At least a dozen hedge fund managers call Orange County home and manage an estimated $32 billion for pension plans, endowments and wealthy investors.
The county is not a big player in the hedge fund industry, which is pegged at $1.6 trillion in assets under management by Chicago-based Hedge Fund Research Inc. But the 2% of the market represented by the largest firms here is bigger than what the county’s population would suggest.
“A decade ago, you’d probably be hard pressed to find any hedge funds in Orange County,” said Chuck Martin, chief executive of hedge fund manager Mont Pelerin Capital LLC in Newport Beach. “It has come a long way in a fairly short amount of time.”
A few of the county’s hedge funds are run by big names. Others fly under the radar.
Newport Beach-based Pacific Investment Management Co. is the 800-pound gorilla among local hedge fund managers, even though hedge funds make up only a fraction of the company’s $1 trillion in assets under management.
Pimco, known for bond and exchange-traded funds, runs about two dozen hedge funds and funds that invest in other hedge funds. It has more than $20 billion in its hedge funds, according to industry sources.
The company, part of Germany’s Allianz SE, makes up about two-thirds of money invested with local hedge fund managers.
The next biggest player here is Irvine-based Pacific Alternative Asset Management Co., which runs funds that invest in hedge funds. The company, known as Paamco, is what’s called a fund of funds.
Four veteran money managers started Paamco a decade ago. Cofounder Jane Buchan is Paamco’s chief executive.
The firm manages about $9.5 billion in investments, mainly from pension plans. Paamco has about 125 employees with about 100 in Irvine.
“Orange County has a highly educated human resources pool,” said Maarten Nederlof, Paamco’s managing director of portfolio solutions. “And it has a very easily accessible airport to reach our client base, which is global.”
Diverse Investments
Hedge funds invest in a range of areas, including stocks, debt and commodities. Some profit by shorting stocks—a bet they’ll fall in value—or by investing in derivatives.
The funds are more aggressive than mutual funds and even can be riskier than venture capital and private equity funds.
Nationally, the hedge fund industry took a hit in the financial crisis of late 2008 and early 2009 as investors pulled back from riskier investments.
And the industry came under fire last year for scandals involving New York’s Galleon Group and Danny Pang’s Private Equity Management Group Inc. of Irvine.
“There are no real regulatory requirements for hedge funds,” said Nadia Papagiannis, an alternative investments strategist with Chicago-based fund tracker Morningstar Inc. “If they trade a specific type of investment, like commodities, they might have to report that activity. But hedge funds don’t generally have to disclose their activities like a registered investment adviser or mutual fund company.”
The Business Journal used estimates from Morningstar and Thom-son Reuters Corp.’s Lipper to find local hedge funds and to estimate their assets under management.
Most local managers run portfolios of $5 million to $30 million. Besides Pimco and Paamco, here are five of the largest players in local hedge funds:
• Research Affiliates LLC. The Newport Beach-based firm offers hedge funds alongside mutual and exchange-traded funds.
It has an estimated $660 million invested in its hedge funds, according to Morningstar.
Rob Arnott, a frequent writer on financial topics and a former Salomon Brothers investment strategist, runs Research Affiliates.
Arnott’s firm creates and maintains indexes used by mutual funds from Charles Schwab & Co. He and his managers also run Pimco’s All Asset Fund, a mutual fund with $14 billion in investments.
In all, Research Affiliates has some $43 billion of investments tied to the firm’s various indexing and money management strategies, according to its Web site.
• Falcon Investment Management LLC. The Newport Beach firm began as a way to manage investments for the family of Paul Merage, who, along with his brother, invented Hot Pockets and sold Colorado-based Chef America Inc. to Nestlé SA for $2.6 billion in 2002.
Merage is Falcon’s chief executive and chief investment officer and is known locally for a $30 million donation in 2005 to the University of California, Irvine’s business school, which is named after him.
Falcon runs a mix of hedge funds. Earlier this month, its long/short consumer-focused hedge fund was opened to the public, according to Chris Ainsworth, the firm’s chief operations officer.
“Falcon is being changed from a family office to more of a traditional alternative investment shop that’s now in some cases accepting external capital,” he said.
Falcon manages more than $450 million, according to Ainsworth.
• Lighthorse Asset Management LLC. The Brea-based firm runs hedge funds for institutional and wealthy individual investors. One is focused on investments in China. The other makes global investments.
The company’s managing partner is Michael Liu.
Educated as a mechanical engineer, Liu got into money management more than 15 years ago. He now manages about $200 million in investments.
• Armored Wolf LLC. The Aliso Viejo firm was started a year ago by former Pimco money manager John Brynjolfsson and a group of hedge fund managers from around the world.
After a slow start, Armored Wolf estimates it has raised more than $100 million to invest.
“We started to see activity increase significantly in May,” Brynjolfsson said.
Armored Wolf works with advisers to wealthy investors as well as institutional investors. Brynjolfsson and his staff are considered experts on analyzing the tug-of-war between inflationary and deflationary trends around the world.
Armored Wolf has 19 people at its headquarters.
“Orange County is a great recruiting hub for the type of talented executives we need to run a thriving hedge fund,” Brynjolfsson said.
• Newport Private Capital. Formerly Censuri Futures Management, it manages about $90 million in investments, according to Jon Hansen, the Newport Beach-based firm’s president.
Hansen also serves as chief investment officer for Newport Private Capital’s two hedge funds. The newest opened to the public at the end of last year.
“When we started our business, we found a large group of people in Orange County who fit a wealth parameter of between $2 million to $5 million of investable assets,” Hansen said. “Most hedge funds are looking for institutional investors or really wealthy families whose net worth exceeds $50 million or more.”
Smaller Investors
Newport Capital works with investors in the $1 million and up category, he said.
“We saw a need for more sophisticated hedging strategies and dynamic management style for people with $1 million more in investable assets,” Hansen said. “That’s why we picked Orange County.”
Martin’s Mont Pelerin Capital is estimated at about $25 million in assets under management. The fund has been around for about six years.
Earlier, Martin worked as a venture capitalist and at Westar Capital LLC, a Costa Mesa private equity firm funded by businessman George Argyros.
“We have a very high concentration of high net-worth investors in Orange County,” Martin said. “This is a market where hedge funds can find a lot of growth opportunities.”
