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September 30, 2003

Hedgies for the Pros

By Kathryn M.Welling

That's not how we'd put it. But you do need to have an organization chart, a real operating infrastructure. You need to have an investment process that is transparent, as well as one that is supported by a robust research infrastructure. All of that is second nature to me, because this is the third institutional investment team I have built just in the last 13 years. The first two at large firms and now this one for myself and my team.

Everything is harder today than it was when Wall was a one-way Street. But aren't you just a little worried that the imposition of consultants, and layers of infrastructure, sectorization etc. on the once-swashbuckling hedge fund sector will kill the goose everyone's expecting to continue laying golden eggs?

The answer is no. I don't think the consultants, for example, are going to have an opportunity to categorize hedge fund managers and to constrain them in style boxes the way they did the long-only universe.

What is to stop them? It seems that process is already underway.

Well, they can try all they want. But one thing I've noticed in getting this business up and running is that the big, traditional long-only pension consultants - the Frank Russells etc. of the world - are still way behind the curve in the alternative asset management category.

The question is, how many institutions really know what they're getting when they dabble in now-trendy alternative vehicles?

We tell potential clients that one of the mainstays of our investment philosophy is that things just aren't what they seem. People make mistakes all the time-and we prey on those errors. The same thing is going to happen to institutional investors in alternative investments that happened to them in the international arena. Remember, in the late 1980s and early 1990s, when Japan was flying and all of a sudden it was like, "Hey, why don't you put some international assets in your plan? They're a good diversifier and reduce risk."

Until they don't.

Yes. But it was such an easy sell. We grew a business from zero to $4 billion in the 1990s with international and global mandates.

What does that say about Avera's own long-term prospects?

Well, that is not to say that alternative investment vehicles, just like international investment portfolios, aren't a robust profitable business opportunity, if you're any good. But for everybody else at the margin, you are right. There is no long-term business plan for mediocrity. And that is the way it should be. During the 1990s there was just so much mediocre product entering the market, it was unbelievable. So for the last three plus years, we've been going through the painful process of weeding all that stuff out. The same cycle will probably happen in alternatives. But you know, I really feel for these people trying to run pension funds and these public plans. They are in a horrible bind.

Because their assets don't come close to matching their liabilities, you mean?