As Barron’s points out this week, 2009 was a “year of recovery and transparency for the hedge fund industry.”
If there is any sort of broad, non-investment-related corollary that has emerged in the alternatives world this past year, it is the emergence of the “third party” in everything from middle- and back-office administration to independent portfolio valuation.
Not to be confused with the counter-party, which we discussed in detail here (or with a third party marketer), the “third party” has become the investment world’s new way of (hypothetically) ensuring that processes, numbers, valuation practices and everything in between are calculated and signed off on at arm’s length from the fund manager.
For hedge fund managers, particularly those with institutional allocations, it has quickly become a new reality: Either have your portfolio independently valued and verified, or lose the business.
Now the rich are apparently getting into it too.
The Institute for Wealth Management Standards, a new, not-for-profit organization “dedicated to advancing a global standard for the management of significant wealth,” recently came up with a draft of what they call New Standards for Wealth Management. (You can read the draft online or download it in PDF form by clicking here.)
Thanks to all the nasty financial things that have happened over the past 18 months, the London-based group is doing what many have already done before them – produce a best practices guideline on everything from social and ethical responsibility to best-valuation practices.
Most involved in family offices are used to taking at least a bit of a drubbing by the press and the broader public for the simple reason that they’re rich. Dubbed “exclusive,” “wealthy” and other pseudonyms and monikers both positive and negative is par for the course when your family has enough dough to make a living out of just being loaded.
Even so, the notion that fiduciaries of wealthy portfolios are looking to jump onto the third-party-valuation bandwagon by making it common practice to hire an independent firm to evaluate and value portfolio positions as well as ensure transparency makes a lot of sense, and is frankly good news for the hedge fund industry, which has long coveted family offices for their cash.
As numerous “buy side” individuals have noted to AllAboutAlpha.com and others over the past year, the key to not just surviving but thriving from the ashes of 2008 is to literally remain diligent: to apply long-standing, albeit unwritten practices – like ensuring managers aren’t using their own internal personnel to come up with transaction and asset values – and making them widespread and mainstream.
The key, of course, is remaining diligent: sticking to the knitting, asking the tough questions and not skipping over boxes just because the manager has a great pedigree, event greater returns, lots of other investors and may balk at intrusive questions such as “Who independently values your portfolio, and what methodology do they use?”
As one institutional investor recently put it to us in a holiday-shopping analogy: “There is no point lining up to get into the store if the goods aren’t as advertised, or worse aren’t even there.”
Then again, it’s probably worth the extra effort in the long run, as the chart below from HFR Research shows.
Of course, we’d be remiss without taking our own friendly shot at the wealth management industry and it’s newfound focus on third parties, which we know takes it all in fun and stride. But for the sake of avoiding revolutions and mutinies, our small piece of advice would be to perhaps amend or delete the following from the final version:
“Allow wealth holders freedom from the burdens of wealth.”
“Wealth is the slave of a wise man. The master of a fool,” quoted by Seneca, is front and center on the IWMS home page.
We at AllAboutAlpha.com prefer this one from Ik Marvel (a.k.a. Donald Grant Mitchell):
“But wealth is a great means of refinement; and it is a security for gentleness, since it removes disturbing anxieties.”
(Ed: So to our loyal readers: May 2010 remove any “distributing anxieties” for you…)