PivotalPath throws down challenge

The traditional hedge fund consultant role is under attack from PivotalPath, a New York based hedge fund consultant, which finds the model antiquated. Managing principal Jon Caplis came to the firm in 2013, having been on the other side of the desk, most recently as the co-head of risk management and member of the investment committee at Campbell & Company, a multi-billion dollar CTA. 

“When I joined PivotalPath, one of the key trends was that funds of funds were in demise and have continued to play a diminishing role in hedge fund investing. The model was clearly broken and we have been observing a similar trend over the past three years with the large general consultants of the world,” he says. 

“In former roles within the research teams of large hedge funds consultants, for the most part, would call me in and I would answer a lot of questions, allowing younger, smart people, who might not be able to differentiate a CTA from a global macro fund, to tick the box. Many firms are not dedicating adequate resources to comprehensive due diligence, instead often relying on inexperienced analysts with ripe with biases. However, these ad hoc approaches to evaluating managers produce information and advice that many institutional investors, and billions of dollars, rely upon. 

“In 2013, we decided that our approach is going to be different in a number of ways. We developed technology to enable large scale research along with the ability to deliver this information to clients, which historically has been cost prohibitive.

“A lot of our clients are fed up with the traditional consulting model in general and also with the lack of transparency and fee structure. The pricing models out there are antiquated because the consultants were competing with the funds of funds, so it seemed like a bargain. A swathe of institutional investors are paying these fees and not getting value.”

Caplis believes that institutions end up being offered a very limited list of hedge funds that, almost by design, must be able to scale across their client base. “Look at the funds we cover,” he says. “A third is USD500 million or less and often times these are emerging managers or capacity constrained funds who have the ability to generate returns on a forward looking basis.”

Hedge funds returns have not been so convincing for the last couple of years. Caplis says: “This is definitely a difficult period but it’s a net positive for us as it causes investors to continue to question the value of their intermediaries, which today is namely their consultants. 

“Historically investing in the largest funds generated adequate performance that investors rarely questioned it, but today people are saying ‘we are spending hundreds of thousands of dollars with large consultants who provide little transparency and performance has been well below expectations’. In fact, a third of our clients still utilise general consultants but have hired us to hold the consultants accountable. 

PivotalPath was founded in 2010 as a traditional boutique hedge fund advisory firm working mostly with single family offices looking to diversify. The firm is now advising on close to USD7 billion (over a 10-fold increase since 2015) in assets for institutional investors, from single family offices to multi-family offices, pension funds, endowments and foundations.

Their client portal covers over 800 hedge funds, or over 90 per cent of global hedge fund assets, with comprehensive research on 230, who are deemed institutionally viable. They have offices in New York, London and travel to Asia at least three times a year.

When evaluating managers, PivotalPath implements a 20 step due diligence process and turns around a comprehensive assessment, complete with ratings, within 30-40 business days, well less than the 12-18 months common with many consultants. Funds are examined through six factors from both a qualitative and quantitative perspective from the firm’s history; the strategy; the team; risk management; performance and business considerations.

“We approach it like an investigative reporter, thoroughly reviewing fund materials, conducting in person interviews with multiple decision makers, all the while looking for consistencies and inconsistencies. At the end we apply a rigorous quantitative analysis that either supports or refutes what the manager tells us and we synthesise it all into a format that our clients can easily consume and compare strengths and weakness to other funds with similar approaches.”

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