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Saturday, 21 January 2017
Last updated 18 hours ago
Jun 6 2008 | 9:59am ET
AIG Investments last week announced a joint venture with Larch Lane Advisors, with the two alternatives shops teaming up to seed emerging hedge fund managers. Independently, the two firms have invested in emerging managers, but they decided to band together to take advantage of the international growth of the hedge fund business.
We spoke with Bob Discolo, head of the hedge fund strategies group at AIG, about the firm’s decision to go into the seeding business and where he sees the next wave of opportunities for hedge fund investors.
FINalternatives: What is the history of AIG’s hedge fund business?
Discolo: AIG has invested over $10 billion in hedge funds, half of it our own capital. We’ve invested in over 100 funds and have been doing so since 1982 through customized accounts and funds, but anything we invest in for our clients, we invest in for ourselves as well.
FINalternatives: Why set up a seeding platform now?
Discolo: We think it is a pretty interesting opportunity because capital is at a premium and managers are willing to cut deals now. I’ve been doing this for 18 years and this is one of the few times that I’ve seen where every hedge fund is opened and they‘re looking to raise capital to take advantage of the opportunities in the market.
We truly believe the hedge fund business will continue to expand. Last year was a mediocre year in most markets, and hedge funds did quite well by comparison. This year, they’ve protected capital during a rough first quarter. If you look at returns for the past few years, the only things that have beaten hedge funds are commodities and Treasuries. Big pension funds and sovereign wealth funds with big balance sheets are going to have to start spending their money somewhere.
We think hedge funds are going to have an explosion of assets, so instead of doing a $5 million investment, we’re doing a $100 million investment.
FINalternatives: Will the JV take a piece of the managers’ general partnership or a share in their revenues?
Discolo: With this vehicle, we’ll probably take a revenue share. We’ve been investing in emerging managers for a long time, but with much smaller amounts. We’re using them as a farm team: We give them some money, watch them grow to a certain size and put them in our main portfolio. We’ve done some arrangements such as revenue sharing and GP stakes in the past, but not too many.
FINalternatives: What sort of managers do you seek, and how does your dealflow look for the foreseeable future?
Discolo: Anyone appealing who we think can grow and manage more money, we’ll invest in. What we’re looking for are different managers from our main portfolio that can complement the existing managers. I have nothing against the mega hedge funds—we have those guys in parts of our portfolio—but we think people are going to start looking at someone who is not small but not mega, investing in mid-market bank loans, or something like that. I know the trend has been to bigger, bigger, bigger, but sometimes bigger isn’t better.
Our pipeline is gigantic. We did our first deal last month on a U.S. mid-market bank loan fund. I think we’re going to close four to eight deals within the next 12 months.
FINalternatives: Do you believe that smaller managers make better returns than their bigger counterparts?
Discolo: No. I think this is a talent pool and not an asset class. There are emerging managers that do really well and there are big managers that perform fantastically. We did some analysis on the managers in our portfolio and their returns and risks are very similar. So our feeling is quality does not depend on size in certain situations. Why not get different people with different skill sets in the portfolio? A combination of large and small strategies makes a better portfolio.
FINalternatives: Where do you see the growth occurring in the hedge fund space?
Discolo: This business is going to grow but in different ways. Historically, the big managers have been in New York and London, and I think the next generation of stars will be in places like Singapore, Hong Kong, Shanghai, China, and Mumbai, India. This is right up our alley because we have a global presence.
I got a call from someone saying that this JV was cutting edge for us. Well, back in 1982, we started investing in hedge funds and I can’t think of any other institutions that started at that time. There were a lot of high net-worths, but we were probably one of the first institutions investing in hedge funds and private equity. The business has changed completely because nine years ago we had a lot less managers and strategies. Now, it’s really expanded across the globe and that’s where the business is now.
by Hung Tran