In the year that John Pileggi ran ING Funds, it grew from a fledgling unit of ING Group to one with 18 funds and $1.5 billion of assets under management.
In January, however, he left ING to run PlusFunds, a New York hedge fund management firm.
All the best minds are leaving mutual fund management and going into the hedge fund business, he said. Theres heavy consolidation in the mutual fund world, and bureaucracies run the large pools of money. Why not run your own shop?
Mr. Pileggi is not alone in his opinion. More and more executives and managers at large fund companies are moving to hedge companies in a quest for independence and remuneration.
Investment professionals who have managed money successfully want to be able to align their financial rewards with performance, said Bill Helms, an executive vice president with LJH Global Investments, an alternative investment consulting firm in Naples, Fla.
Hedge funds had $408 billion of assets under management at the end of last year, according to research by Deutsche Bank. They are similar to mutual funds in that both create pools of stocks in which individuals and institutions can invest.
Unlike mutual funds, hedge funds can sell stocks short and can borrow funds to boost returns. Also, since the funds are not regulated by the Securities and Exchange Commission, they are not required to disclose the trades they make, the positions they hold, or the losses they suffer.
In the past 10 years the number of hedge funds has grown from 600 to 6,000, and strong money managers have been leaving mutual fund companies for hedge funds to gain an independence no longer available at large mutual fund companies, Mr. Helms said.
If an investment manager is good and makes good returns, everyone else starts matching that managers every move, he said. Its hard to generate the same returns under those circumstances. At a hedge fund, the fund is smaller, and the manager can go back to making nimble moves.
Mr. Helms cited Jeffrey N. Vinik, who took five other managers with him when he left Fidelitys Magellan fund in June 1996 to start his own New York-based hedge fund company, Vinik Partners.
By the time the funds were closed to new investors in December, Mr. Vinik had raised $4.2 billion. The funds generated a total return of 646%, and Mr. Vinik and his partners had a profit of $800 million.
Money managers are constantly trying to follow Mr. Viniks model, Mr. Helms said. Everyone wants to leave the mutual fund world to run their own show. There is more freedom and less pressure.
In addition to money managers, banks are also looking away from mutual funds and toward hedge funds. They are eyeing and buying independent firms instead of creating proprietary mutual funds.
In August, Bank of New York entered the hedge fund market by purchasing Ivy Asset Management, a Garden City, N.Y., alternative investment products firm that manages 14 proprietary hedge funds with $3.4 billion of assets.
Larry Simon, Ivys president and chief executive officer, said quality young talent is being drawn to the hedge fund world not just from mutual fund companies, but also from law firms and accounting groups.
Money is the reason people want to become hedge fund managers, he said.
At a typical mutual fund company, the fund has a fixed fee, which stays the same whether the fund manager is having a good year or a bad year, Mr. Simon said. The manager is rewarded with a bonus if the year is good. Meanwhile, with a hedge fund, if you attract $100 million in business, you are entitled to 20% of that. You are the boss. You direct the strategy, and you dont have to deal with a board.
Another bank, State Street Global Alliance LLC, a unit of State Street Corp., announced Wednesday that it will start an alternative investment advisory unit for institutional and private clients, SSARIS Advisors LLC. The company has acquired the assets of RXR Group Inc., a quantitative asset management company with $335 million of assets under management in proprietary programs.
The new units offerings will include hedge funds.
Ironically, PlusFunds has developed software that would reduce hedge funds ability to move without detection. The software magnifies what Mr. Pileggi calls the transparency of the funds the availability of information about the funds holdings and price to consumers by using the Internet to offer real-time data on hedge fund assets and risk analysis.
Hedge funds that behave more like mutual funds in offering up-to-the-minute information will be more attractive to investors and will persuade more banks to offer hedge funds, Mr. Pileggi said.
Though hedge fund assets under management last year grew 26% from the year before, according to research by Deutsche Bank, at the end of February less than 1% of the assets under management at banks were in hedge funds.
Shoaib Khan, a vice president of LJH Global Investments, said he has pending relationships with several commercial banks looking to establish hedge fund units. Banks know this is where the talent wants to be, he said.
Executive recruiters, too, have seen a surge of interest from money managers and financial executives trying to develop and staff newly-launched hedge fund units.
We are seeing a groundswell of interest among people hiring and people looking to be hired, said Jane Marcus, an executive vice president with Heidrick & Struggles, a New York financial executive search firm. This is where talent wants to go.
Josh Weinreich, global head of alternative investments for the New York unit of Deutsche Bank AG, said he is confident more money is going to flow into hedge funds, and more banks are going to offer them, but not because of increased transparency.
For people and institutions uncomfortable with hedge funds, you can tell them all you want. It is not going to increase their comfort level, he said.