“A lot of managers complained, saying: ‘They were using my fund like an ATM’. Well that’s bloody well right. It’s their money. They can use it as they like,” he says. He asks whether implemented consultants invest their personal money in their strategies. “That’s a very important metric to assess the amount of shoulder-to-shoulder commitment,” he says. Vos says investors should be suspicious of any consultant promoting the hypothetical performance of a paper portfolio based on their recommendations. “Such numbers can be easily manipulated by assumptions about timing and ex-post selection, exclusion of share classes and other factors,” he says. “Investors should focus on actual, realised investment performance in hedge funds of a consultant’s clients.” Like hedge FoF managers, consultants research the investment strategies and operational strength of managers. They manage a buy list. Gundle would like to see how the aggregate performance of the funds they recommend to clients – including any that have gone out of business – stands up against a widely-used index of hedge fund returns. Vos says clients’ net performance in hedge funds recommended by Aksia should be used to measure the value of the consultant’s advice.

This can be done by grouping clients’ performance into an equally-weighted composite index or, subject to permissions, anonymously displaying the annualised performance of clients against hedge fund indexes. Gundle suspects that some consultants primarily recommend large funds that can absorb more client assets, and that they overlook emerging managers with less capacity. “You recommend it and sell it to as many clients as possible. So you tend to get crowding in many of the biggest names,” he says. He points to the finding that hedge fund managers with more than $1 billion attract more than 85 per cent of the capital flows into the sector. “The crowding of big league managers on buy lists denies the investors an opportunity to invest in some of the smaller, less well-known managers. These managers have the chance to outperform because the larger your capital base, the greater the chance your performance will be compressed,” Gundle says.

Vos says this is the danger of maintaining a “buy list” and adds that Aksia has never done this. Ruddick says this can apply to consultants with small teams that can only cover a small number of the largest funds. Albourne, with more than 200 employees, is not among them. Collectively, its clients are invested in more than 2,000 funds. “However some investors only want to be in the largest funds. It’s their perception of lowering business and reputation risk, even if it does come at some cost,” Ruddick says. The percentage of client capital that Aksia allocates to emerging managers depends on clients’ investment philosophies and preferences. It ranges from nearly 75 per cent to almost zero. However, in 2009, established managers enjoyed the stability, deal flow and capital base to take advantage of the large investment opportunities available. They became Aksia’s focus. But in 2011, managers of between $300 million and $1.5 billion are absorbing much of Aksia’s attention. In contrast, Albourne allocates a small amount to emerging managers. “If it were large, they wouldn’t be emerging managers,” Ruddick says. “Our clients represent about 15 per cent of the market. We were seeing a resurgence of interest in emerging managers but the current macro turbulence may quell this. Emerging managers have less secure banking lines, which matters a lot in some strategies.”