It can be notoriously difficult to maintain a competitive advantage in industries requiring a high degree of intellectual and human capital. After all, ideas (and people) are free to seek the highest possible return – where ever that may be. This usually means that the behemoths with the deepest pockets and greatest career opportunities can, given enough time, build their own businesses to compete in new and burgeoning markets.
That is, assuming they have the luxury of time. Some markets evolve so quickly and are so scalable, that there is simply no time to build a new business from scratch. So larger players begin falling over themselves to buy their way to a first mover advantage. Witness many of Google’s acquisitions. Sure, the Googleheads could have built any business they wanted by just going out and hiring the right people and throwing money at them. But they obviously felt that establishing a beach head in, say, video sharing, couldn’t wait. Ergo, the YouTube deal.
It’s in times like these when the small fry can hold a major trump card – they’re already established and they have proven experience with these new technologies. And that’s pure gold for the established players.
Sun Trust, the $175 billion US bank, may not be a Google. But like Google, it knows when to pounce quickly on a new idea. Via its asset management subsidiary, Trusco Capital Management, the firm wasted little time last week as it bought a minority stake in Hartford-based Alpha Equity Management, a relatively small firm that had one thing SunTrust couldn’t possibly build in the next year or two: six years of experience running 130/30 funds.
The world’s largest money managers have spent tens of millions of dollars setting up 130/30 funds in 2007. Yet none of them currently qualify for either of these 130/30 requests for proposals: City of Cambridge, City of Plymouth, Los Angeles County Employees Retirement System. All three of these institutional investors asked that prospective managers have at least a one-year track record, and the first two said a three-year track record was “highly advantageous”.
Alan Glatt, a partner with Alpha Equity, underscores the value a smaller niche firm can bring to new lines of business in a press release last week: “To participate in the 130/30 space, you either build a track record or in our particular case we offered built-out infrastructure and attractive six-plus year track record…”
And when it comes to staking a claim to 130/30 leadership, Glatt told AllAboutAlpha.com that the major asset managers only had “18 months to two years” in which to exploit a first mover advantage in the 130/30 space, and that a strategic acquisition of (part of) a smaller player was the quickest route to do so.
Charles Krusen, another partner with Alpha Equity told AllAboutAlpha.com that the deal illustrates two major themes in the asset management industry – the bifurcation of alpha and beta and the separation of manufacturing and distribution. He says that because 130/30 simply loosens the implicit “long-only constraint” in traditional strategies, it is destined to become the “new long-only” (as MIT’s Andrew Lo has recently mused). And as a result, defined contribution pension plans and 401k plans will soon be able to invest in these funds – prompting Krusen to conclude, “I think Merrill Lynch’s $1 trillion estimate for the size of the 130/30 market is too conservative”.
Of course, Trusco also has something Alpha Equity doesn’t have: size and distribution. And with size comes institutional relationships. The combination of Trusco’s institutional pedigree and Alpha Equity’s long/short experience will position both firms to grab a chunk of the 100 billion-gajillion dollar 130/30 industry.
Will the desire to quickly add 130/30 expertise motivate traditional managers to start a new round of hedge fund acquisitions? Probably not. As Glatt points out, there simply aren’t a lot of fish in the sea. Smaller 130/30 managers are few and far between. So a round of acquisitions reminiscent of the recent feeding frenzy (where the likes of JPMorgan and Goldman Sachs gobbled up hedge funds and funds of funds) may not be in the cards. But the fact remains that for the big Kahunas, wasting precious time trying to build their own capability and performance histories could jeopardize their chances of staking their claim in the 130/30 gold rush.
(Ed: But a hedge fund blog acquisition-binge is just around the corner. We’re sure of it…)