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Hedge Fund Synergies: Consultants Find Ways to Leverage Business Smarts

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NEW YORK (–Banks, traditional money managers, insurance companies and private equity shops all have served as hedge fund launching pads or host organizations. Less noted is the role of some business consultancy firms in creating hedge fund operations.

The advantages of a connection to a larger organization, whether it be a bank or a business consultant, are myriad. Besides providing access to ready-made services such as computer expertise and legal counsel, the institutional structure reduces business risk for a fund. Perhaps even more important, skills and experience gained in other areas can add savvy to the investment process.

Cambridge, Mass.-headquartered Monitor Group is a case in point. A company with business consulting and investment management arms, Monitor advises Fortune 500 corporations on matters such as product and pricing strategies and sales development. Started in the 1980s by a group that includes Harvard Business School professors, it now employs 1,000 people in about 30 offices around the world.

The firm formed a merchant banking unit in 1998. That year, it raised its first buy-out fund and opened a hedge fund, a low-volatility long/short equity vehicle that was closed to new investment in 2004.

Industry sources say Monitor now is starting a second hedge fund, again long/short but with a long bias and a focus on small-cap stocks, to be run by the same portfolio manager.

A Shared Perspective

Following a nautical theme, the hedge fund management business is called Monitor Vela–Italian for sail. The investment approach emphasizes the study of company fundamentals through interviews as well as data analysis and checks with the group’s contacts.

The private equity business, called Monitor Clipper, closed on a second fund last year. There is also an early-stage venture capital portfolio.

In this structure, investment management and consultancy can gain from each other’s intellectual capital–in the sense of expertise, rather than any particular information.

The phenomenon of using the same resources for more than one product, known as synergy in common parlance and economies of scope in business school terminology, has in recent decades been a central idea in the organization of firms across industries. But it is not easy to achieve, as the AOL-Time Warner experience has made vividly clear.

A long-standing example of successfully using business consultancy-derived skills in investment management is Bain & Company Inc., a business consultant headquartered in Boston, with a sizable practice in private equity consulting. In 1984, Bill Bain and former Bain employees started a separate entity for venture capital investing, Bain Capital LLC.

This independent offshoot has become a major presence in alternatives investing and includes a multi-billion dollar hedge fund operation. Its long/short equity fund received an allocation from the California Public Employees’ Retirement System in 2002.

Bain & Company emphasizes that the investment firm does not share management or information with the consultancy. What it does have in common is a way of looking at problems and a results-oriented approach. You could say the hedge fund shares DNA with business consultants.

Contact Bob Keane with questions or comments at: [email protected].


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