The resignation of two well-respected boutique fund managers in the space of a couple of weeks has s...
The resignation of two well-respected boutique fund managers in the space of a couple of weeks has served to remind would-be investors that a move to a boutique is not necessarily the last career change an ambitious manager might make.
Both Hugh Hendry of Odey Asset Management and Stuart Mitchell of JO Hambro Investment Management have left their respective companies to set up hedge fund companies on their own (see stories on page 5 and 1).
Traditionally, it was assumed that if a manager could earn his stripes in a big blue-chip company and battle through the bureacracy, the meetings and the marketing, they would either retire early or, if they had not yet grown sick of being managers, join a boutique. There they would get the level of autonomy they had missed working for a big house. They would be well reimbursed and would stay their until retirement.
But it seems that hedge funds are providing a route for individual managers to get even more control over their lives and their salaries. Both Mitchell and Hendry are hoping to take their hedge portfolios with them and it is likely they will be succeed in doing so.
This brings up two important points: firstly, the highly lucrative charging structure of most hedge funds has allowed micro companies with one or two products to be sustainable, which has made keeping track of managers even more of an arduous task. Secondly, it focuses the mind on a question: what is the real value of a fund management house?
If the value is purely in its fund management team, as is often the case in boutiques, then that is a very ephemeral thing and investors should be aware that at any moment the value could vanish.
Furthermore, what happens when a boutique is bought by a larger company? How do you value a company whose core proposition is access to the skills of people who are free to leave whenever they choose?
The solution to these issues seems to be very simple: equity stakes in business. It is ownership of a company that keeps senior people tied in and that provides the only kind of guarantee. Tilney' MBO this month is an instance in point - they could have opted for a trade sale but that would not have been nearly as interesting for the management.
New Star is a good example. CEO John Duffield has an impressive record of keeping his managers and he does not even pay bonuses - he just gives them substantial equity stakes and that provides the ongoing reason to stay. Of course, with New Star, the staff are waiting for the company to be listed, at which point it will be interesting to see how liquid the stock, and the staff, become.
In any case, the key factor for advisers to remember is that when putting your client's money with an exclusive boutique manager, do not think that you have found the permanent solution to the high alpha section of your portfolio. Boutique managers are just as capable of moving on as those working for their blue chip competitors.
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