How hedge funds can get on Goldman Sachs' approved list

Hong Kong-based Tuan Lam has managerial oversight in the alternative investments and manager selection group at Goldman Sachs Asset Management in Asia. Goldman Sachs' global platform consists of three integrated businesses: funds of private equity funds, funds of hedge funds and funds of long-only funds.

What is the typical size of your funds?
Tuan Lam: They vary based on the fund's focus and strategy. For example, in the private-equity area, we have a global diversified programme which is usually about $1.5 billion per fund. [Funds] are raised, on average, once every 18 to 24 months. In addition, we have a family of smaller funds for more niche strategies. An example would be our Asia-focused fund of funds.

What type of hedge fund managers, strategies and locations, interest you for 2010?
In alternatives, investors are migrating back into hedge funds but have not yet jumped in a big way back into the more illiquid strategies, such as private equity. The strategies that are attracting the most interest in Asia are the long-biased ones, not just equity long/short but also event-driven long-biased strategies.

Beyond that, we are also seeing some credit strategy funds getting launched.

Having said that, investors are still cautious about strategies that require high levels of leverage; managers are also generally focused on strategies that can create returns without lots of leverage. Managers are likely to focus on fundamental analysis to identify company-specific, as opposed to deal structure-specific, drivers of returns.

Is the story in Asia the same as globally?
This year in Asia, similar to what we see globally, there will likely be less of a "crowding effect" around some of the strategies, thereby creating more room to drive returns. We also believe managers will be more focused on risk management, downside protection and transparency. 

Another important thing to note is that many of the newer funds currently in the market to raise capital are run by experienced investors, who may have been with larger franchises and saw the lessons of 2008.

What important things can a fund do to get on your approved list?
In talking to managers, we spend a lot of time on the basic elements: the team's capabilities, investment strategy, reputation, track record, etc. We also are very focused on another very important aspect, operational due diligence. 

We have a team of very experienced people, who have backgrounds in investing, fund management and fund operations, who look at how the funds are operated and managed. They focus on areas such as check and balances within a fund, operational robustness, cash management, reporting, transparency, etc. They have interviewed and conducted due diligence on hundreds, or maybe thousands, of managers over time.

In performing operational due diligence, they focus on making sure the fund managers have put in place a list of core, basic operational elements; they also focus on a wide range of qualitative issues. This capability has helped us avoid some of the well known fraud issues in the US. It's going to continue to be an area of focus for us.

What about performance? When does finding a high performing fund become the main driver?
Strong performance is always important to us. Currently many investors are looking for managers who didn't get crushed in 2008 and have been able to participate in the 2009 upturn. If they maintained low net exposure and missed the upturn in 2009, then we focus on understanding their rationale for the strategy and the positions.

If these are well-thought out and are based on sound analysis, our guess is that investors don't necessarily rule the managers out only because of 2009 relative performance. 

Aren't investors flooding to Asia now for quick outperformance and for very high returns?
I think they're looking for longer-term capital appreciation. Our clients generally look at the Asia allocation over a longer horizon. They are also looking for investment themes and strategies that provide a more attractive risk/reward profile than what they see elsewhere around the globe. In addition, they are looking for ways to diversify their portfolios across strategies, geographic markets and themes. 

What is your outlook for 2010?
In Asia private equity, not surprisingly, there is a high level of interest in growth-capital investing in India and China. The macro trends are becoming more compelling. In addition, while there is quite a bit of liquidity in these markets, it is not clear that the liquidity has directly benefited the universe of mid-sized, privately owned enterprises. As a result, private equity will continue to play a key role in funding growth in the mid-market of these two economies. 

In hedge funds, we are seeing interest in various long-biased strategies to address the growth themes. Clients are also focused on newer funds which are run by experienced managers who did relatively well in 2008 and 2009, who are focused on risk management and providing higher levels of transparency.