Surprise! One of your best sources for hedge fund competitor intelligence is Form ADV. You will be amazed at what you can learn from it. I know you are skeptical, but read on.
Most hedge fund managers are Registered Investment Advisors (RIAs) who are required to file an ADV. They are available at the SEC’s Investment Advisor Public Disclosure website.
Hedge Fund Competitor Analysis
If you want to stand out from the crowd – and you do – you need to know about the crowd. Competitor analysis should inform your overall business strategy. The following are some questions you may be able to answer as a result of this type of analysis.
- What different business strategies are there, and how successful are they?
- Do the firms all look alike, or are there distinct groups?
- Which group are you in?
- What does the customer base look like?
- What does the product mix look like?
- Which kinds of funds are getting the most traction?
- What are your competitors doing that you are not and vice versa?
What Is Available In a Hedge Fund’s Form ADV?
Here is some of the gold you can mine from Form ADV:
- Employee profile.
- Customer profile.
- Registered Investment Companies (40 Act Mutual Funds) advised.
- Affiliated entities registered or not, domestic or foreign.
- Private funds and their service providers, structures, asset types.
- Ownership structure.
- Regulatory actions past and present.
Let’s look at some of the most informative parts of Form ADV using actual data filed by funds you will know.
Item 5: Information About Your Advisory Business – Employees, Clients, and Compensation
Employees : Items 5.A. and 5.B.
These two items give you a total headcount and a breakdown. Scale the figures by regulatory $AUM to give you an employees per dollar value you can compare across firms. Consider Adage vs. Cerberus:
Adage is reporting nearly $900m regulatory $AUM per reported full-time and part-time non-clerical employee. That is nine times the $100m Cerberus is reporting!
Ignore the urge to declare the numbers wrong. Remember, filing these forms with the SEC is a serious business, and compliance departments are very careful to get them right. Instead, ask yourself why the numbers are different from what you expected and what, if any, information that difference might contain.
Maybe Adage uses a lot of consultants to run their money, maybe Adage runs more highly leveraged strategies. If I were competing with Adage, I would want to know why there is such a difference.
Customer Profile by Count and by $AUM: Items 5.D.(1) and (2)
I can’t believe a firm is required to disclose their customer profile, but here it is, by count and by $AUM no less. This stuff is competitor intelligence gold! Let’s take a look at Balyasny and AQR:
Balyasny shows the profile I expect to see for a classic hedge fund: it’s clients are 1 or more pooled investment vehicles that are NOT registered investment companies (RICs, 40 Act mutual funds). AQR shows a mix of advisory clients. The RICs are no surprise, but did you expect to see that between 25 and 50% of their $AUM are in private funds? Or that they provide advisory services to pensions, profit-sharing plans, and charities?
Investment Advisory Activities: Item 5.G.
In this section the firm essentially lists all their different business activities, giving you a view of their product offerings. That in itself is not terribly interesting unless item (3) is checked. Item 5.G.(3) indicates that the firm advises registered investment companies (mutual funds) and the firm is required to list them all in Schedule D. For example, below is AQR’s entry for Item 5.G. and their entry from Schedule D:
The SEC File Number you see in red text in the second image can be used in the SEC’s EDGAR system to get all kinds of data on the firm’s 40 Act Funds – that’s a whole other vein of precious information we can explore another day!
Item 7.A. Financial Industry Affiliations
In this section a firm lists all the types of other firms to which it is related by common ownership. The gold is in the supporting schedule: Schedule D. Often, the single firm you started researching lies in a complex web of related firms – you need to look at all those firms to understand who you are really competing with.
Fortress Investment Group LLC is a nice example, and shows why mining through the ADV is necessary:
Fortress Affiliated Group
|Group||CRDNum||Name||File Date||Employees||AUM ($bn)||Accounts|
|FORTRESS||144535||CWCAPITAL INVESTMENTS LLC||3/30/16||9||4||20|
|FORTRESS||143633||LOGAN CIRCLE PARTNERS, L.P.||4/15/16||84||31||183|
|FORTRESS||156119||NEWCASTLE INVESTMENT CORP.||4/15/16||0||0||2|
|FORTRESS||156106||NIC MANAGEMENT LLC||4/15/16||0||1||16|
Notice a simple search for “Fortress” would not have led you to all the affiliated companies.
Item 7.B. Private Fund Reporting
In the hedge fund world, Item 7.B. is pay dirt. This is where the private funds are listed, and there is a remarkable amount of information available on each including:
- Form of organization
- Type of fund
- Assets under management
- Minimum investment
- Service providers
If you want to get a good picture of which products your competitors are offering and which are successful in terms of bringing in assets, this is the place to look. In the near future I will do a post focusing on this section and some of the creative things you can do with it.
Item 10. Control Persons
This section of the ADV is always intriguing. I feel there is value here from a strategy viewpoint, perhaps it can help identify key players and relationships that might bear fruit. Let’s say one firm was considering acquiring another, the ownership structure of the target would certainly be of interest.
The following is the data filed by Brevan Howard US Investment Management LP. The key data is found this time in Schedule A followed by Schedule B:
As you can imagine, when you extend this analysis across all the members of an affiliated group of firms, some incredibly convoluted ownership (and therefore power and influence) structures emerge.
There are many other sections to the ADV – but I have covered the main sections of interest above.
I hope I have demonstrated that there is a wealth of useful information to be found in Form ADV which can be used for bench-marking, market analysis, and competitive strategy. To explore ADVs en masse, requires the process to be automated.
Contact me to discuss how I can help with your hedge fund competitor intelligence.