COVER STORY

The Definitive Source for Everything Hedge Funds

The
Hedge
Fund SOME FORMERLY
INVESTOR-UNFRIENDLY FIRMS
HAVE GROWN UP —

Report
AND THEY’VE GOT NEW,
IMPROVED GRADES
TO SHOW FOR IT.

Card By StephenTaub
ILLUSTRATIONS BY NOMA BAR
After
COVER STORY

Each year we ask pension funds, endowments, foundations,

funds of funds and other institutional investors to rate the firms
in our annual Hedge Fund 100 ranking of the world’s largest
founding his London-based hedge fund firm, The Children’s In- hedge funds. (Only investors that had money in the 100 hedge
vestment Fund Management U.K., in 2003, Christopher Hohn funds in the 12 months before polling are surveyed.) Thanks to a
quickly earned a reputation for producing outstanding returns. strong response among investors surveyed, we were able to rank
But he later also became known for alienating his investors. and grade 58 firms this year, up from 47 in 2014. (For more infor-
Hohn racked up annualized gains of roughly 40 percent in mation on the methodology, see “How We Compiled the Rank-
his firm’s main fund during its first four years and built the firm, ings,” page 22.)
known as TCI, up to $19 billion in assets at its peak, in May 2008, TCI is one of several firms ranking near the top of this year’s
with a staff that included 12 analysts. But after the fund posted a Hedge Fund Report Card that previously were among the most
43.1 percent loss that year, many of Hohn’s investors — who were opaque in the hedge fund industry, especially before the finan-
unhappy with the fund’s unusually severe three- and five-year lock- cial crisis. Other examples include Chicago-based Citadel, which
ups — began fleeing en masse as their terms expired. By the end finishes third overall; Evanston, Illinois–based Magnetar Capital
of 2012, assets had shrunk to $4.9 billion in the main fund, even (No. 4); and three New York–based firms, Perry Capital (No. 5),
though it posted an impressive 29.5 percent gain that year. Inves- Millennium Management (No. 6) and Two Sigma (No. 14). These
tors weren’t the only ones eager to escape the firm: From 2009 to were among the many firms that until the financial crisis felt it
2011 several analysts and the head of investor relations also left. was a badge of honor — perhaps even a sign of success — to keep
“We had strayed from being heavily invested in stocks with a most information close to the vest.
high barrier to entry and a bulletproof franchise to weaker indus- This year’s results underscore the continued institutionaliza-
tries,” Hohn now concedes. “Then we weren’t fully invested in tion of the hedge fund industry. As firms have evolved from in-
2009. The team and the fund got too large.” vesting for wealthy individuals to managing money on behalf of
So in early 2013, when Alpha published its annual Hedge Fund public workers’ pensions, endowments and charities, they have
Report Card, in which investors are asked to grade hedge fund recognized the need to become much more accountable and re-
managers on a variety of factors, it wasn’t sponsive, investors say. This has meant
shocking to see TCI ranked near the bot- implementing elaborate risk management
tom, with an F grade. But by then Hohn had KEY FACTORS WHEN systems and generally paying more atten-
been working assiduously to turn things EVALUATING A HEDGE FUND tion to nonperformance-­related areas,
around. He had shrunk his group of ana- Scale: 1 to 10 such as investor relations. These invest-
(10 = most important)
lysts and began rewarding them as a team ments are reflected in the firms’ improved
rather than on individual performance. RANK FACTORS SCORE standings in the Hedge Fund Report Card
He had hired a new head of investor rela- since the survey’s launch in 2009.
1 Alpha Generation 9.11
tions, slashed fees, significantly loosened Multistrategy giant Citadel exemplifies
liquidity terms for investors and hit the 2 Risk Management 8.64 the shift toward more-investor-friendly
road for a prolonged series of meetings 3 Alignment of Interests 8.57 policies. “We need to stay focused and pro-
with investors. For the first time in years, vide what they need to report to their con-
clients had access to TCI’s investment 4 Transparency 7.73 stituents,” acknowledges Kenneth Griffin,
team, and the firm set up a new online por- 5 Infrastructure 7.28 Citadel’s founder and chief executive.
tal containing presentations and details But an additional factor has been driv-
6 Liquidity Terms 7.25
about the fund’s investments. ing hedge funds to better communicate
By the second half of 2013, Hohn began 7 Independent Oversight 7.22 with their clients and provide more detailed
to see results. His fund gained about 14.5 information: underperformance. In recent
8 Investor Relations 6.44
percent in the fourth quarter alone, fin- years the average hedge fund has regularly
ishing the year up 47 percent, net of fees. lagged various market indexes. Judith Pos-
Finally, after four years of no new money coming in, TCI was grow- nikoff, a co-founder of Irvine, California–based fund-of-funds firm
ing. By year-end 2014 its assets had jumped to $8.7 billion. Pacific Alternative Asset Management Co., says that before 2008
Clearly, investors took notice: TCI finishes in seventh place in no one talked about non-performance-related issues. The financial
Alpha’s annual Hedge Fund Report Card — up from No. 53 just two crisis changed that.
years ago — and is one of only 14 firms to earn an A grade. What’s “I think performance is critically important,” Posnikoff ex-
more, TCI earns an A in five of the eight individual categories on plains. “But I will pass on a top-decile fund for a fund with more-
which investors were asked to rate their managers, gaining the No. flexible and better terms and more transparency.”
1 spot in two of those, Alignment of Interests and Transparency. This year marks the first time that a non-U.S. firm — London-
Most important, peformance bounced back after 2008, with the based Egerton Capital — has topped the Hedge Fund Report Card.
firm’s main fund posting annualized gains of 19.2 percent over the Egerton, founded in 1994 by John Armitage and now-retired for-
past five years. (TCI was up 8.9 percent in 2014.) “They have restruc- mer Tiger Cub William Bollinger, has quietly become one of the
tured, and their results are better,” says a prominent hedge fund in- best hedge fund firms few people know. Armitage “has never been
vestor. “Hohn is one of the best equity investors in the world.” a household name,” says one hedge fund investor.
 THE HEDGE FUND REPORT CARD 2015
WEIGHTED WEIGHTED
RANK FIRM (LOCATION) SCORE RANK FIRM (LOCATION) SCORE

GRADE A GRADE C

1 Egerton Capital (London, U.K.) 86.60 30 Anchorage Capital Group 76.67

Egerton posted double-digit (New York, NY)
gains, ranging between 20 and 2 Silver Point Capital (Greenwich, CT) 86.19
31 Visium Asset Mgmt (New York, NY) 76.60
45 percent, in each of its first
3 Citadel (Chicago, IL) 85.13
full six years. And in nearly 21 32 Winton Capital Mgmt (London, U.K.) 76.59
years, the firm has had only two 4 Magnetar Capital (Evanston, IL) 84.39
33* Och-Ziff Capital Mgmt Group 76.48
losing years: 2008 and 2011. 5 Perry Capital (New York, NY) 84.06 (New York, NY)
Egerton started to gain notice
6 Millennium Mgmt (New York, NY) 83.95 34* BlackRock (New York, NY) 76.48
in the investment community
in 2013, when its long-short 7 The Children’s Investment Fund Mgmt 83.45 35 Third Point (New York, NY) 76.25
fund returned 27.7 percent and U.K. (London, U.K.)
36 D.E. Shaw & Co. (New York, NY) 75.89
its assets under management 8 Glenview Capital Mgmt (New York, NY) 83.14
nearly doubled, to $13.2 bil- 37 Jana Partners (New York, NY) 75.01

lion. At the beginning of 2014, 9 Elliott Mgmt Corp. (New York, NY) 81.93 38 Taconic Capital Advisors 74.92
Egerton was the world’s 43rd- 10 Canyon Capital Advisors 81.86 (New York, NY)
largest hedge fund firm, up (Los Angeles, CA)
39 Pennant Capital Mgmt (Summit, NJ) 74.64
from No. 74 the year before. 11 Fir Tree Partners (New York, NY) 81.78
40 ValueAct Capital Partners 74.59
Today it manages $13.7 billion, (San Francisco, CA)
12 Adage Capital Mgmt (Boston, MA) 81.13
according to its website.
Egerton’s investors appear 41 Angelo, Gordon & Co. (New York, NY) 73.49
13 HBK Capital Mgmt (Dallas, TX) 81.09
to be extremely satisfied. The 42 Pine River Capital Mgmt 73.15
14 Two Sigma (New York, NY) 81.08
firm is one of just three to re- (Minnetonka, MN)
ceive A grades in seven of the MKP Capital Mgmt (New York, NY) 72.63
43
eight Hedge Fund Report Card GRADE B
44 Pacific Investment Mgmt Co. (Newport 72.26
categories. (The other two 15 Senator Investment Group 80.89 Beach, CA)
are Silver Point Capital and (New York, NY)
Magnetar.) Egerton, which 45 AQR Capital Mgmt (Greenwich, CT) 72.23
16 Davidson Kempner Capital Mgmt 79.44
declined to comment on the re- (New York, NY) 46 Lone Pine Capital (Greenwich, CT) 71.28
sults, tops the list for Liquidity 17 King Street Capital Mgmt 79.39
GRADE D
Terms. It is tied with Glenview (New York, NY)
Capital Management for No. 2 18 Farallon Capital Mgmt 79.23 47 Caxton Associates (New York, NY) 70.07
for Transparency, ranks No. 3 (San Francisco, CA) 48 Avenue Capital Group (New York, NY) 68.88
for Investor Relations, is tied
19 Highfields Capital Mgmt (Boston, MA) 78.90 49 Eton Park Capital Mgmt 68.75
with Two Sigma for No. 3 in
(New York, NY)
Risk Management and ranks 20 Tudor Investment Corp. 78.80
(Greenwich, CT) 50 Fortress Investment Group 68.50
No. 4 for Infrastructure.
(New York, NY)
T h i s ye a r S i lve r Po i n t 21 Cerberus Capital Mgmt 78.67
slips one notch to take sec- (New York, NY) 51 Brevan Howard Asset Mgmt 67.19
(London, U.K.)
ond place. The Greenwich, 22 Bridgewater Associates 78.28
Connecticut–­based credit and (Westport, CT) 52 Discovery Capital Mgmt 66.63
distressed-debt firm, founded (South Norwalk, CT)
23 Wellington Hedge Mgmt (Boston, MA) 78.27
by Goldman Sachs Group al- 53 Paulson & Co. (New York, NY) 66.40
ums Edward Mule and Robert 24 GSO Capital Partners (New York, NY) 78.19
54 Greenlight Capital (New York, NY) 66.08
O’Shea, earns an A in all but 25 York Capital Mgmt (New York, NY) 78.10
one category, Risk Manage- GRADE F
26 Marshall Wace (London, U.K.) 77.98
ment, in which it receives a B.
55 Cevian Capital (London, U.K.) 65.69
“They are very good at under- 27 Viking Global Investors 77.97
standing the credit markets (Greenwich, CT) 56 Mason Capital Mgmt (New York, NY) 61.19
and finding opportunities, 28* Maverick Capital (Dallas, TX) 77.38 57 Convexity Capital Mgmt (Boston, MA) 60.29
especially opportunities not
29* Pershing Square Capital Mgmt 77.38 58 BlueCrest Capital Mgmt 55.76
evident to a lot of the market,” (New York, NY) (London, U.K.)
says one investor, who also
* Tie due to rounding, not an actual tie.
lauds the firm for its strong in-
vestor relations team.
Citadel moves up from fifth place last year. It earns an A in alpha for our investors,” Griffin stresses. “If you can’t do that,
six categories, a B for Transparency and a C for Liquidity Terms. you aren’t providing what is fundamentally important.”
The firm, founded by Griffin in 1990, has clearly placed its disas- Griffin also attributes his firm’s rebound to risk management
trous 2008 in the distant past. “We are in the business of creating lessons learned from 2008, especially in regard to the repricing
COVER STORY

of funding. He explains that from 2003 to 2007 Cita-

del took advantage of low funding rates to build a
portfolio, which included convertible securities and
high-yield debt, that suddenly became very expensive
to unwind in 2008. “The portion of our portfolio that
is tied to the price of finance is now far, far smaller,”
Griffin says.
As a result, Citadel’s CEO insists that his firm
would be in a very different position if another
2008-style liquidity crisis erupted. “Portfolio manag-
ers know where risk lies,” he explains. “P&L attributes
are like radar in a plane in a fog-filled night. In a
downdraft [portfolio managers] know where they are
and can get where they need to be.”
After receiving a B in last year’s ranking, Magnetar,
founded by Citadel alumnus Alec Lito­witz, returns to
the near-top of the rankings this year — despite what
one manager calls headline risk for its controversial
role during the mortgage crisis, when regulators in-
vestigated its mortgage-trading activities. However,
most investors, as well as regulators, have moved
beyond the issue. The firm earns an A in all but one
category, Alignment of Interests, where it receives a B.
Magnetar says generating consistent alpha across
a variety of market conditions is the most important
objective for the firm as it tries to achieve what it calls
idiosyncratic returns. It also aims to build a strong
risk management team; at the same time, it tries to
match the liquidity requirements of each of its funds
with their underlying assets, as part of alpha genera-
tion. Last, the firm emphasizes the need for a strong infrastruc- some funds in 2008, Two Sigma suffered substantial redemptions
ture to support all that. the following year.
“To be a robust firm, you need to build out a well-structured Former D.E. Shaw & Co. colleagues John Overdeck and Da-
investment platform and infrastructure and engage with inves- vid Siegel, who founded Two Sigma in 2001, began to seriously
tors,” Magnetar co-founder and president Ross Laser says in an focus not only on serving clients better but on diversifying the
e-mail. “From day one, it has been in our core DNA to build busi- firm’s mix of investors. It looked to attract more institutional
nesses, not trades.” investors, such as pension funds, endowments and sovereign
Perry Capital rounds out the top five. This year the firm re- wealth funds, which typically have longer investment horizons
ceived an A in six of eight categories, including Investor Rela- than high-net-worth investors. Two Sigma began working hard
tions, where it topped all managers. Richard Perry, a former risk to reach out to its investors, spending more on investor relations,
arbitrageur at Goldman, Sachs & Co., has transformed his firm infrastructure and risk management. These days the firm hosts
from one betting on merger deals to one that is more of a special- a client conference each year, attended by dozens of its more
situations maven. He also has slowly emerged from the shadows than 700 employees.
— speaking, for example, at the Delivering Alpha conference co- It took a while, but investors have rewarded Two Sigma’s effort.
hosted by Institutional Investor and CNBC. The firm jumps 12 spots in the Hedge Fund Report Card overall
“He has built a good firm,” says one admiring investor. Al- ranking, to No. 14, just making the A grade cutoff. The firm also
though this client is concerned that Perry sometimes winds up in grabs the top spots for Alpha Generation and Infrastructure and
the society pages, given his firm’s investment returns most inves- is tied for No. 3 for Risk Management. In last year’s survey Two
tors don’t seem bothered. The Perry Partners International fund Sigma received a C overall, as well as an F for both Alignment of
lost more than 3 percent last year but posted double-digit gains in Interests and Independent Oversight and a D for Transparency.
each of the previous two years. Four firms — BlueCrest Capital Management, Cevian Capital,
TCI, Citadel and Magnetar aren’t the only prominent hedge Convexity Capital Management and Mason Capital Manage-
fund firms to learn serious lessons from the financial crisis. Be- ment — receive an F overall and also take the lowest grades in
fore the global meltdown Two Sigma also seemed to take its in- many individual categories.
vestors for granted. All the firm provided to investors were its Mason Capital, a New York–based activist hedge fund firm
performance results, with no additional detail on portfolio con- founded in 2000 by former KS Capital Partners portfolio man-
struction or positions. So despite being up as much as 8 percent in ager Kenneth Garschina and ex–Oppenheimer & Co. arbitrageur
Michael Martino, scores an F in six of the eight individual cate- tematica Investments, which has more than $10 billion under
gories. Late last year the Rhode Island State Investment Commis- management, according to a regulatory filing. It is led by Leda
sion, which manages a $7 billion public pension fund, confirmed Braga, BlueCrest’s former head of systematic trading.
it was pulling its $61.8 million investment in Mason, according to London-based Cevian Capital gets an F in two categories,
a report in the Providence Journal. The newspaper noted that the Liquidity Terms and Risk Management. Cevian’s assets surged
value of Rhode Island’s Mason investment rose by an annual av- nearly 45 percent last year, to $13.3 billion, making the activ-
erage of just 1.02 percent. “Over the three years the SIC has been ist firm the tenth-largest hedge fund in Europe. It was founded
invested, the fund has exhibited less return for the risk taken than in 2002 by former Custos alumni Christer Gardell, who served
expected given its prior track record,” spokeswoman Ashley Gin- as chief executive at the Swedish investment bank from 1996 to
gerella-O’Shea said in a statement.
Boston-based Convexity Capital, a secretive hedge fund firm
founded by former Harvard Management Co. CEO Jack Meyer, “I think performance is critically
David Mittelman and Maurice Samuels in July 2005, receives an important. But I will pass on
F in four individual categories. The firm, which uses complex
relative-­value and fixed-income-oriented strategies to try to beat a top-decile fund for a fund with
a targeted benchmark, has been struggling for several years, with more-flexible and better terms
the founders telling clients it fares best during periods of high
volatility. In mid-2013, Convexity’s management team notified and more transparency.”
investors that it would not take any additional money until its Judith Posnikoff, Pacific Alternative Asset Management Co.
performance improved.
London-based BlueCrest Capital gets an F in six individual cat- 2001, and Lars Förberg, who was CIO there from 1998 to 2001.
egories. Founded in 2000 by former J.P. Morgan derivatives trader Two years ago Cevian earned two A grades, ranking third in In-
Michael Platt and William Reeves — the latter subsequently re- dependent Oversight and seventh in Alignment of Interests, al-
tired — it ranked as the fifth-largest hedge fund firm in the world at though it received an overall grade of C. Last year the firm did not
the beginning of 2014, with $32.6 billion, although that was down receive enough votes to qualify for the ranking.
from $35.3 billion the previous year. In 2013 the firm was hurt in Each year investors rank the eight attributes on which they
part by its systematic BlueTrend fund, which lost 11.4 percent in are asked to vote. Once again voters rate Alpha Generation the
what was a tough year for many computer-driven hedge funds. most important factor when selecting a hedge fund. But manag-
However, like others of its ilk, the BlueTrend fund rebounded ers define alpha differently. For example, Larry Robbins’s New
in 2014, returning 12.7 percent. At the end of last year, BlueCrest York–based Glenview Capital, which finishes fifth in this catego-
spun off its computer-driven hedge funds into a new firm, Sys- ry, in a tie with Silver Point, thinks of alpha generation in terms

ALPHA GENERATION RISK MANAGEMENT

RANK* FIRM (LOCATION) SCORE GRADE RANK* FIRM (LOCATION) SCORE GRADE

TOP 5 TOP 5

1 Two Sigma (New York, NY) 9.50 A 1 Millennium Mgmt (New York, NY) 9.36 A

2 Citadel (Chicago, IL) 9.30 A 2 Elliott Mgmt Corp. (New York, NY) 9.03 A

3 Adage Capital Mgmt (Boston, MA) 9.17 A 3 Egerton Capital (London, U.K.)** 8.86 A
Two Sigma (New York, NY)**
4 Viking Global Investors (Greenwich, CT) 9.05 A
5 Citadel (Chicago, IL) 8.84 A
5 Glenview Capital Mgmt (New York, NY)** 9.00 A
Silver Point Capital (Greenwich, CT)**
BOTTOM 5

BOTTOM 5 54 Avenue Capital Group (New York, NY)** 6.43 D

53 Avenue Capital Group (New York, NY)** 5.50 D Discovery Capital Mgmt (South Norwalk, CT)**
Caxton Associates (New York, NY)**
Maverick Capital (Dallas, TX)** 56 Mason Capital Mgmt (New York, NY) 5.71 F

56 Mason Capital Mgmt (New York, NY) 5.43 F 57 Paulson & Co. (New York, NY) 5.67 F

57 BlueCrest Capital Mgmt (London, U.K.) 4.80 F 58 Cevian Capital (London, U.K.) 5.40 F

58 Convexity Capital Mgmt (Boston, MA) 3.83 F

* The full list is available at institutionalinvestorsalpha.com **Actual tie

* The full list is available at institutionalinvestorsalpha.com **Actual tie

COVER STORY

of its ability to meet a yearly absolute-return target — in its case, On the other hand, TCI received a D — its only poor grade in
15 percent. any of the categories — for Risk Management. Perhaps this re-
However, investors and allocators don’t just want to see statis- flects the firm’s penchant for running a very concentrated port-
tics. They want managers to articulate how they generate alpha. folio, which now holds just ten to 12 meaningful stock positions.
“I want to hear a clear philosophy for how they make their mon- It is not uncommon for Hohn to take huge stakes in one com-
ey,” says Francis Frecentese, director of hedge funds at Bessemer pany, such as when he devoted 18 percent of his assets to Airbus
Trust, a New York–based wealth management firm. “I want to hear at the beginning of 2013. The stock wound up surging 92 percent
a clear mission statement. I want it thought out what they do.” that year. “We take risk and don’t hedge it away,” Hohn declares.
Risk Management is the second most important issue for in- “We don’t hide it, don’t apologize for it, and we understand it is
vestors. And if there is one person who’s had to learn from risk not the taste for everybody.”
management mistakes, it is Citadel’s Griffin. However, the firm’s John Paulson’s New York–based Paulson & Co. is one of three
investors seem to share Griffin’s belief that Citadel has complete- firms that get an F in Risk Management. This may reflect the fact
ly revamped its risk management profile: The firm receives an A that the firm suffered steep losses in most of its funds in 2014 — its
in this category, ranking fifth. second lousy year since it posted triple-digit gains in 2007.
Israel (Izzy) Englander’s Millennium takes the top spot in Risk One prominent hedge fund investor says that before Paulson’s
Management. “Millennium has a fundamentally tried-and-true seminal gains in 2007, which cemented the manager as a billionaire,
risk process, which allows them to bring in many people,” says his firm was much more risk-conscious. “Now it is about getting the
one hedge fund investor. The multistrategy firm is known for its option right,” the investor says. “He’s looking for a big hit. Some peo-
150 individual trading teams. ple feel managers don’t take enough risk. But they must size it right.”
“All I care about is how much risk is utilized and the return Alignment of Interests, the third most important attribute, is
you are getting for it,” says Charles Krusen, founder and CEO of a tricky issue. Most investors say they want to see the bulk of the
Krusen Capital Management, a New York registered investment net worth of the managers and their top people invested in the
adviser that advises clients on alternative investments, including fund. Glenview’s Robbins has 100 percent of his investable liquid
hedge funds and private equity. net worth in his funds, and 22 percent of the firm’s capital is inter-
Apparently, so does Paul Singer, founder of New York–based El- nal money. Robbins even wants his employees to share this align-
liott Management Corp.: He is said to regularly tell employees that ment of interests, so he pays all of them a base salary, as well as
the firm’s objective is to not lose money. Elliott consistently tries a discretionary bonus and profit-sharing units, which represent
to measure how much it can lose on a given investment. “We try compensation directly tied to the net returns of the funds. “We
to hedge or eliminate risk we can’t control,” says chief marketing like to say we are partners looking for co-partners,” says Elizabeth
officer Jaime Hobbeheydar. Elliott is second in Risk Management. Perkins, a partner and the firm’s investor relations chief. Glen-

ALIGNMENT OF INTERESTS TRANSPARENCY

RANK* FIRM (LOCATION) SCORE GRADE RANK* FIRM (LOCATION) SCORE GRADE

TOP 5 TOP 5

1 The Children’s Investment Fund Mgmt U.K. 9.36 A 1 The Children's Investment Fund Mgmt U.K. 9.07 A
(London, U.K.) (London, U.K.)

2 Glenview Capital Mgmt (New York, NY)** 9.00 A 2 Glenview Capital Mgmt (New York, NY)** 8.86 A
Taconic Capital Advisors (New York, NY)** Egerton Capital (London, U.K.)**

4 Highfields Capital Mgmt (Boston, MA) 8.89 A 4 ValueAct Capital Partners 8.83 A
(San Francisco, CA)
5 Pennant Capital Mgmt (Summit, NJ) 8.88 A
5 Perry Capital (New York, NY) 8.50 A
BOTTOM 5
BOTTOM 5
53 Convexity Capital Mgmt (Boston, MA)** 6.33 D
Pacific Investment Mgmt Co. 54 Caxton Associates (New York, NY) 5.88 D
(Newport Beach, CA)**
55 Greenlight Capital (New York, NY) 5.80 F
55 Brevan Howard Asset Mgmt (London, U.K.) 6.31 F
56 Mason Capital Mgmt (New York, NY) 5.43 F
56 Fortress Investment Group (New York, NY) 6.23 F
57 Convexity Capital Mgmt (Boston, MA) 5.33 F
57 Discovery Capital Mgmt (South Norwalk, CT) 6.14 F
58 BlueCrest Capital Mgmt (London, U.K.) 4.10 F
58 BlueCrest Capital Mgmt (London, U.K.) 3.90 F
* The full list is available at institutionalinvestorsalpha.com **Actual tie
* The full list is available at institutionalinvestorsalpha.com **Actual tie
INFRASTRUCTURE INDEPENDENT OVERSIGHT

RANK* FIRM (LOCATION) SCORE GRADE RANK* FIRM (LOCATION) SCORE GRADE

TOP 5 TOP 5

1 Two Sigma (New York, NY) 9.57 A 1 Fir Tree Partners (New York, NY) 8.80 A

2 Citadel (Chicago, IL) 9.51 A 2 Silver Point Capital (Greenwich, CT) 8.73 A

3 Bridgewater Associates (Westport, CT) 9.21 A 3 Millennium Mgmt (New York, NY) 8.71 A

4 Egerton Capital (London, U.K.) 9.14 A 4 Citadel (Chicago, IL) 8.68 A

5 Millennium Mgmt (New York, NY) 9.12 A 5 Perry Capital (New York, NY) 8.50 A

BOTTOM 5 BOTTOM 5

54 Avenue Capital Group (New York, NY) 7.14 D 54 Pacific Investment Mgmt Co. 6.67 D
(Newport Beach, CA)
55 Greenlight Capital (New York, NY) 7.00 F
55 Brevan Howard Asset Mgmt (London, U.K.) 6.53 F
56 Paulson & Co. (New York, NY) 6.83 F
56 Greenlight Capital (New York, NY) 6.29 F
57 BlueCrest Capital Mgmt (London, U.K.) 6.80 F
57 Mason Capital Mgmt (New York, NY) 5.71 F
58 Mason Capital Mgmt (New York, NY) 6.29 F
58 BlueCrest Capital Mgmt (London, U.K.) 5.50 F
*The full list is available at institutionalinvestorsalpha.com
*The full list is available at institutionalinvestorsalpha.com

view is tied with New York–based Taconic Capital Advisors for way.” Some managers — and investors — concede that if a man-
second place in this category, trailing only TCI. ager did provide daily disclosures of individual trades, the inves-
Transparency is the fourth most important factor among in- tor would not know what to do with all of this information.
vestors. PAAMCO’s Posnikoff says her firm always demands A top-rated firm must have top-notch infrastructure — at least,
position-level data; that way she knows precisely how her overall that seems to be what investors are saying given that most of the
portfolio will be affected when she adds a new manager. firms that receive an A overall in the Hedge Fund Report Card also get
These days managers not only provide quarterly reports and dis- an A in the Infrastructure category. “Infrastructure is very important,”
cussions of their portfolio holdings, they send out monthly spread- stresses Mike Hennessy, co-founder of Chapel Hill, North Carolina–
sheets detailing overall exposures, in some cases by geography and based investment adviser Morgan Creek Capital Management.
industry. Some hold quarterly conference calls with top investors. Things can go wrong, so you want to make sure a firm has an “impec-
This is good enough for many investors, including Jonathan cable back and front office” with a separation of duties, he says.
Hook, CIO of the Harry and Jeanette Weinberg Foundation, an In fact, investors want to be able to gauge the stability, and in-
Owings Mills, Maryland–based nonprofit that provides grants to deed the survivability, of the overall firm. PAAMCO’s Posnikoff,
organizations that help the needy. “We want to know where the for example, looks at the asset-raising experience of the hedge
general exposures are,” explains Hook, who joined the $2 billion fund firm, and its expenses, then creates a mock business plan
foundation last April after serving as CIO of Ohio State Univer- to determine its break-even point. She wants to know whether a
sity. “Daily position exposure is too much information for our manager needs to “hit the ball out of the park” to generate perfor-
staff.” Rather, Hook wants what he calls factor analysis: know- mance fees to support the overall firm’s expense base.
ing where the biggest risks are. Though not at the top of the list of important attributes, Li-
For their part, many managers are reluctant to provide too much quidity Terms are still critical, as well as a tricky issue. Yet many
managers, especially shareholder activists and those running

“The portion of our portfolio less-liquid portfolios, have instituted two- and three-year lock-
ups. Several funds even have five-year lock-ups.
that is tied to the price of finance Hennessy, however, says “liquidity is on us.” He emphasizes

is now far, far smaller.” that investors such as his firm should make sure the lock-up and
redemption terms match the overall strategy of the fund. For ex-
Kenneth Griffin, Citadel ample, many investors understand that certain strategies, such as
credit, need a longer lock-up, but they doubt that many long-short
detail, especially if they are invested in assets other than highly equity strategies need more than the standard one-year lock-up
liquid equities. “As we move to more-liquid assets, we are able to and 30-day or quarterly notification for redemptions. Indeed,
provide more transparency,” says Citadel’s Griffin. But, he adds, if Citadel, which receives a C in this category, reduced its lock-up
a manager provides too much detail about its individual positions period as its portfolio became more liquid.
and stumbles, “other trading firms can take advantage of you.” After 2008, Glenview — which this year receives a B for Liquid-
Elliott keeps investors apprised of its major positions and the ity Terms— cut its two-year lock-up to one year and maintained its
types of risks it is taking in its lengthy quarterly letters. The firm quarterly liquidity. In 2013 it went to a soft one-year lock-up, mean-
also provides monthly exposure reports. But Hobbeheydar says: ing there is a penalty if an investor redeems in the first year.
“We don’t make our entire portfolio available on our website. Although several investors question why an activist needs a
Even big positions are occasionally referred to in a descriptive multiyear lock-up, investors like the Weinberg Foundation’s Hook
COVER STORY

are willing to talk: “If you need something out of the ordinary, ex-
plain it to us.” In general, he says he has no hard-and-fast rule in INVESTOR RELATIONSS
this area, but he stresses that he wants to know he has the same
terms and fees as everyone else in the fund. “I’d rather be in a fund RANK* FIRM (LOCATION) SCORE GRADE
where everyone is treated the same,” he adds.
Interestingly, three of the four firms that rank at the top in this TOP 5
category are based in London: Egerton, Winton Capital Manage- 1 Perry Capital (New York, NY) 9.00 A
ment and Marshall Wace. Elliott is the only firm with an overall
A grade that scores poorly in this category. “We probably have less 2 Silver Point Capital (Greenwich, CT) 8.83 A

liquidity than other funds,” concedes Hobbeheydar. “We have 3 Egerton Capital (London, U.K.) 8.71 A
longer lock-ups and restrictions on redemptions.” But he points
4 Citadel (Chicago, IL) 8.68 A
out that Elliott’s terms are aligned with its liquidity profile. For
example, the fund has an initial two-year lock-up, then it has slid- 5 Fir Tree Partners (New York, NY) 8.60 A
ing fees depending upon the liquidity the investor chooses.
BOTTOM 5

54 Cevian Capital (London, U.K.) 6.20 D

“We take risk and don’t hedge it 55 Mason Capital Mgmt (New York, NY) 6.14 F
away.We don’t hide it, don’t apologize 56 BlueCrest Capital Mgmt (London, U.K.) 5.80 F
for it, and we understand it is 57 Lone Pine Capital (Greenwich, CT) 5.71 F
not the taste for everybody.” 58 Convexity Capital Mgmt (Boston, MA) 4.83 F
Christopher Hohn, The Children’s Investment Fund Management U.K.
*The full list is available at institutionalinvestorsalpha.com

Independent Oversight is ranked next to last among the eight egories, in some ways its importance is underestimated by many
attributes, and investors interviewed about the survey appeared hedge fund firms. Ideally, investors want regular access to the
to have few concerns in this area. Perhaps it is assumed that all of portfolio manager, but this is not practical. Therefore it is up to
these firms’ funds are audited by a major accounting firm or that the IR department not only to tell the investor when the portfolio
they have quality boards of directors. In any case, the firm that manager is unavailable but to provide the information the inves-
ranks the highest is New York–based Fir Tree Partners, founded tor is seeking — which could make or break the relationship.
by Jeffrey Tannenbaum; it also receives an A overall. “We have had situations where the IR person was not pleasant
Although Investor Relations ranks last among the eight cat- and we did not invest,” says Weinberg’s Hook. “But that is rare. IR
can make other things easier, such as the due diligence process.”
Citadel’s Griffin personally meets his 20 largest investors each
LIQUIDITY TERMS year, but he insists he is available to all others “at any time.” If
there is a significant news story involving the firm, he adds, “our
RANK* FIRM (LOCATION) SCORE GRADE IR team reaches out to investors to answer questions and give
context around a story.”
TOP 5
The reality is, the more time that managers spend speaking
1 Egerton Capital (London, U.K.) 9.29 A to investors, the less time they have to perform the investment
tasks for which they are being paid big fees. Although Morgan
2 Winton Capital Mgmt (London, U.K.) 8.85 A
Creek’s Hennessy says he would like direct access to all manag-
3 Perry Capital (New York, NY) 8.25 A ers in his portfolio, he concedes they can’t do it for all of the lim-
4 Marshall Wace (London, U.K.) 8.07 A
ited partners. But he notes, “If they have top-notch IR people, it
could be okay.” a
5 Canyon Capital Advisors (Los Angeles, CA) 8.05 A

BOTTOM 5 HOW WE COMPILED THE RANKINGS

Investors were asked to score the funds they’re invested in on eight
54 ValueAct Capital Partners 5.67 D attributes: Alignment of Interests, Alpha Generation, Independent
(San Francisco, CA) Oversight, Infrastructure, Investor Relations, Liquidity Terms, Risk
Management and Transparency. Investors also rated each of the
55 Eton Park Capital Mgmt (New York, NY) 5.58 F attributes in terms of importance. The scores in the attribute categories
are based on the average of the ratings for each hedge fund firm by its
56 Greenlight Capital (New York, NY) 5.00 F investors. For the overall ranking we started by calculating weighted
scores for the attribute categories for each firm, using the importance
57 Convexity Capital Mgmt (Boston, MA) 4.83 F ratings for those attributes. The attribute-weighted scores were added
up for each firm, then divided by the total possible maximum score to
58 Cevian Capital (London, U.K.) 4.40 F come up with the overall weighted scores. A grading curve was applied
to the results to arrive at the relevant letter grades.
*The full list is available at institutionalinvestorsalpha.com

Reprinted from the Winter 2015 issue of alpha Magazine. Copyright 2015 by alpha Magazine. All rights reserved.
For more information call (212) 224-3675.