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Hedge funds: a family office perspective

When the Manuli family went public with its Manuli Rubber company in 1997, Antonello Manuli did something many cash-rich family business owners have done – he set up a family office, writes Marc Smith.

But that's where the similarities with most of his peers end because the 64 year-old Italian subsequently invested a staggering 80% of the financial wealth into hedge funds.

"The interest in hedge funds came about because the family was ultimately disappointed with the performance of traditional asset managers," Karim Varini, CEO of Hedge Invest Financial Advisors, a subsidiary company set up by Varini and Manuli in 2006 to specialise in fund of hedge funds, exclusively tells

Instead of spending the intervening years looking for expert managers to hire, the family took it upon themselves to develop expertise in this niche area. The results were spectacular and have propelled the family as true experts in the field.

Antonello's two daughters, Elisabetta and Alessandra, both studied business administration at Bocconi University, but took a special interest in hedge funds. Alessandra graduated with highest honours thanks to her dissertation "Management policy of hedge funds: a comparing analysis".

Not content with that, the sisters went on to publish the first-ever book in Italian on hedge funds.

They then went to work for a London-based hedge fund before joining Hedge Invest, which following changes to how hedge funds were regulated by the Bank of Italy in 2001 opened itself up to outside investors. Elisabetta is currently vice chairman while Alessandra is co-CEO and both have helped to grow the business into a vehicle that has €1.1 billion AUM.

The Manuli hedge fund philosophy has a typically family twist to it, as Varini explains: "We don't view hedge funds as an asset class, we view them as an investment style, which is why the family invested the vast proportion of its wealth into them.

"The long-only industry as promoted by the big banks has been suffering since the end of the 1990s and hedge funds are proven to deliver superior returns in the short, medium and long term."

Although he admits that, in common with many, they lost money as a result of the financial crisis, he puts it at -10%, which despite being a loss is better than the average and was recovered in its entirety by the end of 2009. "Having a bad run is the nature of things," says Varini who pinpoints certain factors as key to the problems that hedge funds have encountered over the past 18 months.

"There are roughly 8000-9000 hedge funds out there, but too many new players have entered the fray since 2005," he explains. "Back then it was too easy to launch a fund – every bank was doing it because it was a product to sell and many wanted to transform what is an alpha product into a beta one."

Varini claims hedge funds came very close to becoming a commodity but because the industry is not scaleable – hedge funds have to close capacity at a certain time – he says thankfully this eventuality was avoided.

The negative coverage that the industry has received is unfair, according to Varini, particularly the bashing that shorting has endured by both press and certain governments.

"Shorting isn't a bad thing, it is actually good for markets. When I short, I'm simply expressing an opinion that a company is overvalued. The economic crisis was partly due to the fact that it was difficult to short because markets were so illiquid. A bubble happens when everyone is buying – you need people who short otherwise its undemocratic," Varini says.

He claims it is "pure fantasy" to suggest that shorting can manipulate a share price because price manipulation occurs when mainstream investors are only buying. "Shorting is not the cause of a problem, it is the effect. Remember when you short you have to buy back at some point, which provides liquidity to the market," he concludes.

Overall, Varini agrees with the hypothesis that we have seen a reduction in the number of funds but a concentration of quality as a result of the financial crisis. He says it is harder to find a good fund today when compared with 2007, but that is no bad thing. "Today it is much cleaner with less players but you have to be very selective," he says.

Karim Varini's hedge fund advice for family offices
• Keep it simple, We stay in long-short because it is relatively easy to understand. The best funds are also closed capacity.

• 90% of your time should be invested in the boring stuff such as reading the prospectus and doing site visits, not in evaluating performance. Ensure the structure surrounding the hedge fund can help the manager to perform.

• If a manager doesn't want to answer your questions, there are thousands of other funds that potentially could. Don't stay with people who are opaque – you may miss the next big thing, but it will also help to avoid the blow-ups.

• Avoid short cuts. We don't believe in managed account structures and hedge fund platforms. The former impose an extra administrative burden on hedge fund mangers with the risk that managed accounts take a back seat vis-à-vis their flagship product; the latter represent a kind of secondary market, which we believe is second rate.

Karim Varini will be speaking at The Family Alternative Investment Conference in Monte Carlo. Organised by Campden Conferences, it is held on 20-21 April 2010. Click here for more information.

Related hedge fund links:
Accessing the best funds
Gong it alone with the family
Needling out the best third party advice

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