Q&A with Bruce Lipnick: The State of the Hedge Fund Industry

Feb 11 2010 | 3:54am ET

Bruce Lipnick, chief executive officer of Asset Alliance, a global alternative investment firm specializing in acquiring, seeding and growing hedge funds, talks to FINalternatives about the state of the hedge fund industry today and tells us how managers need to adapt in order to succeed tomorrow.

How would you describe the state of the hedge fund industry today?

I’d say it is in a state of repair and re-growth. The industry experienced a strong run from the late 1990s through the 2000s, until the most recent 2008 market downturn. But going forward hedge funds are positioned to be on better footing and attract greater institutional capital. 

What led to this state of repair?

For a while, it seemed like everybody and his uncle wanted to be and could be in the hedge fund business. All you needed was a desk, a Bloomberg machine and a bit of capital and then you were a hedge fund manager. In truth, the majority of these “hedge funds” weren’t truly hedge funds – they were long-only funds using leverage and illiquid securities that got hit during the downturn.

But at the same time, institutional investors aren’t dissuaded from investing in hedge funds. The state of Ohio Treasurer, for instance, recently conducted a study that found that small, emerging manager hedge funds produced superior investment returns for their plans. New York State is actually pulling back on private equity, but increasing its allocations to newly launched hedge funds. There is still a demand for these strategies, but a more institutional-based process for implementing them is needed.

What is Asset Alliance’s role in the industry?

We were one of the pioneers in acquiring interests in and seeding hedge funds, beginning in 1996. Our core business is to acquire, seed, market and help grow the hedge fund companies we invest in. We place strategic capital with select emerging hedge fund managers.

Today, we again see a great opportunity to help re-seed hedge funds, including those that made money in 2008 and 2009, but that also need help with distribution and strategic capital. There a number of hedge funds with liquid investments, good infrastructure and sound track records that are looking to raise capital yet need to overcome certain growing pains before institutions will be ready to invest in them.

How did Asset Alliance get involved in seeding hedge funds?

In 1986, the president from United Asset Management who had started purchasing interests in long-only managers came to see me. At the time, we were managing about $300 million in assets. I asked him, ‘why not do this in the hedge fund world?’ He wanted to focus on traditional managers, because that was his background and what he knew. But I thought it could be great in the hedge fund realm.

In 1986, there were only a few hedge funds, but none willing to sell pieces of their business. Once the industry began to substantially expand in the 1990s, it was clear that the opportunity to buy managers became timely as small emerging managers had to either raise capital on their own, or partner with a platform that could help them do this. Most managers wanted to manage money, not worry about marketing themselves, and they needed longer term strategic capital for their funds.

We then moved to seeding new managers by providing capital start-up hedge funds, as well as helping with overhead and infrastructure capital to build their platforms.

How has the 2008 financial crisis affected capital raising in the industry?

During the boom years, many managers didn’t think they needed a strategic partner. After 2008, managers have had a difficult time taking their funds to the next level – in both size and capabilities. This next generation of hedge fund managers recognizes that they need a platform to help them with compliance, distribution, new product development and strategic capital. The 2008 downturn has accelerated this shift toward institutionalization and partnering.

At the same time, while 2008 was difficult, it was difficult for just about every traditional investment. Yes, the hedge fund industry was down about 18% but the broader markets were down 40-50%. In 2009, the hedge fund industry had one of its best years in a decade, once again proving the resiliency of the Hedge Fund industry.

How do you think the next generation of hedge fund managers will change the industry?

The next generation is more process-driven and institutionally-minded. This makes sense, because institutions are the bulk of the client base. Institutions want to know, how do you pick stocks? How deep is your management experience? What is your process for risk management? Do you have a qualified team? Hedge funds are shifting from that mom-and-pop setup, where a single trader has a desk and a Bloomberg terminal, to becoming a real business, and a sort of mini-institution in its own right.

Where do you see the hedge fund industry headed in the next five to 10 years?

One trend is that hedge funds will move more into the open-end mutual fund market to give retail investors access to these strategies. I think we’ll also see more “tracking funds,” or funds that mimic a basket of Hedge Funds.

The result is that the industry will be more mainstream, providing greater diversification within its client base. In turn, it will also need to discover more innovative strategies in order to translate hedge fund strategies into the retail world. And, it will become a more transparent industry, as investors seek to understand what is in their portfolios. But all in all the industry is here to stay.

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