London-based GAM, which Julius Baer recently acquired from UBS, oversees $22.7 billion of hedge fund assets, making it the second-largest fund-of-funds manager in the world. Originally known as a European powerhouse, GAM has been expanding in the U.S. for the past several years. Joe Gieger, formerly president of Lombard Odier Darier Hentsch in the U.S., joined GAM in September to run the company's fund and institutional business in North America. TheStreet.com: You joined GAM from Lombard Odier. Why the move from private equity to hedge funds? Joe Gieger: I joined GAM because I was excited about their global reach, their product offerings and their commitment to the U.S. market. As far as making a move from private equity to hedge funds, it's important to note that they are both alternative asset classes and that both are growing quite nicely. GAM offers a broad array of alternatives such as fund of hedge funds and single-manager hedge funds, and who is to say that we wouldn't offer private equity as well? As a specialist in alternatives, it doesn't preclude the fact that in the future there won't be opportunities for private equity as well. TSC: Some say there are too many investors chasing returns in the hedge fund universe. Returns this year have been poor across all strategies. What's your take on this? JG: Hedging, by definition, is not about producing the highest returns. It is about having consistent returns, investing in newer asset classes and using those asset classes in conjunction with the total portfolio to accomplish and meet the funding liabilities of a pension plan in a more steady way. While clients are considering holding alternative investments in their portfolios, diversification of risk, low correlation to markets and lower downside volatility are all aims of this type of investment. However, using a fund of hedge funds in conjunction with S&P 500 futures will potentially produce higher returns than equity, both in up and down market cycles. But some areas are limited by capacity, and it's the job of a fund of fund or single-strategy manager to constantly look for ideas to generate the appropriate return opportunities.
TSC: Describe your fund-of-funds business in terms of size, strategies and geographic exposure. What makes GAM unique? JG: GAM has been managing funds of hedge funds since 1989. As of last September, GAM manages in excess of $18.6 billion in fund-of-fund strategies. We run $2.2 billion of internal hedge funds and also oversee $1.9 billion of external managers such as Caxton or Gabelli, who subadvise funds for us. Our single-manager hedge funds focus primarily on equity long/short, and we have strategies that cover geographic and strategy-specific styles, including the U.S., Japan, Asia, Europe and globally. Our largest fund of funds, Multi-Strategy, has $8 billion by itself and is diversified by both geography and strategy. We're one of the few managers to offer both single-manager hedge funds as well as funds of funds. We not only have one of the largest teams of hedge fund professionals in the world, we boast a rigorous manager selection process and extensive due diligence capabilities. TSC: Tell us about performance. JG: Our multi-strategy fund of funds, created in 1989, has not had a negative year in over a decade. Furthermore, it has achieved this with nearly half the volatility of the index. Manager selection has been key to our performance. Also, our allocation to trading managers has helped historically to provide uncorrelated returns in periods of market dislocation and stress. This year we have seen strong returns from equity hedge allocations, particularly European long short managers in the third quarter. Positive results from trading managers were primarily driven by discretionary macro and systematic non-trend allocations. In the arbitrage allocations, credit managers had a good third quarter, driven by distressed managers. TSC: Any new strategies under consideration? JG: We are looking at new strategies for the offshore markets and investigating the feasibility and demand with U.S. institutions. Examples include emerging-market, long-short and a global arbitrage fund of hedge funds. The idea of the global arbitrage fund comes from the success we had with our multi-arbitrage offshore fund, which has produced approximately 7% return on an annualized basis since its inception in September 2002.
TSC: There is no central chief investment officer at GAM. Describe your approach to investment management and how you coordinate all the different strategies. JG: GAM's expertise in single-manager hedge funds is derived from the fact that we allow our managers to manage their funds according to their own unique processes and market views. We have managers internally that differ in style considerably, from small-cap to large-cap, from deep-value contrarians to systematic stock-pickers. They provide GAM with a valuable source of differing market views and allow for lively debates and exchanges of information. Within the multi-manager team, David Smith, chief investment officer, has been with GAM since 1998.He and his team work with managers on the ground around the world, taking the pulse of the markets in which they invest. We give each the autonomy to make investment decisions while we monitor their performance and ensure that they follow their funds' investment mandates. In fact, that is one of the underlying strengths of our firm. We're not trying to be a McDonald's here. TSC: GAM has been recently acquired by Julius Baer. Talk to us about the institutionalization of hedge funds. Is it a good thing for the industry? JG: The institutionalization of hedge funds is a function of the marketplace and the increased sophistication and education of both consultants and clients. Having clear processes, correct levels of investment and operational due diligence, as well as clearer levels of transparency, are all good things in my mind if they provide investor protection. TSC: How do you protect your investors from fraudulent managers? What's your due diligence process? JG: GAM will always seek to avoid such investments and managers. We have a dedicated nine-person operational due diligence team, which includes accountants and lawyers who conduct thorough reviews of documentation, conduct on-site visits and review hedge fund processes and their providers' processes. Sometimes our due diligence teams will make recommendations for a manager to improve his or her processes. This is based on GAM's extensive dealings with other underlying hedge funds and identifying their best practices.
TSC: Are hedge funds becoming more accessible to high-net-worth and retail investors in the U.S.? JG: Yes, and I am not surprised. In general, there has been an appetite for diversifying risk following the declines in markets during 2000-2003. Other than bonds and cash, there was no real vehicle other than hedge funds to protect a retail investor from over 40% declines as measured by the S&P 500. Hence the growing population of hedge funds. You only have to look at the number of registrations to see that investment minimums are becoming lower. In fact, there are now many funds with investment minimums below $100,000. However, I would always say that they should be a part of an overall portfolio and should only be purchased by accredited investors.