More Banks, Execs Drawn to Flexibility of Hedge Funds

By Ackermann, Matt | American Banker, June 7, 2001 | Go to article overview

More Banks, Execs Drawn to Flexibility of Hedge Funds


Ackermann, Matt, American Banker


In the year that John Pileggi ran ING Funds, it grew from a fledgling unit of ING Group to one with 18 funds and $1.5 billion of assets under management.

In January, however, he left ING to run PlusFunds, a New York hedge fund management firm.

"All the best minds are leaving mutual fund management and going into the hedge fund business," he said. "There's heavy consolidation in the mutual fund world, and bureaucracies run the large pools of money. Why not run your own shop?"

Mr. Pileggi is not alone in his opinion. More and more executives and managers at large fund companies are moving to hedge companies in a quest for independence and remuneration.

"Investment professionals who have managed money successfully want to be able to align their financial rewards with performance," said Bill Helms, an executive vice president with LJH Global Investments, an alternative investment consulting firm in Naples, Fla.

Hedge funds had $408 billion of assets under management at the end of last year, according to research by Deutsche Bank. They are similar to mutual funds in that both create pools of stocks in which individuals and institutions can invest.

Unlike mutual funds, hedge funds can sell stocks short and can borrow funds to boost returns. Also, since the funds are not regulated by the Securities and Exchange Commission, they are not required to disclose the trades they make, the positions they hold, or the losses they suffer.

In the past 10 years the number of hedge funds has grown from 600 to 6,000, and strong money managers have been leaving mutual fund companies for hedge funds to gain an independence no longer available at large mutual fund companies, Mr. Helms said.

"If an investment manager is good and makes good returns, everyone else starts matching that manager's every move," he said. "It's hard to generate the same returns under those circumstances. At a hedge fund, the fund is smaller, and the manager can go back to making nimble moves."

Mr. Helms cited Jeffrey N. Vinik, who took five other managers with him when he left Fidelity's Magellan fund in June 1996 to start his own New York-based hedge fund company, Vinik Partners.

By the time the funds were closed to new investors in December, Mr. Vinik had raised $4.2 billion. The funds generated a total return of 646%, and Mr. Vinik and his partners had a profit of $800 million.

Money managers "are constantly trying to follow Mr. Vinik's model," Mr. Helms said. "Everyone wants to leave the mutual fund world to run their own show. There is more freedom and less pressure."

In addition to money managers, banks are also looking away from mutual funds and toward hedge funds. They are eyeing and buying independent firms instead of creating proprietary mutual funds.

In August, Bank of New York entered the hedge fund market by purchasing Ivy Asset Management, a Garden City, N.Y., alternative investment products firm that manages 14 proprietary hedge funds with $3.4 billion of assets.

Larry Simon, Ivy's president and chief executive officer, said quality young talent is being drawn to the hedge fund world not just from mutual fund companies, but also from law firms and accounting groups. …

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