Pictet’s taking no chances

Swiss private banks have had a lot of experience in selecting hedge fund managers. For the last few decades the sector has been investing its client assets through these investment vehicles, witnessing from a privileged position the dramatic growth in the hedge fund industry.

The proliferation of hedge fund managers has been the natural response to investors’ demands for the hedge fund product, although most of those with years of experience in hedge fund investing believe that more choice does not necessarily translate into better investment opportunities.

Geneva, one of the world’s top spots for buying luxury goods, is also a prime location to go hedge fund shopping. Its solid private banking industry and the large amount of assets invested in hedge funds means that hedge fund managers around the world come here looking for business, and the private banks have developed specialist teams to detect the best talent.

Specialist team

This is the case with Pictet & Cie, which has been investing in hedge funds since 1989. At the beginning of the 1990s, the bank created a department dedicated to hedge fund selection; now it boasts a staff of 14. The bank’s assets invested in hedge funds currently account for SFr10.9bn (e7.1bn), of which around SFr5.1bn is discretionary money invested in funds of hedge funds or segregated mandates.

“The number of people [employed] has grown and our process has somewhat changed recently,” says Nicolas Campiche, CEO of Pictet’s Manager Selection Services in Geneva. Each member of the team concentrates on a particular hedge fund strategy, focusing on avoiding any landmines that the market might hide.

“The entire selection process is very much risk-driven and what we have to assess first and foremost is those managers we don’t want to invest with. This is one aspect where we have been very successful and we haven’t been involved in most of the industry’s big blow-ups.” Over the years Pictet has been able to develop and maintain an extensive network of contacts within the hedge fund community. This Mr Campiche considers a “competitive advantage” – it has allowed the bank to invest with hedge fund managers who are often not accessible to new investors.

New players

It also provides them with the opportunity to identify new talent at an early stage. On occasion, such new talent comes as spin-offs from existing entities. “Sometimes the second in command decides to start his own shop, and this is the type of situation we like to follow very carefully,” explains Mr Campiche.

Although he admits Geneva is a good location for meeting hedge fund managers, Mr Campiche stresses the importance of trying to find hidden treasures elsewhere. “Geneva is high on the map for hedge fund managers when they are looking for new assets. It has always been a centre for these type of activities and we are a big player in the market. We constantly have managers contacting us.

“However, one has to get out of the usual spots to find new managers and we spend a lot of time on the road. We go to the US, but not only to New York, but to the Midwest and the West Coast, and we are also trying to find managers in Europe that are not necessarily based in London,” he says. Alongside Switzerland, he mentions France, Scandinavia and Spain as places where they are searching for new talent.

“We look at all the different strategies,” he says. “We focus a lot on the sustainability of the hedge fund manager, because you want to invest with someone that will survive for the next 10 to 20 years. Their ethics have to be outstanding. We spend a lot of time talking to the managers, and if we have the smallest doubt we would never invest with them.”

Although he admits transparency has improved, he adds that this only relates to new hedge fund structures. “Most of the new hedge funds offer better transparency and reporting, but it is because of the need for them to do that.” He mentions the growing interest among institutions in hedge fund investing as one of the reasons why new funds are required to be more transparent. “There are new funds catering for this type of client, which are more focused on non-correlation and risk management. But these funds are quite different to the old ones. It’s almost a new category of funds.”

Talent search

In 1994 Pictet launched the Mosaic fund, its first fund of hedge funds. Since then both the number of products on offer and the assets under management have grown considerably.

From a hedge fund universe of some 8000 funds, Pictet searches for talent among both established hedge fund managers and new players trying to break into the market. After extensive research and interviews, a ‘watch list’ of some 250 funds is created. Next, the selection team examines the managers, taking two key aspects into account: their ability to generate alpha and their capacity to manage their business. The whole selection process results in a ‘buy list’ of around 50 to 60 funds.

In total the team meets around 300 new managers a year and invests in fewer than 10.

Campiche: a lot of time on the road