BIG-TIME MONEY RAISING AT THE BREAKERS :Business Strategy /Financial Advisors

the odyssey of raising money begins. Madhav, my
partner in illusion, and I flew to Palm Beach for Morgan Stanley’s fabled
hedge-fund conference at The Breakers.This conference is widely
considered the prime event at which to raise money because it attracts
the biggest, richest collection of hedge-fund buyers in the world. I had
never attended before. It is an amazing event.There must have been at
least 500 people in attendance, overflowing the richly appointed meeting
rooms and lawns of the great hotel by the ocean.

After an elaborate opening dinner and a couple of investor panels
with various hedge-fund managers trying to talk smart and appear brilliant,
there were two long days of nonstop group presentations and oneon-
one pitches with another fancy dinner the second night. The
intensity and the hustle level were incredibly high. Everybody was on
the make.The conference is organized and paid for by Morgan Stanley’s
Prime Brokerage division, and its sole purpose is to bring together
prospective investors in hedge funds with the funds that either clear
through or (like us) are going to clear through Morgan Stanley. Morgan
Stanley’s prime brokerage guys made a big deal of my being on an investment
panel and of our being given a major slot to present at the
conference.

Morgan Stanley is the biggest factor in the very lucrative prime
brokerage business.The firm’s prime brokerage business is an extremely
well managed, big fat gold mine.Why is it so attractive? Because it is a
direct beneficiary of the growth of the hedge-fund industry, which has
been, by far, the most dynamic segment of the asset management space.
The money managed by hedge funds has grown from $36 billion in
1990 to more than $1 trillion by the end of 2004, and no business that
the world’s investment banks are involved with has anywhere near those
growth and profitability characteristics. However, there are so many
new entrants trying to buy their way into the business by poaching
people that the bloom is beginning to come off the rose. Some large
hedge funds, in an effort to spread the wealth around, have more than
one prime broker.

What do prime brokers do? They provide securities to cover short
sales, make margin loans, clear trades, provide reporting services and
custody assets, provide research, and help with money raising. A fund’s
prime broker executes roughly 25% to 30% of its hedge-fund clients’
transactions, and most provide a daily net asset value (NAV) and a rudimentary
risk management system. The prime broker will find a new
hedge-fund office space, an operations officer, and traders, and it will
also provide basic accounting systems. How do prime brokers make
money? First, they earn from commissions and order flow, and hedge
funds now account for about one-third of total trading volume. Second
and most important, hedge funds are a captive source of demand for the
lucrative securities and margin lending activities from which a prime
broker locks in a fat spread. Morgan Stanley has the biggest prime brokerage
book, and its volume and profits have been growing at around
20% per annum. It’s now a major and cherished profit contributor to
the firm, with revenues currently well over $1 billion.

The competition for clients among the prime brokers is about service
and back-office infrastructure, but it is also about so-called capital
introductions. Prime brokers legally can only introduce hedge funds to
prospective investors; they can’t actually make pitches or solicit clients.
Only the hedge funds themselves can do that. Morgan Stanley has been
helpful in critiquing our presentation and advising us on office infrastructure.
In the months to come, the prime brokerage will organize
lunches or dinners for us with prospective investors across the United
States and in London, Geneva, and Hong Kong. At these functions, we
will tell our story. After that, about all Morgan Stanley can do is call the
prospective investor and ask if they would like to hear more. In addition
to the Breakers conference, Morgan Stanley and the other prime bro-
kers have various conferences for new managers throughout the year in
the United States, Europe, and Asia, but the meeting at The Breakers is
the big one!

I viewed the conference with trepidation.While at Morgan Stanley,
I had certainly peddled to plenty of blasé, semiskeptical audiences, but I
had also accumulated my allocation of hubris, and I was a little disconcerted
to be in Palm Beach grubbing for money with all the other
twerps. I envied the superstar hedge-fund guys who have a surfeit of
capital and don’t deign to appear at conferences. It is only we struggling
mortals who want money who come hat in hand. The superstars have
marketing managers who organize their own annual meetings with
their investors, complete with elaborate presentations by the messiah
himself and his entourage. In the glory days of Tiger, Julian Robertson
took this venue to new heights, with glittering formal dinner dances
following annual business sessions in wonderful settings like the Temple
of Dendur at the Metropolitan Museum of Art, the Duke of Wellington’s
house in London, and a chateau outside Paris. However, hedgefund
investors are not fools, and parties are not substitutes for
performance. Julian’s investors liked the parties, but they loved his performance
even more.

The group presentations are grindingly repetitious. The day is divided
into 45-minute segments with 10-minute intervals, and the
crowd circulates from one room to another. Madhav and I made the
same basic presentation over and over to groups of 10 to 30 people.The
skeptical faces gaze up at you, and by the fourth or fifth rendition you
are varying the routine to keep yourself from going batty, but by then
you can’t remember what you have or haven’t said.

On the second evening at The Breakers, there is a cocktail reception
on the terrace.The night was clear with stars and a moon, but cold
for Florida. Moët et Chandon champagne and the best California
chardonnay flowed under a cold, pale moon with a vast crowd of beautifully
dressed people milling about, gossiping in many tongues about
the rise and fall of hedge funds and their managers. In this milieu, a
Swiss accent is worth an automatic 50 IQ points, and an Oxbridge
tongue is worth 25. Plain old American is definitely déclassé.