Private Banking: Old-line Firm Starts Offering Hedge Funds

Bessemer Trust Corp., a bastion of old-school investment management, is offering hedge funds to attract new clients.The New York-based bank and LJH Global Investment LLC this week announced a joint venture that will invest in hedge fund portfolios.

Dubbed Fifth Avenue Alternative Investments, the venture will be directed by LJH managing director James R. Hedges 4th, a well-known adviser who made his mark evaluating, selecting, and monitoring fund managers for private and institutional investors.

"As part of our ongoing effort to manage our clients' assets in the most sophisticated and prudent manner, we concluded that a hedge funds of funds strategy is appropriate in addition to our current investment disciplines," Donald J. Herrema, chief operating officer of Bessemer, said in a release.

Hedge funds are private partnerships that use a variety of investment styles-including shorting equities, investing in distressed securities, and arbitraging mortgage-backed securities-to harness big returns.

Although they can be quite lucrative for investors, hedge funds often are highly volatile and usually are recommended only to longtime investors who can allocate less than 10% of their investable assets to alternative investments.

Limited partnerships with hedged investment styles may number as high as 1,500. But many come and go, giving the field a reputation for uncertainty. Mr. Hedges and other consultants cull the track records of hedge funds into data bases to help investors choose the best ones.

"The fact that one of the old-line, blue-blood banks is validating the process by participating means alternative investments are here to stay," said a hedge fund consultant in New York who asked not to be named.

Bessemer Trust has $14.3 billion under management, primarily in large- and mid-cap stocks as well as fixed-income securities. Naples, Fla.-based LJH advises over $1 billion in private capital and $1.5 billion of institutional investments on allocations to hedge funds.

Fifth Avenue will be fully registered with the Securities and Exchange Commission and with the Commodity Futures Trading Commission. It will develop what will be known as the Fifth Avenue family of hedge funds of funds.

The arrangement will be exclusive, said Mr. Hedges, who added that the similar backgrounds of Bessemer and LJH-both firms manage the assets of families-provide a "wonderful synergy."

American banks had stayed away from the gunslinger image of hedge funds, though their European counterparts have begun to offer proprietary versions of the product.

But U.S. banks are increasingly aligning with hedge fund experts to offer their private clients access to the esoteric products. Chase Manhattan Corp. and smaller institutions such as Capital Bank, Miami, are developing hedge fund programs.

"It's a recognition that their clients, and particularly the clients they want-the new wealth-are attracted to nontraditional investments," said Michael P. Kostoff, managing director of Advisory Board, a private banking consulting firm in Washington, D.C.

But don't expect many banks to manage their own hedge funds, Mr. Kostoff said. He anticipates most banks will emulate the arrangement Bessemer has struck.

"When they look at this industry and the cowboy mentality inherent in large numbers of its smaller players, banks have avoided these funds," he said. "Now that the hedge fund industry has matured, the most aggressive banks are getting in."

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER