aiCIO Summit: ‘Outliers Are Like Cholesterol’

(April 11, 2013) — Investing in outliers-whether that’s new hedge fund managers or unusual strategies-is risky business, which is perhaps why so few institutional investors are doing it.

Speaking today at the aiCIO CIO Summit 2013 in New York, Lyxor Asset Management CIO Lionel Erdely pointed out that investors pursuing outliers are, well, outliers.

The vast majority of recent hedge fund inflows have gone to large, established firms, he said, not to scrappy upstarts pursuing novel strategies. 

And that’s not a bad thing, according to Erdely.

“We all agree that bringing diversification into a portfolio creates value,” he said. “But originality is something very different. Robust performance should always trump originality-that’s why we have to spend a little time on the relevance of this question. Everybody talks about the importance of investing in outliers, but they do the opposite.”

The data bears out Erdely’s position: Fundraising for first-time private equity managers hit its lowest point since the financial crisis in the first quarter of 2013, according to Preqin data.

But as the other panelists and moderator Jim Dunn, Wake Forest University’s CIO, pointed out, “outlier” is a matter of definition.

To Christine Pastore,the former head of alternatives for New Jersey’s $70 billion pension fund, “outlier” meant an innovative investment structure. Pastore was an architect of the fund’s multibillion strategic partnership with Blackstone. It is still early, but the partnership is rumored to be producing some seriously outsized returns.

“The separate account vehicles were initially created to find managers for us in geographies that were difficult to access,” Pastore said. “But the Blackstone partnership was not only to find opportunities areas, but also to train our staff to look at investments. I would consider new managers and new structures with established managers to be outliers.” 

Dunn, the moderator, certainly had the most creative description: “Outliers are like cholesterol: There are good outliers and bad outliers. And we want to find the good ones.” 

The fourth annual aiCIO CIO Summit runs this Thursday-Friday at the Harvard Club of New York.

Related content: Interview with Jim Dunn for the Power 100.