How a SWF Picks a Hedge Fund – The Inside Track

Are you a hedge fund manager wanting to take on SWF assets? It’s not just your performance they are after, a former CIO has revealed.

(November 14, 2012) - Alternative asset managers targeting sovereign wealth fund (SWF) money have to be much more than alpha-generators, a former CIO has revealed.

Scott Kalb, who recently completed a term as CIO of the Korean Investment Corporation (KIC), said in a backstage interview with sector specialist Opalesque TV this month that picking any manager involved a long and detailed process, but when dealing with alternatives firms, investors had to be especially careful.

Kalb said: "You're not in public markets, you're investing as an LP and so you have an LP-GP relationship. You have to set up a process that's looking at things like track record, staffing, management. You have to look at not only past performance but also strategy, systems, risk management - you have to look at everything soup-to-nuts and vet the process completely. It usually takes three-to-six months to select a manager, so it's a long process. You have to make sure you see them on the ground and make a thorough evaluation."

Before joining the KIC, Kalb worked for several investment banks, asset and alternative managers in the global markets. The SWF was founded in 2005 and has around $43 billion in assets.

The diversity in SWFs means there is little similarity in the asset allocation strategies among the group. However the size of the assets and usual sophistication of the investment committee means most will have some allocation to alternative assets.

"My belief is that if you are going to invest in hedge funds, for example, you may as well start from the top down rather than bottom-up and that is I believe in working with large, well-known, well-established firms," Kalb said. "I don't mind if they have lots of assets under management, I have found that even managers with lots of assets under management can continue to perform very well."

Over the past 18 months there has been a shift within the investor community, with a surge of assets being allocated to larger hedge fund managers.

"Some people believe that smaller, more nimble managers can get you better returns, but I think in the alternative space, it's not just about returns," said Kalb. "Returns are a requirement - it's what gets you in the game. Besides that, a lot of what you need to see is around the quality of the platform, the people, the infrastructure - you need a deep team to be comfortable to invest in them."

Kalb said the days of a "couple of guys" running money in a simple set up were over.

"These days what you need is a partnership so you want to invest with firms that are not only going to make returns for you, but are going to be able to provide you with information and software, who are going to be able to help you to understand what is going on in the markets and help you to be a better investor."

To watch the full interview, click here

| cioeditors@assetinternational.com |