AIG's Robert Discolo Talks Hedge Fund Talent

TSC: Describe your investment philosophy.

RD: Our portfolio is diversified. We have had close to a zero correlation to bonds over the past 18 years. If you want pure market exposure and a 15% return, it's not us. A lot of funds of funds sold themselves as portfolio enhancers. But funds of funds are more like a diversifier. We follow the Markowitz portfolio theory. If we get competitive returns, competitive risk and low correlation, we buy it. Right now, many funds of funds are taking a lot of market exposure. We don't do that. Why pay high fees for beta?

TSC: What about your organization? What strategies do you run?

RD: We're a $7 billion fund of funds but half of the money is our own money. The other half is our clients' money. That's a major point that distinguishes us from our competitors. In fact, it is the first question we ask our hedge funds: "How much of your own money is invested?" And when I mean our own money, I mean it's not just AIG that invests, but it's our employee fund, it's my own money, it's my kid's education. We allocate approximately 30%-35% to equity long/short; 25%-35% to relative value strategies; 30%-35% to event-driven and 10%-15% in macro and [commodity trading adviser]. But we have 27 sub-strategies underneath those four groups. Macro, for instance, will include short-term traders, energy traders, mid-long-term trend followers and non-trend following managers.

TSC: What are the main lessons of Bayou?

RD: I'm shocked that people invested in it. We sent a letter to our investors to tell them that we never invested in it. I won't go into the details of why we rejected the fund. But look at the audit. We have an approved list of auditors and an approved list of fund administrators. At AIG, we have an investigative team, a Kroll-like firm, but it's internal. We're the largest insurance company in the world, so of course we have that type of investigative team handy. A lot of funds of funds put their clients' money in tiny hedge funds. When we invest in funds with less than $50 million under management (and we do), we use our own money. We see that as part of our research and development effort. We may put in small amounts to find up-and-coming talent and negotiate capacity early on.