What happens when two worlds collide?

Hedge funds are no longer “alternatives” – that’s the verdict on the investment industry from Blake Grossman, chief executive of Barclays Global Investors (BGI), one of the world’s largest hedge fund players. Of course, this has been said many times before, but by smaller to mid-size investment houses and boutiques, managing between nothing and ?200bn. But once BGI enters the debate, it is no longer a debate. The weight of a manager running $1,600bn (?1,250bn) suddenly saying that hedge funds don’t really exist anymore means that convergence between the long-only and alternative world in fund management is no longer a trend, but that it has already happened. What does this mean to the buyers and distributors of fund strategies? First, it means they will become much more wary of boutique managers. If they are assessing all strategies in the same way, then it figures that distributors will expect their fund providers to have the custody, back office and administrative back-up offered by a big group. If hedge funds collapse, it is usually because there is inadequate monitoring of their investment strategy – in fact, this is normally the case for all funds. If there is a good infrastructure associated with a larger player, this is less likely to happen. The likes of BNP Paribas, Société Générale and Crédit Agricole are now very much promoting this culture in France, where a boutique has its own profit and loss account, but shares the administrative and marketing resources of a much bigger group. Of course, there is a danger that the artisans working for a boutique can have their traditional way of doing things destroyed by the modern ways of a big conglomerate asset manager. There are many examples of fear of this happening in the past. When Banque du Louvre was sold by the Taittinger family to HSBC, much of the fund talent bailed out, claiming that their special culture would be destroyed. The Louvre mavericks wanted to do it all again, but they did not start their own shop: they moved to Ofivalmo, which despite its boutique culture and location in a back street in northern Paris, well away from other financial institutions, is owned and controlled by France’s largest mutual insurers. This is proof that units of a large company can act in an independent fashion, despite what detractors of large houses may tell you. The “village of boutiques” has proved to be an attractive marketing concept, rhythmically chanted by some louder than others, alongside the “multi-boutique” and the “super boutique” mantra. The only way for private bankers and other distributors to separate the walkers from the talkers is to actually visit the fund houses they are interested in. Walk around and see who sits with whom, and decide for yourself who is the master of the house.