News Column

Hedging Its Bets

October 2003, HISPANIC BUSINESS Magazine

Derek Reveron

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Global Partners Group (GPG), an investment management company based in Fort Lauderdale, Florida, is a rarity in the finance industry. GPG is a Hispanic-owned firm that seeks to develop hedge fund managers and connect them with institutions that provide seed capital to launch new funds.

"It's like a matchmaking service," says chairman and CEO Marcos Konig, a native of Venezuela. "We take people who have talent in trading, give them the tools and infrastructure they need to develop, and match them with the appropriate hedge fund capital providers."

GPG has offered a range of financial products and services to institutional and private investors since Mr. Konig founded the company as North American Institutional Brokers in 1987. He and his two brothers, senior advisor Salomon and senior vice-president Harry, together own 51 percent of GPG. The firm has 31 employees in the United States and 25 representatives in 14 countries, mostly in Latin America.

GPG posted revenue of $8.5 million in 2000, during the height of the bull stock market. That same year, the company acquired New Jersey–based Westfalia Investments in return for 49 percent of GPG. As the market fizzled, GPG's revenue dropped to $4.6 million in 2001 and $4.2 million in 2002.

Looking to profit from the growing popularity of hedge funds, last year GPG launched efforts to develop or train hedge fund managers. The company recruits individual traders who manage their own portfolios of at least $250,000. GPG provides research, administrative assistance, and technology to make trades. The firm tracks and evaluates portfolio returns and strategies. Top performers will get seed capital from GPG and its financial partners to create boutique hedge funds.

Hedge funds are controversial and high-risk investments. Like mutual funds, hedge funds consist of pools of money from investors. But hedge funds can make a much wider variety of moves. They can take long or short positions (betting values will rise or fall). They can trade stocks, options, bonds, derivatives, currencies, and commodities. And they can use arbitrage and buy and sell undervalued securities. Many funds hedge against downturns in the market, but there are dozens of investment strategies, and they can vary greatly.

Hedge funds are a mystery to most people, including most Hispanics, who tend to have fewer investments in stocks and mutual funds than the general population, according to polls and financial experts (see the Hispanic Asset Portfolio report on page 14 of this issue).

"Hispanics are 10 steps behind in understanding what investments are in general, so it will take a while for them to understand hedge funds and invest in them," Mr. Konig says.

For the most part, Hispanics have not been among the higher-income individuals who have traditionally invested in hedge funds. But that could change. Hedge funds have become more popular during the stock market downturn of the last few years. Institutions are starting to market hedge fund investments to small investors for as little as $500.

There are more than 6,000 hedge funds in the United States, and the assets they manage have doubled over the last five years to $665 billion, according to Chicago-based Hedge Fund Research. Analysts predict that figure could reach $2 trillion by 2010.

Because of that growth, the demand for fund managers threatens to exceed supply. More than $7.5 billion in hedge fund seed capital is in need of managers, according to InvestHedge, an industry publication. Analysts point to the need for hedge fund "intermediaries" like GPG because there are no industry standards for training and evaluating hedge fund managers, and poorly trained managers can threaten fund performance.

"Increasing asset flows into hedge funds and growing institutional interest are putting pressure on industry participants to continue to deliver on the true promise of this asset class," states the investment consulting group Hawthorn, a unit of PNC Financial Services Group.

The Konig brothers hope to build their hedge fund business by helping institutional investors expand and improve their hedge fund operations, and by teaming up with hedge fund seed capital providers to invest in the creation of funds run by managers provided by GPG. So far, the company has agreements with four financial institutions, including the global banking group ABN AMRO, to groom hedge fund managers, Mr. Konig says.

GPG has not debuted or hired any hedge fund managers yet but expects to do so soon.

The company is evaluating three traders as potential overseers. "Some of them look good and have sound strategies. One has had very good months but some bad months," Mr. Konig says. It can take several months to a few years to produce a hedge fund manager, he adds. GPG is recruiting more candidates.

Developing hedge fund managers is a low-overhead proposition for GPG. The company doesn't pay the traders, who use GPG's electronic trading system at a cost of up to 1.25 cents per order. "It's a win-win situation. We get access to traders that trade frequently and generate revenue. And they can get capital they wouldn't ordinarily have," Mr. Konig explains.

GPG targets independent traders with their own portfolios largely because it's less expensive and time-consuming than recruiting traders and money managers who work for financial institutions. Also, the industry will need entrepreneurial traders to help fill the need for managers.

Companies like GPG can develop hedge fund traders with pretty much a free hand because the industry lacks consistent standards for grooming managers, analysts say. However, GPG evaluates potential managers according to its own criteria for measuring financial returns and investment strategies, Mr. Konig says.

"We have many indicators that show whether a person is successful or not. A trader must sustain an amount of money over a specific period of time and grow it," he says.

If anyone can judge trading talent, Mr. Konig emphasizes, it's him and his brothers. Before launching GPG, Mr. Konig was managing director of an investment firm in Caracas and president of a U.S. company that provides currency exchange risk management services. Salomon Konig previously traded securities for investment companies and advised several hedge funds. Harry Konig traded currencies, commodities, and precious metals for several companies.

The Konig brothers are working to create hedge fund managers amid growing controversy about the industry's practices. The Securities and Exchange Commission began investigating hedge funds early last year after the number of fraud cases increased to 12 in 2002 from two in 1999.

In a recent high-profile case, the SEC alleged that South Florida–based Lancer Management Group defrauded investors with false performance and net asset figures. A Florida judge froze the assets of the company, which once claimed to have $1 billion under management.

One problem is that there are few barriers to starting and operating hedge funds. Registration with the SEC is not required, and the funds are not subject to many of the federal and state laws that require other investments to disclose information.

Hedge fund managers are notoriously secretive about their strategies. Returns have dropped recently, and many institutional investors that lost millions have directed their anger at managers who refuse to explain how it happened. The SEC also has expressed concerns about the trend to sell hedge funds to small investors and is considering proposing new rules and laws to regulate the industry.

But that shouldn't hurt the business of firms like GPG, Mr. Konig says. Hedge funds will inevitably grow, become a more common investment, and require more managers created by firms like GPG, he says.



Source: HISPANIC BUSINESS Magazine


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