How do you build the world’s biggest stock hedge fund? Call it something else.
As the Wall Street Journal reports today, Adage Capital Management, led by former Harvard endowment executives Robert Atchinson and Phillip Gross, now oversees $28 billion, more than any of its stock-picking peers.
The quiet Boston firm’s penchant for secrecy hardly makes it an outlier in the hedge-fund world. But its unusual practices do: Adage only collects its 20% performance fee if it beats the S&P 500 including dividends (a so-called hurdle)—and it refunds up to half the charge if it fails to keep pace in the subsequent year.
Adage is perhaps more suitable to that sort of practice because Messrs. Atchinson and Gross at all points keep the portfolio fully “net-long,” with a heavy emphasis on long bets over shorts, and keep 100% exposure to the S&P’s rise and fall. Most hedge funds pitch themselves as less exposed, with 30-40% net exposure more typical to keep performance from whipsawing along with the equity benchmark.
By yoking themselves closely to the S&P, however, Adage has also successfully convinced investors, who include the endowments of Harvard and the University of California, to allow it to wriggle into their “long only” equity portfolios, rather than shunting it off in the much smaller hedge-fund or alternatives categories.
Critics say the practice has the effect of adding costlier, more complex investments which over time may underperform, but influential consultants like Cambridge Associates have given the habit a stamp of approval. A Cambridge executive declined to comment on any specific advice given.
From that vantage, Adage is a relatively expensive substitute for more passive investments like exchange-traded funds, rather than a cheaper version of a hedge fund. Given the firm’s performance, beating the S&P 500 by 3.27% a year on average over the past 14 years, many investors don’t seem bothered. The firm hasn’t taken in new money in years.
“We think: Let’s find managers who can produce excess returns without any preconceived notions of filling buckets,” said Scott Chan, senior managing director at the University of California’s endowment. “They’re not this one, two or three-trick pony. They didn’t call the market turn here or there—they’ve just picked stocks over a long period of time. That’s really rare.”...MORE