little too heavy-handed – a situation that will not be helped by the establishment of a new dedicated hedge fund unit, set up by the SEC last month. But as the impending Alternative Investment Fund Managers (AIFM) Directive and the uncertainty associated with it casts a dark shadow over operations in Europe, the US appears, if anything, the lesser of two evils. 

If regulation is one of the catalysts for European managers to look appetisingly to the US, then the opportunity set borne from the fallout in 2008 has them salivating.

“Managers will often send a senior-level employee from their European team and then fill the rest of the team with US-based staff,” said Dambacher.

Union Bancaire Privee Asset Management (UBP AM), the Geneva-based private bank, has recently done more than most European managers to recruit from the US. In fact, they have filled their entire alternative investments team in New York with talented US employees. A particular coup for UBP AM was the hiring of Sara Sprung from Fortress Investments, where she was portfolio manager for the listed fund manager’s flagship Drawbridge product.  

The hire made by UBP AM was only one part of an enormous internal restructuring in the alternatives outfit. The firm had operated as a hub-and-spoke business, with three relatively autonomous units working out of Geneva, London and New York. According to Matt Stadtmauer, CEO of UBP AM in New York, all three units have now been merged into one centrally-controlled entity with its headquarters not in Geneva but in New York – an indication, if it was ever needed, that New York is still the seat of hedge fund power. Other notable hires at UBP AM include Jonathan Morgan as head of research for alternative investments, Matt Auriemma as co-head of structural risk analysis and Dan Kelly as chief risk officer of alternative investments.

“We took a look at our internal procedures and thought about how best to benefit our clients and it made most sense to locate in New York by hiring a global CIO of alternatives, global risk officer and basing them there,” said Stadtmauer.

For the CIO of a CHF19.5 billion ($18.1 billion) funds of hedge funds (FoHFs) unit, the simple logistics of getting around all the underlying managers, as well as the universe of potential managers, is a lot easier if you are based closer to the majority of them. “We have a long and fairly decent relationship with the funds,” says Sara Sprung. “I have seen most of the managers on the approved list”.

It is not just the chance to pick up good talent that is drawing hedge funds to the US; arguably, the most critical component is the honey pot of institutional and private wealth capital.

Lyxor Asset Management is a global brand with a strong European footprint. It has joined the ranks of European managers exploring opportunities in the US. The business is now preparing to build out in the US, following the reorganisation of the business last year.

The Paris-based manager had built up its position and standing in Europe, where it had established a strong institutional investor base. Lyxor has continued to expand in the institutional market throughout 2009. “We have built out a very strong franchise in Europe and Asia and we want to do the same in the US,” says CEO of Lyxor Asset Management in the US, Lionel Erdely. “We have already increased our marketing team [in the US]”.

Lyxor recently hired Michael Bernstein from the Americas business of global $8.5 billion FoHF, FRM, where he was head of North American marketing. Bernstein was brought in to spearhead Lyxor’s push on the fund of hedge funds side and ultimately bolster sales in the region.

Lyxor’s merger with Societe Generale Asset Management’s Alternative Investments (SGAM AI) business late last year opened the door for a stronger push into the US. “We had the investment management products, but we just did not have as complete a legal set up as we do now,” says Erdely. Following the merger, the US subsidiary, SGAM Incorporated, became Lyxor Asset Management Incorporated, which is a registered investment advisor regulated by the SEC.

The old SGAM AI product range shed a large amount of assets through 2008 and into 2009 but nothing unusual set against the FoHF industry’s wider redemptions. Losing established European hedge fund manager and global head of hedge funds at SGAM AI, Arie Assayag, last year merely confirms the difficulties at the time. However, Erdely has assumed the role of CIO for the entire FoHF range as well as CEO for the US business.

The firm will likely market existing Lyxor Asset Management Incorporated (formerly SGAM AI) products, as well as roll out new offerings on the FoHF side and of course, continue to market the highly successful managed account. 

Lyxor raised more than $5 billion on the managed accounts side last year and Erdely suspects the interest is not over. “We think investment in managed accounts still has a lot of potential,” he says.

In many ways, the fallout in 2008-2009 was opportune for Lyxor Asset Management (the merger was officially completed on 1 September 2009).

“It was good timing because the industry was retrenching and we were able to further develop globally and in the US,” says Erdely. Part of that development at Lyxor could include an acquisition to enhance its ETF business in the US. Lyxor is rumoured to be looking at targets for a potential deal to be completed before the end of the year.

Many more hedge fund managers are working hard to expand in the US. Gartmore is probably the largest, where newly installed head of alternatives, Paul Graham, has been charged with building the business out in the US. Recently, Threadneedle hired Kris Haber from Lazard to do the same thing. It only remains to be seen if there is enough capital and talent to go round.

This article first appeared in on 17 February 2010.