Emanuel Arbib, chief executive of Integrated Asset Management, says the firm’s sale of the bulk of its institutional fund of hedge funds business to former shareholder Sal. Oppenheim at the height of the crisis proved timely, but Integrated now is looking to scale back up through acquisitions in Europe or the US.
GFM: What is the history and background of your company, principals and funds?
EA: The Integrated Group started trading in 2001 and at its peak had more than USD3bn in assets under management. We were among the pioneers in combining an internal and an acquisitive growth strategy. Our current fund offering comprises a BVI-based multistrategy fund and a Cayman-based feeder.
In 2009, when Deutsche Bank acquired our strategic partner, Sal. Oppenheim Bank, we agreed to sell Sal. Oppenheim the bulk of our assets under management in return for cash and its shareholding in Integrated. The company is currently controlled by its board members and management. Integrated was listed on London’s Alternative Investment Market until the end of 2010, when we tendered for roughly 50 per cent of the shares and delisted the company.
GFM: Who are your main service providers?
EA: Both funds have Citco as custodian and Trinity as administrator. The auditor is KPMG, and our legal advisers are Kramer Levin, Maples and Calder, and Schulte Roth & Zabel.
GFM: What is your distribution strategy and targeted client base?
EA: Traditionally our clients have been European-based private banks and high net worth individuals for the offshore funds, and insurance companies and foundations for the onshore part. Today our clients are mainly private banks and high net worth clients after we sold the onshore business to Sal. Oppenheim in 2009.
GFM: What impact has the recent global financial crisis and economic downturn had on your business?
EA: The 2008 crisis paradoxically hurt mostly our main institutional shareholders of the time, Sal. Oppenheim and Lehman Brothers; Lehman went out of business, and Sal. Oppenheim had to be acquired by Deutsche Bank.
As we historically relied on our partners for structuring and distribution, we decided soon after September 15, 2008 that the prevalent fund of funds business model would be severely affected by the “joint nuclear strike” of the gating and side-pocketing exercises and the Madoff affair. Having sold most of our fund of funds business to Sal. Oppenheim, we reinvested the proceeds by participating in the acquisition of a global commodity business, which has proved good timing.
GFM: Funds of hedge funds have had something of a bad press over the past few years. How would you respond?
EA: In the past funds of hedge funds have demonstrably over-promised and under-delivered in two major ways. They were not able to meet their liquidity promises to investors, and many of them failed in their due diligence to spot rogue managers, of which Madoff is only the most famous example.
However, when observed with some perspective, investors that were looking for lower losses in down markets by accepting lower returns in bull markets actually received this. The investors that were most disappointed were those that thought funds of funds would behave like equities in bull markets and bonds in bear markets.
There may have been some moral mis-selling in this case. However, the investors that remained and the new ones that are allocating now are much more aware of these pitfalls, while the funds have also been restructured and are managed to cope better with such an event.
GFM: What developments do you expect to see in your investment sector or industry field in the coming year?
EA: We have been early believers in the need for consolidation in our industry and over the past decade we have executed six M&A transactions involving funds of funds. We believe consolidation is the only realistic solution for small- to medium-sized fund of funds managers that no longer have the critical mass to attract the institutional investors that represent the bulk of large-scale allocation to this investment class.
GFM: How will these developments affect your firm and the performance of your funds?
EA: Even though we have sold the bulk of our assets, we have maintained a beachhead and intend to use that to scale back up through acquisitions. We have looked at several opportunities post-2008, but haven’t yet found a convincing fit. We are looking both in Europe and the US.
GFM: What do investors currently expect from managers, and how do you deal with those expectations?
EA: Investors are looking to hedge funds as ingredients in their portfolios. A good manager should be able to provide solutions to his clients by keeping his overall asset allocation in mind. Larger investors should no longer tolerate being forced to forfeit liquidity by participating in a pooled investment. They want tailor-made solutions.
GFM: What differentiates you from other managers in your sector?
EA: We believe we identified the need for consolidation almost before anybody else in the early 2000s. We executed on the strategy and were also able to make a decent exit when the market reached turmoil. I believe that 2012 should bring new opportunities.
GFM: How do you view the environment for fundraising over the coming 12 months?
EA: Challenging, of course. In the words of a doyen of the fund of funds community I was talking to a few days ago, “nobody is allocating to FOHFs these days”. Decent allocations are only coming to the largest funds from institutional investors.