Greg Hoffman

This article contains general investment advice only (under AFSL 282288).

Greg Hoffman is research director of The Intelligent Investor. BusinessDay readers can enjoy a free trial offer at The Intelligent Investor website. For more Intelligent Investor articles Old Broad Street Research has withdrawn its A rating for the Baring Emerging Markets fund and removed it from the service following recent manager changes.

The move was prompted by the announced departure of managers James Syme and Paul Wymborne.

Roberto Lampl, current head of Latin America equities, is set to take over management of the fund becoming head of global emerging market equities.

The rating service said it would meet with the new fund manager in the coming months to discuss his plans.

Lampl will be supported by Mark Julio. Syme and Wymborne will stay on 'to ensure a smooth transition process' before joining JO Hambro Capital Management, according to Baring. An additional person is set to be recruited onto its Latin American team.

Syme and Wimborne have been recruited ahead of the launch of a new emerging markets fund for JO Hambro later in 2011.

By Simon Gray - No-one is ready to say that the good times have returned for London’s hedge fund industry, but professionals say the sector is definitely on the mend after the traumas of the past three years, when a near-across the board slump in performance and a resulting wave of investor redemptions sent the industry worldwide assets plunging by at least 30 per cent (possibly more) from peak to trough. Today the trend remains resolutely in the other direction.

Although up to date statistics are lacking and in some respects verge on the anecdotal, and the recent trend toward firms setting up operations in multiple jurisdictions makes calculation even harder, there is little reason to believe that there has been any substantial shift since 2009, when London accounted for around two-thirds of European hedge fund management firms and an estimated 75 to 90 per cent of their total assets under management, according to promotional body TheCityUK and its predecessor, International Financial Services London.

The optimism is qualified, though. What is taken as a clear sign of the industry’s returning health, the number of new funds being launched and of start-up managers entering the market, has to be weighed against the evident difficulties managers, especially newcomers with little or no independent track record, are encountering in trying to raise capital, although firms with an established infrastructure that got through the downturn without infuriating their client base with redemption restriction seem to be faring better.

This is at a time when the increased transparency being demanded by investors, especially institutions, is adding to costs in areas such as compliance, risk management and reporting, and when regulatory changes are promising more of the same. And maddeningly, the downturn seems to have done little to tame the often-daunting costs inherent in using London as a base from which to do business.

“We found that rental prices were still very high when we moved office a year ago,” says Simon Dinning, London managing partner of offshore legal specialist Ogier. “Things seem to have gone full circle in recruitment, too. The reality is that it’s an employee’s market now. A lot of people were laid off, but things are picking up and firms need to recruit. Good managers are in a much stronger position than they were 18 months ago.”

“We found that rental prices were still very high when we moved office a year ago,” says Simon Dinning, London managing partner of offshore legal specialist Ogier. “Things seem to have recovered and indeed gone full circle in recruitment. The reality is that in the legal field it is an employee’s market now. Unfortunately some firms did have to let a number of people go, but things are picking up and firms are hiring again.”

He recognises that these trends reflect the rebound in business confidence in recent months. “We had a very busy end to last year, not just in funds but notably in equity capital markets transactions. This activity appears to be continuing in 2011. While I don't believe anyone is predicting an exceptional year, there is certainly a degree of confidence returning.”

According to Dinning, fund launches are taking place with, on average, smaller amounts of capital being raised than would have been the case three or four years ago, but even then there are exceptions. “There are still some decent-sized launches taking place involving established managers with a track record and perhaps access to a larger pool of capital,” he says. “But it may take all of this year and perhaps some of next year before some of the new start-ups really begin to raise significant pools of capital.”

Recovery from the market turbulence of 2008-09 may not yet be in full throttle but an improvement in the business environment is clear, according to Julian Korek (pictured), founding member of consultants Kinetic Partners. “What is noticeable is that funds that enjoy investor confidence have fared particularly well,” he says. “For example, there are new flows into funds that investors feel have good governance plus performance. In addition, there is a pattern of the larger funds getting bigger, which reinforces the view that larger managers with better infrastructure and governance are seen as better places to invest.”

He also notes the tougher environment for start-ups. “The influx of new managers into the market is picking up, but capital-raising for new funds is proving difficult unless the manager has come out of an environment where they are taking a fund with them,” Korek says. “For managers starting from scratch it is still an uphill struggle, but we expect an upturn in the establishment of new funds in 2011. Of particular importance is the significant number of prop teams leaving large banks and setting up on their own, often with bank support.”

Getting the right infrastructure in place is essential if these managers are to inspire confidence among investing institutions, according to Chris Cattermole, sales manager for Advent Software’s Geneva system for Europe, the Middle East and Africa. “A lot of managers spinning out of investment banks are used to having all the tools at their fingertips,” he says. “All of a sudden they need to think about building a business rather than just trading.”

The founders of start-up firms need more than just the technology, though. “They need to have someone who understands the industry as their de facto chief operating officer,” Cattermole says. “They have to keep abreast of all regulatory requirements, the requirements of the new EU alternative fund managers directive or the Ucits requirements if that’s relevant. In small firms there is often one person wearing multiple hats as the chief operating officer, chief financial officer and compliance officer. The need for such a person is often overlooked until the business starts to gain traction.”

Martin Cornish, an investment management partner at law firm K&L Gates, says the industry is probably benefiting from a lifting of some of the uncertainty that has surrounded it over the past couple of years, not only because of ongoing volatility in the markets, fears over the solvency of certain European issuers of sovereign debt and the risk of a ‘double-dip’ economic recession, but also the long-running soap opera of the European Union’s Alternative Investment Fund Managers Directive.

“It was beginning to clear by the third quarter of last year, but up to then there was so much uncertainty about regulation, tax and jobs that you’d have been a brave man to set up during that period,” he says. “Some probably did it out of necessity, but it wasn’t the ideal time, and money-raising was – and continues to be – a real issue.

“Some investors that lost a lot of money have adopted very conservative strategies going forward and won’t part with their money unless they’re pretty sure they know what they’re investing in and are confident that the manager has all the right capabilities. It’s taking a lot longer for people to get their chequebooks out, even where they may be keen to invest and ultimately will do so. Investors are conducting more due diligence, they are thinking about it harder, and they want to understand things that previously they did not feel they needed to understand. All these factors have affected money-raising for new funds.”

Meanwhile, managers face another headache in the increasing readiness of governments and regulators to set out stipulations on how individuals in the sector should be remunerated. Many UK-based investment firms have been caught up by the Financial Services Authority’s new Remuneration Code, which came into effect at the beginning of this year and is designed to prevent individuals within financial institutions having a monetary incentive to engage in behaviour that increases risks for their employer or the financial system.