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Bridgewater, Man: Clients Want More Than Money Management

By Lydia Tomkiw, re-published with permission from FundFire. The original article can be found here.

The largest hedge funds aren’t just investing client money these days. Increasingly, managers are focused on many other angles to the client relationship, stepping up their research and sharing tools, talking with investors about hot topics such as data, cybersecurity, technology and diversity and inclusion, and in some cases developing new products.

Some of the industry’s largest firms — Bridgewater Associates, Man Group, AQR Capital Management, the D.E. Shaw Group and Two Sigma Investments – shared details with FundFire on the changing general partner (GP) and limited partner (LP) relationship and how it has evolved and often deepened.

Hedge fund managers have taken on a more “consultative role than in the past” as allocators look for “information flow that will help other parts of their business,” says Scott Radke, CEO at New Holland Capital, a fund of funds manager and hedge fund seeder.

“It’s a really hard business and people understand that returns can come and go through a combination of bad luck and market conditions,” he says. “GPs are better off trying to add value beyond just returns.”

One-on-one talks between managers and investors have increased, with Radke citing discussions on topics such as business operations, working from home amid the pandemic, cybersecurity and classic market trends. New Holland has even taken advantage of secondments, sending a new hire to sit on the desk of a relative value manager to get a better understanding of the space, he adds.

A notable broadening of investor expectations began in 2008-2009, when institutions became a larger portion of the hedge fund industry base, says a spokesperson for D. E. Shaw in an email to FundFire. D.E. Shaw cites providing investors with written research, direct conversations and video calls featuring senior members of its leadership and investment teams as examples of that expansion.

“Engagement with investors on a broader range of topics helps them better understand our approach to analyzing markets and answering difficult questions, and it helps us better understand the matters that influence their work and portfolio decisions,” the spokesperson says.

Focusing on Strategic Partnerships

For Bridgewater, the firm’s roots in the 1970s were based in research — which evolved into items like its well-known Daily Observations notes — and in conducting strategic advisory work for C-suite leaders on challenges of that era, including emerging globalization and coming off the gold standard, says Kyle Delaney, chief commercial officer at Bridgewater.

Today, Bridgewater works with approximately 270 clients and has 130 people in client service roles. As large institutional investors have brought money in-house to manage, that has expanded the number of challenges and questions, Delaney says.

“[T]he nature of the problems is changing and therefore the nature of advice is changing,” he says.

Bridgewater created a risk budget tool that allows clients to model their portfolios with different economic scenarios, Delaney says. It's part of clients wanting to “know more about data — where do you get it, how do you clean it, rationalize it.” The firm also creates its own bespoke data sets.

Cybersecurity, data, analytics, charting, stress testing, portfolio construction and all the technology that goes into this effort “are very top-of-mind questions and concerns that the leadership of our clients have,” he says.

Another item in high demand for clients is the ability to leverage the manager's knowledge to figure out how to develop technology, especially amid the high costs of hiring and retaining great technologists and maintaining software. In the future, it could make sense to invest in such tech together, Delaney says.

Clients also seek Bridgewater’s input on diversity and inclusion, training and staff development and issues around environmental, social and governance (ESG) topics, and Delaney says the firm is “very open and willing to share how we are wrestling with problems and very willing to share the lessons learned.”

The past 15 months of the pandemic also has meant working with clients to build work-from-home packages tapping Bridgewater’s software teams and setting up calls for clients with virologists and cybersecurity experts.

About five years ago, Bridgewater formalized these kinds of strategic partnerships. “A

good number of our clients have contractual relationships with us,” Delaney says. “It’s very clearly articulated what we will do for them beyond managing money. It’s a formalized business relationship.”

For well over a decade, the Westport, Conn.-based firm has sent surveys to its clients to understand the challenges they are facing so client teams can come up with custom responses, he says.

“I think the future is… that we and some of our competitors will probably do more with clients than we have in the past than just managing money,” Delaney says.

Clients Driving Product Development

For Man Group, major changes came even prior to 2008 when its business became more institutional, says Eric Burl, co-head of global sales at the firm. Today, the firm’s asset base is 80% institutional and 20% third party distribution, he adds.

“There’s different and increasing demands and interest from those institutional investors for broader relationships than the standard GP investor and product,” Burl says.

Today, 70% of clients are invested in more than one product and the firm’s top 20 clients have more than six investments with Man.

“A number of Man’s existing flagship products have been developed either in response to client queries or in partnership with clients,” Burl says. He points to the development of the firm’s Institutional Solutions business, which came as a request for one product umbrella for efficiency of capital, creating one NAV and fee netting.

Man launched Man Institute in 2019 as a central repository for all its research and creates bespoke research at client request, Burl says. And Man FRM’s Managed Account Platform has given institutional investors the capabilities to diligence managers.

Like its peers, conversations around risk management, trading, technology and diversity and inclusion are also part of client discussions today.

“For firms like us, this is absolutely what we need to be doing to cement and deepen client relationships,” Burl says.

Diving Into Data Tools

Two Sigma Investments is also providing research and primers on topics and in-person discussions with technology, machine learning and data science experts for investors, as well as sharing best practices on areas from staffing to culture, says David Cohen, global head of investor relations, in an email to FundFire. Investors are interested in particular in understanding new tools and techniques in technology and data science, he adds. The firm also offers clients access to Venn Pro, a cloud-based tool that helps assess risk profiles across an entire portfolio.

And like all other firms, Two Sigma’s Cohen says all of this has “absolutely” strengthened GP-LP relationships.

“While deeper engagement is no substitute for performance, providing value to our clients by helping them address the challenges of their jobs, learn new areas of expertise and thinking creatively leads to deeper, longer-lasting relationships,” he says. “Our sophisticated investors have also come to expect more than just returns from their managers.”

Pandemic Virtual Pivot

For AQR, research papers have been core to the firm, with hundreds of papers available on its website, and the firm regularly performs client analyses and education events, including its flagship AQR University annual client event, says Dan Villalon, principal and global co-head of the Portfolio Solutions Group, in an email to FundFire.

When Covid-19 prevented in-person events, AQR introduced a virtual four-part series designed to give clients timely content on a weekly basis, began making quick summary clips of selected webinars and webisodes on research topics investors were asking about — such as yield floors and value’s recovery — and held a virtual roundtable of value investing experts.

AQR began building its analytical tool suite before the global financial crisis in 2008. Today, its Portfolio Solutions Group provides education, thought leadership and portfolio analysis for clients.

“Our clients wanted us to help quantify whether their portfolios were actually lacking something—and if so, how much. Answers to those questions are a source of ‘alpha’ investors increasingly want access to,” Villalon says.

The firm has also seen new product development emerge from client relationships. “[I]n many cases we’ve built custom portfolios to directly fill a gap identified in client analyses,” he says.

And the capabilities have strengthened relationships, Villalon says. “In economic terms, these additional capabilities can allow [the] client and investment manager to come up with more 'globally optimal' decisions, and often ones that are more likely to stick,” he says.

Investors? The Changes Are “Terrific”

The bottom line is that hedge funds are doing more for clients, says Tim Ng, CIO at consultancy Clearbrook Global Advisors. While portfolio risk and holdings data sharing has been around for some time, more information is now being shared on areas such as the subscription and redemption side, including attorneys walking investors through the “onerous” process of filling out initial subscription documents, and firms immediately informing clients of personnel changes, he says.

“It’s an evolution of the business, where many years ago you’d have to chase them down for this information,” he says. “And now they are at the forefront and that’s terrific. It has helped a lot.”

It’s a change Ng has noted over the last several years with large hedge funds. “I think they’ve come to realize in many cases that relationships are hard to come by in terms of institutional investors and I think they are… moving toward solidifying a long-term relationship with investors today,” he says.

There are, however, tensions at play, New Holland’s Radke says, pointing to firms needing to protect their intellectual property while being helpful, as well as scalability of research versus customization.

“I think you will see GPs being very thoughtful, however, on how they deploy this. You can’t have an infinite number of these deep strategic relationships,” he says.

Copyright 2021, Money-Media Inc. All rights reserved. Redistributed with permission. Unauthorized copying or redistribution prohibited by law

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