Hedge fund managers have heard the message regarding the diversity and inclusivity composition of their employee force directly from their institutional investors, investment consultants said.

"There's a business case for managers because many institutional investors have adopted the concept that diverse teams lead to better decision making. A homogeneous team represents a source of risk — group think," said Tathata "Ta" Lohachitkul, partner and portfolio analyst, based in the San Francisco office of alternative investment consultant Albourne Partners Ltd.

"Many investors … have expressed the perspective that a diverse team leads to cognitive diversity, which leads to better investment outcomes," Ms. Lohachitkul added.

Global investment consultant Albourne Partners announced its revamped News & Initiatives page on www.albourne.com. 

Albourne prides itself on its non-discretionary business model which sets it apart from competitors, and its role as an advisor and advocate for better practices within the alternatives industry over the last 25 years. The webpage features press coverage of Albourne in recent years and information on the firm’s key initiatives.

“At launch, this page includes over 20 articles written on Albourne, including hot-off-the-press coverage from HFM on the importance of improving ESG data, as well as a recent piece from Pensions & Investments on the increasing rarity of pure-play non-discretionary consultants,” said Clare Cuming, Head of Communications at Albourne Partners. She added that, “The webpage hosts Albourne’s first public film, Women in Alternatives, which highlights several interviews with leading women in our industry and provides an update on Albourne’s Diversity & Inclusion initiatives.” 

Committed to improving the Alternatives Industry, some of Albourne’s key initiatives are:

• Investor Manifesto I & II: In October 2013, Albourne launched the Investor Manifesto, a 10-point plan, recommending areas for improvement in hedge fund reporting standards, disclosures to investors, documentation and governance. Subsequently, in October 2018, Albourne published Investor Manifesto II, which is a 50-point reference document of interesting ideas across all alternatives, spanning 10 general themes that Albourne plans to discuss with investors, industry bodies, investment managers and financial regulators.
• The Shape of Fees: Albourne has been leading efforts to promote fee transparency and encourage better-alignment of fee terms to achieve a more consistent and fair share of returns between investment managers and investors. Central to this initiative has been to encourage a dialogue between investors and investment managers on the “shape of fees”. One example is Albourne's development of the “1-or-30” fee structure, which we also refer to as “X-or-Y”. Albourne recognizes that one size does not fit all, and thus, advocates for a transparent range of economically-equivalent fee “shapes” to meet the wide and varied mandates of investors.
• Open Protocol: This is an industry-accepted, consistent reporting template for managers’ risk and exposure information, created to encourage transparency and to enable investors to aggregate exposure information at the portfolio level. Open Protocol is a template that standardizes how investment managers convey risk information. Albourne helped launch Open Protocol in August 2011 and is co-chair of its Working Group.

Will Bryant of Albourne reflects on beneficial changes that would help evolve ESG and give greater value to the field

Plenty has been written over the recent months and years regarding the increasing amounts of capital being allocated to Environmental, Social and Governance (ESG) investment strategies. This has come about on the back of increased investor focus due several different drivers, including a shift of capital to younger generations and increased public and media pressure.

Alongside this there have been several articles on the different approaches to ESG investing. These range from simple screens and tilting strategies, whether exclusionary or positive targeted methods, to integrated approaches where ESG factors are embedded within the investment process, using active engagement as an added tool to further enhance positive change. Thematic and impact investing are included in this spectrum, where measurement of the environmental and social goals is a key output.

These different approaches to the inclusion of ESG or ‘non-financial’ data into the investment process will vary based on the characteristics of the investment strategy or the portfolio manager’s belief in the efficacy of ESG integration. Whatever the approach, one thing that has become increasingly clear in conversations with investors and managers, is that the integration of ESG data in the investment space is here to stay. Investors are increasingly demanding ESG inclusion, asset managers are developing ways to integrate ESG into their processes, and corporates are beginning to grasp the potential long-term security valuation benefits of embedding ESG into their business.

Despite the demand for ESG, one key area is holding back further integration. The lack of standardized non-financial data provided by corporates is the main hurdle for many fund managers to be able to easily integrate ESG into their investment strategies; the proliferation of questionnaires with different approaches is also a growing burden for corporates.

Albourne sits at the intersection of investors and alternative asset managers. From this position we have seen the development of the trends for ever increasing ESG integration and the issues that both fund managers and investors face when focusing on ESG in their processes. Along with the rigorous Investment, Quantitative and Operational Due Diligence Albourne currently completes on alternative funds, Albourne conducts a review of their ESG capabilities. Albourne has integrated ESG into its operational due diligence of fund managers to complement its existing ESG questionnaire, and subsequent report, through which Albourne has been gathering and conveying a manager’s approach to ESG integration for over eight years.

To further widen ESG integration Albourne is looking to promote and support efforts to move towards a standardized approach to data production as part of Albourne Investor Manifesto II, launched in 2018.

Texas Employees Retirement System, Austin, rehired Albourne as hedge fund consultant,a webcast of the pension fund's board meeting Wednesday showed.

The $28.7 billion pension fund issued an RFP in March as part of the normal process of putting the services up for bid every few years. ERS' general investment consultant NEPC was the other finalist.

Texas ERS originally hired Albourne as its first hedge fund consultant in 2011.

Separately, the pension fund returned a net 5.3% for the year ended June 30, below its policy benchmark return of 6.1%. For the three, five and 10 years ended June 30, ERS returned an annualized net 9.2%, 6.2% and 8.9%, respectively, compared to their respective policy benchmark returns of 8.7%, 5.9% and 8.9%.

The ranks of pure-play alternative investment consulting firms are thinning as the consulting industry consolidates and firms add money management to their services, a trend that winnows investors' choices and opens up consultants to potential conflicts of interest. Faced with increasing competition from general investment consultants and pressure from asset owners to reduce fees, alternative investment consultants are adjusting by merging with other consulting firms or augmenting services with higher-profit money management and managing discretionary assets.

A review of Preqin's top 20 list of nondiscretionary investment consultants and Pensions & Investments' database revealed only two pure-play alternative investment consultants that do not manage capital: Albourne Partners Ltd. and TorreyCove Capital Partners LLC.

As part of the $56.5 billion Los Angeles County Employees Retirement Association’s search process earlier this year for a specialty investment consultant for hedge funds, illiquid credit and real assets, the Pasadena, Calif.-based pension fund scored bidders on potential conflicts of interest. LACERA in March hired Albourne Partners Ltd. as the best fit. Albourne had scored the highest of three finalists based on a number of factors that also included fees and services offered. Among its strengths, LACERA officials noted that Albourne was solely focused on alternative investments and that it had the least potential conflicts because it has a pure non-discretionary advisory model. The other two finalists derived a portion of their income from discretionary clients.

Please refer to the full article for further details. 

Albourne Partners is expanding its focus on environmental, social and governance factors by incorporating ESG into its broader operational due diligence process.

The consultant, which oversees over $500bn in alternative advisory assets, has some 75 staff dedicated to ODD, who will now start asking all managers they review about their approach to ESG. The ODD team will focus on how hedge fund managers incorporate ESG across various metrics, including operational set-up and resources.

Following the insurance losses from catastrophic events worldwide in 2017 and 2018, the Standards Board for Alternative Investments (SBAI), whose members include both managers and institutional investors in alternative investments, has published “Valuation of Insurance-Linked Funds”, a document that provides guidance for investors conducting due diligence on funds that invest in (re)insurance-linked investments (“ILS Funds”). The document, developed by a working group of institutional investors, investment managers, and investment consultants – including Albourne Partners – is the first in a series of Toolbox Memos on ILS Funds to be published by the SBAI.

Michael Hamer, Partner and Senior Analyst at Albourne Partners, said: “The process for valuing reinsurance investments is a very important aspect of due diligence, given the high levels of uncertainty that can arise after large loss events. Investors also need to understand the differing ways in which funds deal with this uncertainty, including the use of side pockets and other mechanisms that may reduce the risk of unintentional value transfers between investors. We look forward to contributing to the SBAI’s future work in this important area of investment.”

Members of the SBAI ILS Working Group include representatives from Aberdeen Standard Investments, Albourne Partners, CPPIB, Elementum Advisors, Future Fund, Hiscox Re-insurance Linked Strategies, Nephila Capital, PGGM, PIMCO and Varma. The Toolbox Memo can be accessed here.

Sean Crawford joins in Connecticut, as the alts consultant boosts San Fran office with Spencer Edge.

Albourne Partners has hired the former CIO of the New York Metropolitan Transportation Authority, HFM InvestHedge has learnt. Sean Crawford joined the Connecticut office last month. Albourne, which advises on $500bn in alternatives assets, has also boosted its ranks in San Francisco, bringing on board Spencer Edge.

Albourne Partners Ltd. has been around for a quarter-century and advises institutions who collectively invest more than $500 billion in alternative assets. So when Albourne this month, for the first time, made it mandatory for the roughly 650 hedge funds one of its teams monitors to answer questions about their approach to environmental, social and governance issues, it highlighted a shift the industry is struggling to cope with but can’t afford to ignore.

Steve Kennedy, the partner who leads Albourne’s ESG initiatives, said hedge funds can tackle the issue “from a lot of angles.” Albourne still has an optional questionnaire that hedge funds can choose whether to answer. The mandatory part comes when the firm is hired by an endowment or pension fund to conduct due diligence on a fund’s operational risks. 

EuroHedge sits down with Albourne Partners co-founder Simon Ruddick to discuss fraud warnings, allocating in the aftermath of Lehman and shifting the conversation on fees.

The collapse of LTCM and Bernie Madoff’s fraud: events that occurred almost a decade apart with little in common, except that they played a key role in cementing Albourne’s credibility as a leading investment consultant for hedge funds. In February 1998 the London-based firm produced a document that was hugely bearish on fixed income arbitrage. It was one of Albourne’s first strategy reports, drafted by Hitoshi Nagata, whose hedge fund, Cambridge Financial Products, had recently closed and returned investor capital because of the limited opportunity set. Unlike other pieces of research, which were only shared with clients, Albourne widely distributed its concerns on fixed income arb, which played out a few months later when hedge fund giant LTCM saw the value of its trades drop by 50% as a result of Russian currency devaluations and a flight to US treasuries.

“It wasn’t luck that we wrote that, it was skill, but what was luck was that we gave it to everyone we knew,” explains co-founder Simon Ruddick. “In the summer of 1998 that was the whole story and we had this document from February pointing out all the issues, so that was a huge leap in credibility.”

For Mark White, real assets are starting to come into their own. “It’s the most interesting asset class to be in as far as I’m concerned,” he says.

Formed in 1994, Albourne is a specialist alternative consultancy focusing on complex activity, including hedge funds, private equity, real estate, and real assets. White joined the firm in 2008 to build out its real assets practice. Now he oversees a team of nine dedicated analysts, conducting due diligence on investment managers, doing portfolio construction, and running day-to-day operations. He helps build portfolios from scratch and revamps existing ones, as well as advising on direct and co-investments, and managed accounts. According to White, he’s helped clients build and oversee (since Albourne is non-discretionary) roughly $21 billion in real asset portfolios.

Albourne has published its second Investor Manifesto setting out “game-changing” proposals to reform the alternative asset management industry for the benefit of fund managers and investors.

The document, which contains 50 recommendations, was unveiled on the first day of the advisory firm’s annual meeting today.

Points from the manifesto that are likely to prove particularly popular with hedge funds include a change to the US tax code that would make multi-year crystallization fee structures more tax efficient and the formulation of templates for permanent capital structures.

Other key proposals include the development of an identifier database covering all industry participants and the creation of a standardised means of corporate-level ESG reporting.

Investors are improving fee alignment with their asset managers, renegotiating old fee structures and ensuring they pay only for skill, a panel of experts told the Fiduciary Investors Symposium at Stanford University.

Albourne Partners chief executive John Claisse has helped asset owners such as the $140 billion Teacher Retirement System of Texas develop a new structure for hedge fund fees with a 1-or-30 model. Under this system, investors agree to pay more for alpha than the traditional 20 per cent. And although investors prefer to only pay for excess returns, under this model they also pay a fixed management fee to enable the manager to “keep the lights on” during periods of underperformance. Crucially, the management fee is an advance on future performance fees – managers need to earn the management fee back before they receive performance fees.

“We were set a goal to put in shape a structure that was easy to explain and where Teachers retained 70 per cent of alpha,” Claisse recalled.

He also noted that investors shouldn’t pay high fees for systematic strategies.

“There are now many ways to access underlying drivers of hedge fund strategies through risk premia,” he told delegates. These strategies have created an investable alternative that is liquid and transparent and makes it easy for investors to assess whether they are genuinely getting alpha. “The pressure on hedge funds to justify returns has never been greater,” Claisse said. “Don’t pay for expensive beta, pay for skill.”

Two years ago, Albourne Partners Chairman Simon Ruddick described the fees hedge funds charge as the “elephant in the room.” Disappointing returns and a lack of transparency about levies meant investors were at risk of losing interest in the market, he warned.

Mark Gilbert caught up with Jonathan Koerner, the partner at Albourne who devised the arrangement, by telephone from Norwalk, Connecticut. Following is a lightly edited transcript of their conversation.

MARK GILBERT: Hedge fund fees have been coming down for a while now, with Hedge Fund Research figures showing average management fees dropping to about 1.43 percent this year, while incentive fees are down to about 17 percent. Your proposal for a 1-or-30 structure has gathered pace, with more than 60 hedge funds adopting it by the end of last year. What’s the current tally?

JONATHAN  KOERNER: There are 77 that I know about and are confirmed. There are certainly some out there that I don’t know about. We have clients that are actively pursuing 1-or-30 or x-or-y structures across their portfolio but have decided to keep the results private.

MG: In the event of a massive outperformance, it seems like the investor can lose out compared with traditional previous structures?

JK: This structure won’t always benefit investors, but it will benefit them when the manager underperforms. In a way, the 1-or-30 is an insurance policy. The premium is paying extra fees when the manager truly outperforms. But that is the only condition under which the investor pays more. The protection the investor buys is avoiding the risk of overpaying for underperformance.

Conversations about environmental, social and governance (ESG) factors with hedge fund managers circa 2011 were painful – there was “complete silence” from most firms in the industry, Stephen Kennedy, a senior portfolio analyst at Albourne Partners, recalls.

Fast forward to today, and although some managers still look blankly when ESG is raised, the situation has improved somewhat, he says. “[ESG] has definitely been more of an area where some groups have done a decent amount in terms of finding the data sources, thinking about it and how they want to integrate that without altering their basic, initial investment process.”

More importantly, investors have also been stepping up their focus on ESG, in terms of the stocks they choose to hold as well as the conversations they have with third-party managers.

“The number of conversations with our clients is increasing. Almost every European investor has some level of interest in this and many more US investors are talking about it,” says Will Bryant, a partner and portfolio analyst at the consultant.

The fact that more US investors are starting to show interest is significant, he adds, given that the majority of hedge fund capital still comes from there.

To reflect the changing focus of clients regarding ESG, Albourne is evolving its own efforts in this area. Over the last year, the specialist consultant, which advises on more than $400bn in hedge fund assets and $50bn of other alternative assets, has changed its ESG-focused questionnaire and has developed a new set of ratings for those managers that incorporate ESG into their investment process.

The North American Committee (NAC) was set up in March 2018 to help the SBAI direct its efforts in North America, including identifying local issues for inclusion in the SBAI’s studies and working groups, supporting the SBAI’s North American roundtables, communicating with SBAI members, and driving increased participation in the SBAI process among North American alternative investment managers and institutional investors.

Hedge funds need to be more flexible with fee arrangements and respond to investor demands for fee alignment, said Albourne Partners chief executive John Claisse, who pointed to the ‘1 or 30’ fee structure the consultant helped develop with Teacher Retirement System of Texas (TRS) as an example.

“When it is working, there is an elegance,” Claisse said, speaking at the 11th-annual Investment Magazine Absolute Returns Conference, which was held in Sydney on September 14, 2017. “You are tapping entirely into your share of alpha, and paying for skill.”

As Albourne partner Jonathan Koerner explained in the case study on the $140 billion Texas Teachers, the 1 or 30 structure always pays a 1 per cent management fee or a performance fee of 30 per cent of alpha, whichever is greater. However, following periods when the 1 per cent management fee exceeded 30 per cent of alpha, an investor pays less to bring its share of alpha back to 70 per cent.

Essentially, when alpha is not sufficient to cover the 1 per cent management fee, that fee is paid as an advance on future performance fees.

“What we’re hearing from asset owners is that 1 or 30 revolutionises the conversation,” Claisse said. “It simplifies the focus to [put it] on alpha, and there is an elegance to that. Credit to TRS, they are not just doing it for their own benefit. Ultimately, it stabilises the business model of the manager, which is good for every investor.”

He says some large sovereign wealth funds are asking all their managers to consider these structures.

Furthering this, Albourne has conducted a survey, which 350 funds have completed. It found that more than 40 per cent have adopted a 1 or 30-style fee structure or are considering it.

Claisse said the beta hurdle and performance fee share are negotiable.

“This is not a one-size-fits-all,” he explained. “There are a lot of different types of fee structures for different strategies, but the important thing is they are all focused on the alignment of fees. It’s not the level but the shape of fees that’s most important.”

Albourne commends SBAI for its guidance on Standardised Total Expense Ratio (STER). The SBAI STER calculates a single, standardised expense ratio to facilitate better understanding, comparison and monitoring of fees and expenses across alternative investment funds. A unique and important feature of the new STER methodology is that it includes the costs of research bundled with dealing commissions (often referred to as “soft dollared research costs”). Thus, the STER allows the comparison of a fund’s structural costs on an “apples to apples” basis (i.e., providing additional transparency to which operating expenses are allocated to the fund or conversely borne by the manager). The STER was developed in response to needs amongst institutional investors for a standardised tool to compare and monitor structural costs between alternative investment funds and over time.

To make it useful for comparison purposes, STER excludes incentive fees which will fluctuate as a function of performance and trading related costs that will vary significantly and depend on the specific investment strategy. Given the benefits of a simple, consistent and transparent comparison of costs among funds and peer groups, the SBAI encourages the industry to start to use the STER methodology.

Alternative investment consultant Albourne Partners has been named as the sector’s most influential name in HFMWeek’s annual investor Power 30 rankings, as it leads the charge on fee innovation and transparency.

Albourne’s efforts in promoting a new ‘1 or 30’ fee structure, which sees managers earn either a 1% management fee or a 30% share of alpha-generated performance over a benchmark if that becomes greater, has been tipped as a hugely significant move by prime brokers and managers canvassed for HFMWeek’s research highlighting the industry’s 30 most influential investor-related firms.

Well over 50 hedge fund managers are implementing the new fee structure which Albourne has been pushing alongside long-standing client, the Teacher Retirement System (TRS) of Texas.

A number of other investors are also asking managers for similar deals.

Albourne advises clients with over $400bn in hedge fund and other alternative assets and given its reach, alongside its work on fees, it has knocked the Abu Dhabi Investment Authority (ADIA) off the top spot.

ADIA, which manages over $800bn, takes the number two spot, while the $814bn China Investment Corporation, another sovereign wealth fund with over $100bn invested in hedge funds, sits in third position.

A recent HFMWeek poll of 200 managers found that half of them were “seriously considering” moving to a 1 or 30-type model.

Referred to by Albourne as an ‘or’ structure, the use of a management fee recoup can also be applied to a larger or tiered management fee, while the performance hurdle calculations can also be modified, by using a longer investment horizon, for example.

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^{Disclosure: The 2017 HFM Investor Power 30 List is a subjective compilation based on the opinion of HFM editors and consequently, the results may no longer be current or applicable. Albourne Partners is not in position to know how many firms HFM considered for this award, but the firms that appear on this list were judged on criteria such as: pushing for more consideration of environmental, social and governance factors; demanding customised structures or co-investments; leading the charge for better alignment of interest between managers and LPs; its activities over the last 12 months; opinions of managers and prime brokers.}

SBAI, the organization previously known as Hedge Fund Standards Board (HFSB), the global standard-setting body for the alternative investment industry, has become Co-Chair of the Open Protocol Working Group. The Open Protocol template standardises the collection and representation of risk information of hedge funds and other types of investment funds, and currently is used by funds with over $1 trillion in assets under management. Open Protocol, which is an open standard which all investors and managers are free to adopt, will be added to the HFSB Toolbox. The Toolbox complements the HFSB's standard-setting activities by providing additional guidance on practical issues to managers, investors and fund directors. The materials available through the Toolbox serve as a guide only and are not formally part of the Standards and the HFSB's "comply-or-explain" approach. Open Protocol will become the fourth item in the HFSB Toolbox, following the publication of the Cyber Security Memo, Administrator Transparency Reporting and the Standardised Board Agenda.