Pictet & Cie, Switzerland’s biggest closely held private bank, is shifting more of its $10 billion hedge fund investments to newer, lesser-known managers from the largest, most established houses to boost returns.
The bank may increase money invested in newer managers to 60 percent, said Nicolas Campiche, Geneva-based chief executive officer of Pictet Alternative Investments. It currently allocates about half of the assets in its funds of funds and tailored pools for clients to “blue-chip names.”
Pictet is focusing on returns while more investors are adding money to the largest and oldest funds seen as having the expertise to control risks. It’s also reducing its bias toward older managers because of the “Druckenmiller risk,” said Campiche, referring to the New York hedge-fund manager who announced the end of his 30-year career after returns failed to meet his expectations.
“The typical situation in the aftermath of a crisis is people tend to focus too much on the risk and not enough on performance,” Campiche, 41, said in an interview in Hong Kong yesterday. “We’re trying to refocus a bit our portfolio on lesser-known entities, smaller, more nimble funds.”
Managers overseeing at least $5 billion drew 75 percent of the $19 billion net inflows in the industry in the third quarter, data from Chicago-based Hedge Fund Research Inc. show. Pictet had a traditional bias toward the largest and oldest managers and further built up allocations to them in 2006, expecting a four-year bull run in the securities markets and the good performances of hedge-fund managers to end, Campiche said.
Hedge funds with less than $100 million of assets returned an annualized 16 percent from 1996 to 2007, beating the 11.5 percent for peers with more than $500 million of assets, according to a PerTrac Financial Solutions study. Small- and mid-sized funds also outperformed large peers in 2009, the New York-based software provider said in a statement last month.
Pictet is tilting its allocations toward smaller, newer funds as a growing number of blue-chip fund managers retire since the global crisis in 2008 increased volatility in the markets, Campiche said.
“It’s a more challenging environment and some that have nothing to prove any more, either to themselves or to the investor base, may just decide to do something else,” said Campiche. “That Druckenmiller risk is higher today than three years ago. This is a bit of new risk in our portfolio.”
Stanley Druckenmiller said in August he was shutting his Duquesne Capital Management LLC, pulling the plug on the manager of $12 billion of assets after he failed in the last three years to match returns averaging 30 percent a year since 1986.
Bank of America Corp.’s Merrill Lynch & Co. unit expected the hedge fund closure rate to climb to as much as 20 percent by the first quarter 2011, from 15 percent in the last two years, Justin Fredericks, its New York-based head of U.S. capital introductions, said in September.
The challenge for investors is to find managers who can replace the old guard in their allocations, Campiche said. He declined to give any names dropped from Pictet’s allocation list or added to its pipeline.
Half of Pictet’s hedge-fund assets are in the form of funds of funds, and the other half are portfolios tailored to meet the requirements of specific investors, said Campiche. Its $1.1 billion Mosaic fund returned 13.8 percent since January 2007.
Pictet invests in about 100 hedge funds and has another 100 funds in its pipeline for possible allocations, Campiche said.
It picks managers who have at least 15 years of experience in the financial industry. It is also replacing some funds in its allocation pipeline to focus on strategies “more conducive for performance,” Campiche said.
Pictet attracted about $400 million of net inflows this year, Campiche said. About 50 percent of its money comes from institutions such as pension and government departments, especially in Europe, and the rest from wealthy individuals.