Busted!

Skeletons in the corporate closet? Then the last person you want on your case is Anthony Yadgaroff, says Christopher Silvester.

To meet him, you wouldn’t think that Anthony Yadgaroff is capable of striking fear into anyone. That would be a mistake, possibly a costly one. Sure, he may be modest, charming, self-deprecating, and nervous about posing for the camera. (Our photographer found it nigh impossible to coax even the thinnest of smiles out of him.) Yet on a couple of occasions he has vanquished or wounded some mighty financial beasts – all through the power of research and analysis.

In the early 1990s, Allenbridge, Yadgaroff’s company, produced a negative report about an Enterprise Zone Trust (EZT) that was being promoted by stockbrokers Greig Middleton. Ill-advisedly, they sued him. He helped to form an action group on behalf of the investors and defended his corner doughtily, with the result that the SFA (forerunner of the FSA) fined Greig Middleton £200,000.

Incredibly, Grieg Middleton had no professional indemnity insurance, so it had to sell its business in order to pay the investors and settle the legal bills – around £8.5 million in total. A year later, the developer of Canary Wharf, Olympia & York, was forced to pull another EZT issue, valued at £215 million, after he came out with a damning report.

Yadgaroff the dragon slayer struck again in the late 1990s when his research into three of its unit trusts helped with the prosecution of a case that eventually cost Morgan Grenfell a reputed £300 million. Deutsche Bank, by then Morgan Grenfell’s parent, was again in Mr Yadgaroff’s sights in 2001, when its ambitious plans to launch a $1 billion hedge fund in the UK were holed by a very poor rating in an Allenbridge report.

More recently, he criticised certain leading unit trust groups for allowing hedge fund Pentagon Capital Management to make returns of 37 per cent for its high-net-worth clients through an unethical strategy based on market-timed dealings. In a letter to the leading unit trust groups, Yadgaroff warned that his investment advisory business would remove their funds from its buy list unless it gave assurances that it would not permit hedge funds to exploit tiny mispricings to the detriment of long-only unit holders.

Allenbridge has two prongs to its business, a research and analysis prong for wealth-management clients and a discount brokerage prong, whereby it puts investors into unit trusts but with this difference: it provides these investors with a regular analysis of their funds’ investment performance. Unusually, its customers include, on the one hand, private banks, major pension funds, and family offices, and on the other hand ordinary retail investors.

‘Our main business is doing research,’ says Yadgaroff. ‘We are a research organisation and we’ve brought in a lot of experience, such as Alan Saunders, the former chief economist of Shell; Peter Scales, the former chief executive of the London Pensions Fund Authority; and Peter Murray, the former chief executive of the Railways Pension Trustee Company. So we have a lot of grey hairs, people who’ve been around the City. As I said, the DNA of our business is research and experience, and we do research in two different areas. We are probably best known now for doing research into hedge funds and hedge funds of funds.’

Allenbridge offers two research services. One is where a hedge fund pays to be rated. The other is where an institution mandates Allenbridge to do due diligence on a fund’s or fund management group’s performance. Last year, for example, the European private-equity group Sagard (formed from a group of industrial families led by the Desmarais family of Canada) decided it wanted to buy into a hedge-fund business in Paris called the Olympia Group and Allenbridge was asked to undertake a due diligence assessment. ‘Sagard bought 45 per cent of Olympia,’ says Yadgaroff, ‘and so our bit was to go in and make sure everything was OK.’

Allenbridge has its own rating system, which is ‘enormously complicated’, Yadgaroff explains with pride. ‘What we do is, first compare a hedge fund, or fund of funds, with similar funds, a peer-group comparison, which is probably the hardest bit. So similar hedge funds, because unlike a unit trust or mutual fund where everything is transparent and there is no gearing, here you’ve got gearing in the funds.

‘We try to compare different funds in the same category and then look at the track record of the fund in question. We have come up with a proprietary system called Tempus, a metric which uses time-weighting and looks at different risks and performance measurements. We look especially at recent performance. The more recent the performance, the more important it is.

‘There are a lot of ratios in hedge funds, Sortino and Sharpe ratios, but the problem with these ratios is that if you have a small fund that was doing well at the beginning and you have a big fund that is doing well now but that hadn’t done so well before, sometimes, looking at these ratios, they will look exactly the same. So what we do is look at improving performance, because the problem with hedge funds is that the bigger they get, the less well they tend to do.’ Yadgaroff insists on dividing hedge funds into two distinct groups: hedge funds pure and simple and hedge funds of funds, which diversify by clustering hedge funds together.

At the moment, he explains, most of the pension funds in the UK are going into a hedge fund of funds rather than a hedge fund. ‘You get some funds of funds which are a mixture of everything and some which just specialise in a specific area, for example Gottex, whose specialty has been creating funds of funds that are market-neutral and which has grown from $45 million to $14 billion in six years.

‘Some of the best performing hedge funds are closed, so you can’t get access to them, and the only way you could get access to them is to go into a fund of funds that’s already got an allocation. The whole idea of hedge funds is that they are there to protect the downside and that is why they are so popular with family offices, where people have made their fortune and want to preserve capital, and anything that will give them eight per cent, ten per cent or twelve per cent is welcome.

‘So yes, the perception, particularly from retail, is that they are very hairy. But in most cases you can’t get performance when you’re paying insurance, because there is a cost. I can’t understand why the FSA thought it was risky to go into a hedge fund that protected you on the downside, and yet you could buy a technology fund unit trust and lose 90 per cent. But personally I don’t think a hedge fund is a retail-market product. It is not going to make people their fortunes.’ Other than the managers, that is.

Allenbridge began its life as a performance measurer. ‘When we started in the 1980s,’ recalls Yadgaroff, ‘what we thought was needed was an organisation that could evaluate some fund managers’ performance. People would ask James Capel or Rothschild’s to look after their money and everybody thought everybody did the same thing – nobody researched the market.

‘But pension funds had WM, which was the old Wood Mackenzie, which would measure the fund managers’ performance and rank them and show how they compared to other pension funds doing the same thing. We thought there was a need for private clients to have the same sort of service and understand how managers were getting performance and what risks they were taking to get performance. Also, private clients were very badly treated in the old days compared to institutions.

‘Young stockbrokers were let loose on private clients, would lose them a bit of money, then later they could move on to pension funds, because pension funds were the big market and private clients were very definitely not.

‘What happened was that a couple of clients came to us with their portfolios and in these portfolios they had hedge funds. This was in 1986. So we had to start understanding what these hedge-fund managers were doing. And it was funny, because 1987 came along and those clients with hedge funds in their portfolio weathered the market quite well, whereas some people’s portfolios went down 30 per cent in six weeks.

‘Then you were getting more and more hedge funds starting up. I think what had happened was that Yale and the big foundations in America had decided they couldn’t have the market drop another 30 or 40 per cent. Therefore, they were looking for things that would give them the power of compounding, so that if you were getting ten or twelve per cent every year, you didn’t need 40 per cent. Also, I think what people don’t realise is that if you drop twenty or 30 per cent, you’ve got to make 40 or 60 per cent simply to get back to where you were. So there is merit in always being able to protect your downside, especially for family offices and endowments.’

Through the awards ceremonies it holds, Allenbridge is able to obtain good information, even on closed funds (those which are not admitting additional investors). ‘It is very useful for us because a lot of the hedge-fund databases don’t get data from the worst managers, obviously because those managers don’t want people to see how bad they are doing, and they don’t get it from the top guys, because they have raised enough money already.

‘But if you are running a hedge fund in the middle or even at the top end, what you want is for your competitors or people in the industry or on Wall Street to know about your performance.’ Indeed, a recent article in Time magazine suggested that about 800 out of the world’s 8,000 estimated hedge funds would gradually predominate and blossom, based on their reputations and track records.

Allenbridge’s office is located in Hill Street, just off Berkeley Square’s ‘Hedge Fund Alley’. ‘We have only been here for three years,’ says Yadgaroff, ‘and we were three years at number 30, which is the building on the corner, and before that we were just off Curzon Street. But we started off in St James’s Street. So for the last 25 years we have always been within a mile’s proximity of here, which is better than the City. Better restaurants, certainly.’ With a couple of satellite offices in Lancaster and Glasgow, Allenbridge has a team of just under 60.

‘We’ve moved towards providing institutional advice now, mainly to pension funds. We have a number of local authority pension schemes where we’re the independent advisers to the trustees, so we sit in between the consultants and the trustees. Our team will help them implement their strategy. Recently, for example, we were asked to do a review of their managers by Islington Council, and we work for a number of Swiss private banks who need someone else, a third party, to endorse their choice of hedge funds.

‘Our main business now is asset allocation and looking at where clients should be investing and the risks of doing that.’ Allenbridge’s discount brokerage business for retail investors evolved out of the research it was doing into fund managers for its wealth-management clients. ‘The same people who are running these organisations are running unit trusts as well, so we thought let’s broaden the research to analyse the unit-trust market and we started providing our research to the smaller investor. We have about 15,000 clients who buy funds through us, using our research.

‘On the institutional side, we advise just under £9 billion of funds. We rate all retail funds and then if a client invests with us we send out a quarterly evaluation of their funds and we tell the client in our research note whether the fund is performing in line with expectations. If you invested directly with one of the fund-management groups, they’re unlikely to tell that you should move your money away because their star fund manager has left. We have used some of our expertise in analysing hedge funds on the analysis of retail funds.’

Allenbridge has found that clients come to the company through having looked at their Tempus hedge-fund rankings online. ‘Our hedge-fund rankings and word of mouth have really been our best marketing tools, especially when we are doing the awards.’ Allenbridge hosts one awards ceremony for North American funds in New York at the beginning of November and another in London for European managers in May.’

Anthony Yadgaroff is of Bukharan Jewish ancestry. His parents were born in Bukhara, in Uzbekistan, but his father served as a major in the British Army in the Second World War. Anthony started his career as an equity analyst and pension fund manager. He is also a vice-president of Western Marble Arch Synagogue and treasurer of the Western Charitable Foundation as well as a governor of Tel Aviv University.

Yadgaroff believes it is ‘a very interesting time’ for the hedge-fund universe. ‘There are more and more family offices starting up,’ he notes. ‘I think the problem we’ve had during the last few years is that big banks are real product pushers. If you’re somebody who has built a business, has sold out and has a few hundred million, you go to the banks and they have a few guys with MBAs who tell you what you should be doing. But most of these entrepreneurs are better off being fully in control with just a few people and run their own family office.’

Yadgaroff sees a big potential market for Allenbridge’s services in the US. ‘I think there will be a great demand for our service from private banks, wealth-management groups, and pension funds, all of which need someone to monitor their hedge funds for them, because they just don’t have the expertise to do that.’ And besides, there are always some dragons that need slaying.