By Staff Writer, Hedge Fund Insight
Emerging managers struggle to get attention. There are a multitude of reasons why. Yet all the studies show that smaller, more nimble, managers out-perform their larger brethren. For many managers there is a Catch-22 at play in terms of assets under management. “If only you were at $50m then I could allocate to you.” “If you and two other allocators could give me $5m each then I am on a promise for two $10m tickets, and we are there.” If this sounds familiar problem then the Los Angeles Investment Company might have a solution for you.
CEO Les Allan, an experienced builder of businesses in financial markets, describes what he has seen amongst smaller hedge funds, and how that relates to his offering. “I’ve noticed that too many hedge funds are being treated as not investible, even though the funds and their managers have substantial intrinsic merit. What the Los Angeles Investment Company (LAIC) does is put the funds we work with in a different category as far as potential investors are concerned.”
This is achieved firstly by putting the funds on a robust, institutional grade operating platform. The LAIC structure conforms to the high standards for trade processing, cash management and risk infrastructure that investing institutions need to see before they invest. There are sufficient people and systems to carry out all the necessary reconciliations and daily and monthly routines that emerging managers know are best practice, but oftentimes do not have the resources to do. The LAIC provides a complete operational solution.
If you will, these are the hygiene factors in hedge fund assessment. The analysts involved in fund selection will be satisfied by the Los Angeles Investment Company infrastructure and approach. But attracting investors requires a lot more. A lot of things have to be in place before a potential investor gets to the point of operational due diligence.
Beyond The Hygiene Factors
Not the least of requirements for an emerging manager to get attention is the necessity of having a track record with commanding returns. “At the moment it looks like emerging managers have to be in the top 10 or 15% of funds for their style to get attention,” says Scots born Allan. “Our job here is to help the manager turn the potential of those returns into allocation meetings with investors.”
The step between investment returns and investor interest is marketing and out-reach by investment managers. Small managers with limited staff often struggle with this element of business. The halo effect can apply to managers joining the LAIC stable of managers – the same effective marketing clout is enjoyed by all the affiliated managers, as is access to the marketing tools and methods developed by the California based company. CEO Les Allan has taken financial market companies he has built from plans-on-paper through to buy-out stage – he knows about developing good client-facing businesses, and seems determined to make the Los Angeles outfit the next on his impressive resume.
There is a long-tail of small managers in the hedge fund industry – there are over thousands of hedge funds with assets under management of less than a billion dollars. Of those, nearly 5,000 of them are in North America, giving the LAIC a large universe of target managers to work with, and the Los Angeles Investment Company, despite its name, has no regional bias. “We’re keen to work with managers that have investment talent, but are able to recognize that passing on the burden of managing a small, but heavily regulated company can work in favor of them and their clients,” explains Les Allan.
The theory is that by centralizing the production of financial statements for investors, financial accounts for the investment managers and liaising with auditors and administrators, the Los Angeles Investment Company frees up time for their investment teams to concentrate on their main event – investing. “In talking with guys who run small hedge fund management companies, it is clear to me that a lot of them feel pulled in too many directions at once,” explains CEO Allan. “They want to commit time to their investment research and running portfolios, but they also have responsibilities of running small businesses, and they know they need to find time to grow their business beyond e-mailing a few monthly letters. That is a lot of different demands, and that is before we even get to the work/life balance,” acknowledges Allan.
Of course all of these benefits do not come without a balancing cost. The Los Angeles Investment Company has a revenue sharing agreement with the managers in its stable. It is a give-to-get with a free warrant. There is the possibility of changing the break-even point of AUM for the underlying managers, and out-sourcing shared functions, but some see the potential of a joint-and-several fee sharing arrangement as the building of equity in a sustainable business. The free warrant is the potential for a manager to join who subsequently hits a commercial hot streak. All the equity owners in LAIC would benefit, and a growth in assets at the company level will open up the possibility of flotation, selling a stake or monetizing the collective effort in other ways.
Having just received confirmation of the firm’s registration with the SEC Allan is full of enthusiasm. “Building a business is a medium term project at a minimum, and a collective one at that,” asserts LAIC CEO Les Allan. “We know from the response we have received from fund managers that the LAIC fills a significant void in the hedge fund space. Every day that we spend talking to funds about their opportunity for growth and their efforts to bridge the allocation gap confirms the potential that managers can realize by aligning with the Los Angeles Investment Company.”