Conference Call: Institutions upping stake in alternatives

Investors looking for diversification came face to face late last month with marketers offering some of the most exclusive investment products available – and some warnings as well.

“Right now we’re very much interested in some market-neutral [hedge fund] strategies,” said Richard Hampton, a member of the board that allocates investments for the Fire Pension Relief Fund of New Orleans. “We will continue to be creative in adding alternatives. We don’t look at alternatives as being a higher risk.”

Regardless of the size of their portfolios, Mr. Hampton and most of those attending the Global Alternative Investment Management Symposium in Palm Beach, Fla., were ready to move beyond 10% allocations in such investments as venture capital and hedge funds.

David Hornfischer, an investment committee member for the Berklee College of Music in Boston, said the college is continuing a “patient growth strategy into alternatives.”

“The lesson we’ve learned so far is that it takes a long time to get to a 10% allocation,” he said – music to the ears of eager money managers and marketing representatives.

But just as the institutional and wealthy individual investors were divulging their growing appetite for alternatives, they were also being reminded that in an industry of limited regulatory oversight, it is very much a case of “buyer beware.”

With that in mind, due diligence was the theme of a session hosted by Amy Hirsch, CEO of Paradigm Consulting in Clifton, N.J. The session, aptly dubbed “Fry the Manager,” included a live lesson in due-diligence interviewing. Ms. Hirsch picked hedge fund managers out of the audience for a thorough grilling.

“Here’s a hint on conducting due diligence – use your ears, not your mouth,” Ms. Hirsch said. “Give the managers time to speak.”

As Ms. Hirsch illustrated, even the most basic information can be twisted or glossed over – sometimes intentionally, sometimes not – if the investor doesn’t pay attention.

“Delve into the issue of leverage,” Ms. Hirsch warned. “Remember, there are basically three kinds of leverage: implied leverage, implicit leverage and massive leverage.”

Ms. Hirsch, whose company is responsible for allocating client assets to various alternative investments, said she typically spends two days conducting on-site due diligence at a company, leaving no paperweight unturned.

“Meet everyone in the office, find out if anyone is related, find out the employee turnover rate,” she said, emphasizing that investment performance should be the last area of investigation.

“Due diligence is an art, not a science,” Ms. Hirsch said. “And you can’t do it over lunch.”

Mix and mingle

The conference, sponsored by the Institute for International Research in New York, was created to bring asset allocators and asset managers together in an environment that encourages open and relaxed dialogue.

John Sanpietro, senior business development manager with the institute, said the recent volatility in the stock market has contributed to the increased interest in alternative investments.

And, he said, on par with those kinds of investments, the investors prefer to mingle among their peers.

“We’re dealing with the alternative investment arena on a broad scale, and that attracts a good cross-section of people,” he said in a reference to the crowd, made up mostly of top-level executives.