Amid Bank of America Corp.'s high-profile integration of U.S. Trust Corp. this year, a quiet restructuring is taking place within the Charlotte company in which alternative investments are taking on a leading role.
The goal, according to David Bailin, the head of alternative investments in the company's global wealth and investment management business, is to bring to small institutions and high-net-worth clients the same options generally offered only to large institutional investors.
"If you ask me if there's any one thing we can do to change the world, it's to say to a smaller investor that you should come to Bank of America, because we're going to get you the right asset allocation and the best possible managers, just like the large foundations and endowments have," Mr. Bailin said.
"In the individual space, there is very limited exposure to alternatives," he said. "But if they would like to get a slice of Major Private Equity Fund A or Major Hedge Fund B, or access those funds through a fund of funds, we should be able to bring that to the client."
As bellwether institutional investors like Harvard University and Yale University boast annual returns in the 20% range, in large part because of hefty allocations to hedge funds and other alternative investments, "there's a whole cascade of foundations and endowments that are looking at those returns, saying, 'If Harvard can do it, our $100 million fund can do it, too,' " Mr. Bailin said. "So if we can do that for the individual, and for the midmarket institutions, that's huge."
Huge would also be an accurate description for the high-net-worth client base of both Bank of America and U.S. Trust — the newly combined U.S. Trust, Bank of America Private Wealth Management had $220 billion of assets under management as of July 1. Before B of A bought it this year, U.S. Trust Corp., where Mr. Bailin was the head of alternatives, boasted relationships with 13,600 wealthy individuals and families.
B of A's alternative investments unit, which Mr. Bailin took over in May, is one of five business lines within the company's global wealth and investment management operation, headed up by Keith Banks. The others are the private bank, premier banking and investments, the asset management arm Columbia Management, and retirement services.
The alternative investment business, according to Mr. Bailin, is critical to the growth of the global wealth and investment management operations.
"The great thing about the merger was that Bank of America said, 'Regardless of whether it's Columbia or U.S. Trust or premier banking or retirement, in order to be a leader, you have to have a deep alternative investment group with enough research breadth and institutional support to provide solutions for the broader business,' " he said.
The global wealth operations were a bright spot in a tough third quarter for which B of A posted a much-publicized $1.5 billion of trading losses, prompting 3,000 job cuts last month, primarily in the investment banking unit. Net revenue at the global wealth operations increased 24% from a year earlier, and net income increased 17%, while assets under management rose to $710 billion.
The alternative investment business has also grown dramatically. It currently manages about $7 billion of client assets, in part through funds of hedge funds. The operation is split into three functions — hedge fund research, private equity research, and the recently formed advisory group — and is agnostic about whether clients invest in B of A-sponsored products or external offerings.
"An interesting feature of our new structure is that our GWIM asset allocation in alternatives is now fed into the asset allocation for U.S. Trust and is also fed into the asset allocation for our institutional business," Mr. Bailin said. His unit's "best thinking is being baked into the best thinking for all of our clients."
Supporting that effort are two newly dedicated distribution channels: one geared toward U.S. Trust clients and headed by Suzanne Sack, and one for institutional clients headed by Kristina McDonough.
According to Mr. Bailin, part of the reason for the new structure is that U.S. Trust is "not only our biggest 'client', but our most demanding, given its range of customers and breadth of services within that business, from family offices to trusts and estate planning."
It is, however, within the institutional channel in particular that Mr. Bailin is looking to extend the alternative investment unit's reach to a broader group of the bank's clients.
"Bank of America already services a thousand middle-market institutions, through a group called Mid-Market Institutional," he said. "MMI gives those clients exposure to our asset management capabilities but has not yet given them exposure to our AI capabilities. Well, that's changing now. We're now saying to these institutions, 'Here's our traditional thinking. Here's our alternative thinking. Here's our best thinking on the client's needs.' "
B of A is far from alone among large banking companies in expanding the role of hedge funds and funds of funds within its operations in recent years. JPMorgan Chase & Co. has had notable success following its acquisition of the New York single-manager Highbridge Capital Management LLC. It has increased hedge fund assets to more than $33 billion, making it the world's largest hedge fund provider, according to Institutional Investor. Legg Mason Inc.'s 2005 purchase of Permal Group has resulted in a fund of funds business with a global scope and close to $30 billion of assets.
On a smaller scale, KeyCorp's Victory Capital Management bought Austin Capital Management Ltd. early last year, and since then assets in the Texas fund of funds increased by two-thirds, to about $1.5 billion, as a result of continuing strong returns for the niche provider.
Citigroup Inc. garnered a great deal of attention last month when it restructured its struggling alternative investments unit, shutting down its in-house hedge fund platform, Tribeca Global Investments, and elevating Vikram Pandit to head up banking, markets, and alternative investments. Mr. Pandit joined Citi after the April acquisition of his hedge fund, Old Lane Partners LP.
But B of A is a different animal — not only is it targeting the high-net-worth market through U.S. Trust, as opposed to the institutional focus of most deals in the sector, but it also boasts a long track record in alternative investments, Mr. Bailin said.
"We're going through none of the pain of a firm that, say, has not been in AI and buys an AI shop," he said. "There, they have to do a cultural realignment. They have to look at their asset allocation. That's not the case with us. B of A was a leader in alternatives before I came; they're going to have AI after I die. The bank has been in the venture capital business for 50 years, the private-equity business for 40 years, and the real estate business for forever. So the difference here is we're not going through an organizational transformation in terms of the acceptance of AI. What we are doing, though, is we're making great opportunities available as investments for all clients, regardless of where they reside in the bank."
The ultimate goal, of course, is better returns for clients, and in a tumultuous time for the markets, alternative investments can play a pivotal role in that quest, he said.
"We're recommending an allocation of 16% to 27% to AI for many of our qualified clients — that's private equity, real estate, real assets, and hedge funds," Mr. Bailin said. "The presumption of some people is that it's too late to go into AI. But is Harvard reducing its allocation? The idea that, if someone made money in something yesterday, I can't make money in it tomorrow is simply incorrect."
