The Standards Board for Alternative Investments (SBAI) has published a memo on co-investments which was developed by the Standards Board’s Governance Working Group. 

The Standard Board’s Co-investment memo sets out the processes investment managers need to put in place to address key governance and compliance challenges that can arise when granting investors the right to co-invest. The memo also covers structuring considerations and issues in relation to fee, expense and cost allocation.

Jessica Ross, Head of Customized Investments at Albourne Partners, said: “The best way for managers to address conflicts of interest and risks that can arise through co-investments is to adopt a co-investment policy which establishes procedures addressing the entire process from the allocation decision all the way through to the liquidation of the co-investment. The memo sets out these process steps, including suitability assessment of the co-investments opportunity, an investor eligibility framework, structuring considerations and the allocation/disposal approach.”  

Currently, the Governance Working Group is reviewing a number of other topics, including investment manager committee structures and fund Director conflicts of interest. The findings of these reviews will be published in the coming months as part of the SBAI Toolbox.

For the full story, click here.

Albourne continues to see increased demand from investors for ESG integration in the investment process, however there are issues that both fund managers and investors face when integrating ESG in their processes.

Albourne has integrated a review of managers ESG capabilities in its Operational Due Diligence with the aim to provide an overview of their ESG capabilities, thus complimenting the investment, operational and quantitative due diligence that Albourne already completes on funds. The significant issue for fund managers continues to be accessibility to objective standard material ESG information on the investment universe.

Please watch the below Albourne film on the aspirations and challenges of ESG reporting, covering the following key areas:

• Why Albourne views that the integration of ESG data into investment decisions is key.
• What can be done to make it easier for managers to integrate ESG data into their investment processes.
• The need for a standardized reporting framework for ESG data from corporates.

Albourne believes that the future of ESG data provision requires a standardized framework, allowing for simple collection collation and comparison, similar to the creation of the Open Protocol reporting of a fund’s risk exposures. The ability for fund managers to factor in all information that is relevant and material to an investment, is the key to any investment strategy. Albourne is looking to work with others in the investment industry that are focused on providing a solution to this problem.

An Interview with Simon Ruddick

Simon Ruddick is the founder and current Chairman of Albourne Partners, a major player in the financial services industry that has been providing research advice on alternative investments since 1994. The combined investments of the firm’s clients now top $500 billion. 

As a long-standing supporter of Synchronicity Earth, we asked Simon what lay behind his growing passion for the natural world and his commitment to promoting the urgency of environmental issues within his industry. We also learnt more about what Albourne are doing to promote greater integration of Environmental, Social and Governance criteria in the sector. 

The global alternatives community has published a Diversity and Inclusion guide in a push to attract the broadest pool of talent to the industry. This paper:

• brings hedge fund leaders’ perspectives on the competitive advantage of having a diverse team;
• establishes D&I practices as a strategic senior management matter;
• provides 45 practical recommendations to enhance diversity and inclusion (D&I) in hedge funds. 

A woman from a New York housing project who becomes co-CEO of the largest hedge fund firm in the world. A young man who learns investing from scratch in order to provide for his family. A woman who leaves the former Eastern Bloc and pays her way through Harvard so she can learn how capitalism works. A man who doesn’t believe those who tell him finance isn’t for people like him, and goes on to gain a doctorate in econometrics.

These are just some of the stories of the hedge fund industry. Our industry has always attracted pioneers; hedge fund firms are staffed with people who refuse to accept the status quo. This pioneering spirit is now being turned inwards, as hedge fund firms examine the composition of their own workforces. Despite leading the investment management industry in many fields, hedge fund firms still face challenges when it comes to attracting and retaining diverse talent. These challenges are not, of course, entirely of the industry’s own making. Social norms in many countries deter women from pursuing quantitative subjects, for instance, and thus limit the pool of talent available to hedge fund firms. Further, the small size of most hedge fund firms limits their ability to search out talent, meaning that those who are not already familiar with the industry may have trouble finding a way in.

The attached paper, was produced by AIMA in partnership with EY. This paper is intended as a first, partial answer to the question of what hedge fund firms can do to promote D&I. Before that question can be answered, however, we must first explain what we mean by diversity and inclusion. This paper will use the definitions adopted by the AIMA Diversity and Inclusion Steering Group. Diversity is taken to mean the presence of underrepresented groups from all backgrounds, life experiences, and beliefs. Inclusion is the act of ensuring that all individuals are equally recognised and respected, and are judged only on their contributions to the organisation. D&I is thus a situation in which underrepresented groups are not only present, but accorded the respect and recognition they deserve. This paper is based on in-depth interviews with over a dozen figures in the hedge fund industry around the world who have pioneered new approaches to D&I. It is also informed by research into how firms large and small have promoted D&I. 

Simon Ruddick, Chairman of Albourne Partners, on D&I in the Hedge Fund Industry

Diversity is about the composition of the workforce. Based on the definitions we’ve seen from the investors we work with, diversity typically focuses on women and minority groups, including ethnic minorities, LGBTQ+ individuals, veterans and persons with disabilities.  There are many other elements of diversity, such as socioeconomic background, educational background, religion, and age. However, these are not elements of diversity that we’ve typically seen investors focused on. Inclusion is present when underrepresented groups within an organisation feel valued, respected and empowered to fully participate and share their views. Simply put, diversity is about composition and inclusion is about culture.

We believe that diverse teams lead to better decision making, as a diverse team leads to cognitive diversity. A homogenous team presents a source of risk, which is the risk of groupthink. Another way to frame this is that in portfolio construction, we all understand the benefits of diversification: adding assets that have a low correlation to other assets in the portfolio lowers the overall risk of the portfolio. In team construction, if you have a diverse team, you'll add orthogonal perspectives into the mix, which lowers the risk of groupthink and increases the chances that you’ll catch your blind spots.

Albourne’s Role

As a consultant, our role in promoting D&I is to collect D&I information (via establishing a standardised due diligence questionnaire), validate that information (via our operational due diligence—ODD—process), and through that process lead managers to reflect on their D&I profiles.  

We've encouraged managers to self-classify as minority/women-own business enterprises (MWBE) since 2012 via MoatSpace (Albourne’s portal for fund managers to enter their data). We have over 60 investment due diligence analysts meeting with managers, and when they meet with managers who they understand are MWBE managers, they ask the managers to self-classify. We canvass service providers (like cap intro groups who maintain lists of MWBE managers) so we can aggregate this. Clients currently have the ability to search for MWBE funds on the Albourne client web portal. The existing MoatSpace questionnaire is narrow in scope in that it only applies to women and minorities who are US citizens, as the MWBE definition used by some of the institutional investors we referenced when we built the questionnaire limited the definition of MWBE managers this way. A challenge is what the definition of MWBE is: is it based on ownership or on the senior risk-taker? So it was important that we revamp our original MWBE questionnaire, so that it's more comprehensive. 

We're also partnering with AIMA to produce a questionnaire inspired by the one used by the Institutional Limited Partners Association that can be used across the alternatives industry. This will include ownership and workforce diversity statistics, as well as policies and practices on D&I issues such as family leave, anti-harassment, retention, and recruitment. 

The other aspect that we're rolling out is the new ESG and Manager and Employment Practices section in our ODD report, which will focus on the validation of anti-harassment, equal pay and diversity policies and initiatives. Within the next 12 months, through our over 80-person ODD team, we expect that we will have captured D&I information in our ODD reports on over 1,000 funds. Based on the work we've done so far, managers want feedback and guidance on D&I. Similar to how managers want to align themselves with industry best practices on ODD, managers are eager to learn how they can align themselves with best practices on D&I.  

We are still in the early stages of capturing more information on D&I. Managers should be capturing data and measuring the diversity of their organisation. They should also establish D&I policies and practices. Anti-harassment and equal pay policies should be in place. An important aspect of due diligence on this topic is that D&I policies may be in place but what practices are actually being implemented? 

D&I is one of the high priority initiatives within our Investor Manifesto II, which is a document we published that includes 50 initiatives we're advocating for across the alternatives industry.  

D&I is not just a company policy. It is who we want to be.

Please see the attached full paper for more details.

Albourne published the Investor Manifestor II (IMii) in October 2018, furthering its commitment to the pursuit of better practice within the Alternatives industry. This 50-point Manifesto is the second edition of the Investor Manifesto, and it covers ten themes that Albourne has been discussing with investors, industry bodies, managers and regulators. 

The below booklet provides a short narrative of the objectives, key points, considerations, and ultimate value of the first 14 proposals of the Investor Manifesto II.

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.