October 19, 2022 • Institutionalinvestor.com

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Every Asset Manager Wants More Alts.
Here’s How Wellington Is Achieving It.
The firm isn’t new to alternatives, but there’s a new urgency behind its business case.
By Julie Segal

Wellington Management, whose massive Wellington
Fund is a mutual fund favorite, is investing heavily into
making the firm a viable home for rising hedge fundand other alternatives managers.
Wellington isn’t new to alternatives, but the argument
for using them is becoming more compelling. Industry
executives argue that the multidecade investment success of a plain vanilla portfolio — 60 percent in stocks
and 40 percent in bonds — is running out of steam. Sothe firm is going after talent.
A traditional, old-line manager like Wellington offers
a lot of advantages — some obvious, some not — forpotential hedge fund recruits who have proven skills.
“We can be a really attractive destination for a subset ofinvestors,” says Mark Sullivan, team leader of global
macro and fixed income and head of hedge fund andliquid alternative strategies. “We’re looking for investment professionals who really believe that being partof Wellington will make them better, and [that] they
will do what it takes to make Wellington better.”
But hedge fund and other alternatives managers —especially those who are risk-taking, headstrong, andinterested in having their name on the door — might
not want to be a small part of a $1.4 trillion manager, and Sullivan concedes that it’s not for everyone.
Still, traditional managers aren’t such a hard sell for
most hedge funds, particularly in the current environment. As Sullivan says, “One of the greatest advantages Wellington has is our private partnership ownership model, which provides stability and allows us

to focus on long-term results.”
Unlike a lot of hedge fund firms that will capitalize
a team, see what they can do, and then keep or cut
them loose, Sullivan insists that Wellington isn’t going to a high-turnover model. “We’re not sifting forgold,” he said.
The firm has been fairly quietly building its alternatives business since the 1990s. It now has $31.5 billon
in 37 alternatives funds, including long-short equity,
long-short credit, emerging markets macro, late-stage
private equity, and a fintech fund that invests in bothpublic and private companies. Like most managers
whose traditional stock and bond funds make up themajority of their assets, the firm has watched as institutional and, increasingly, retail investors have shoveled
money into PE, venture capital, and other asset classes
that aren’t listed on any exchange.
Jon Caplis, the CEO of hedge fund research anddata firm PivotalPath, said that many traditional players have been aggressively growing their hedge fundplatforms in recent years. Those firms, he said, are “onthe constant lookout for talented managers that theybelieve they can help scale.” Although Caplis declined
to comment specifically on Wellington’s capabilities or
strategy, he did say that managers can leverage similarelements in their pitches. “Use our platform to [helpraise] capital or for back-office support, [or] use ourbrand if you want to. But you don’t have to.”Caplis added that traditional firms need to have a“light touch” to attract top hedge fund managers who
can meet real needs. “Every investor wants something

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different and [something] that is not heavily correlated
to equity markets. An institutional portfolio of hedge
funds has done well this year, even as everything else isdown double digits,” he said. “There was a time when
there was a stigma to being associated with a traditionalmanager. But that’s long gone.”
Sullivan, who has been with Wellington for 23 years,
was asked to lead a review of alternatives before thepandemic, in part because he had helped grow thelong-only global bond platform and created a competitive alternatives version in macro. It’s a model that thefirm can use more across strategies. The review concluded that the firm had done a good job, but that it
could be bigger and better and that it needed more of a
top-down strategy.
Performance of the products is inconsistent. In afollow-up e-mail, Sullivan wrote, “Investments we havemade to deepen our alternatives capabilities are impacting performance in a number of our strategies this year.
Specifically, our macro, multi-strat, and market-neutral
equity strategies are delivering strong, diversifying returns at a time our clients need them most.”
Wellington believes that alts will be a big part of theanswer for investors who are grappling with inflation
and an uneasy geopolitical future. Even though alternatives have had a good run, they’re even more crucial
as markets move into what many experts say is a newphase or regime shift.
Think about the question of how much money investors should put into bond funds. That answer was
once fairly simple. But the last few years, with interest rates at record lows, have compromised the abilityof bonds to deliver on the characteristics that investors
have come to expect: basically, a port in the storm whenstocks get punished, and maybe even some return. Thisyear, bonds and stocks are down meaningfully, and thebond market is catalyzing the move into alternatives,according to Sullivan.
“That’s a big question. What else can I allocate to?
There is no obvious answer,” he said. “We can’t checkall the boxes that the global bond market would traditionally check. You have to look at a more complicatedor diversified set of things.”
Sullivan is blunt about the challenges that Wellington
faces when it comes to expanding its alternative invest-ments business. It’s not hard to imagine: Some of thefirm’s hard-won strengths, which can’t be easily copied, were built to manage stocks and bonds, not hedge
funds and private equity.
The firm spent years developing a global platform toprevent its portfolio managers and analysts from getting stuck in their individual silos and to instead getthem working closely with colleagues and sourcing
answers from subject-matter experts around the world.
The company says it’s an advantage that shows up inperformance. Wellington has been able to maintain thatemphasis on collaboration — which has been particularly valuable at a time when war and the price of oil,among other issues, are driving markets — even as it’sgrown to a couple of thousand employees.
But it’s not necessarily the answer for people who,for example, are overseeing hedge funds. “That is an
important piece of why we think we can compete, butthere are gaps between what that platform generates
versus what an [alternative] manager or private equity
manager ultimately needs to succeed,” Sullivan said.
“And that’s because of the differences in where someof the work gets done to support the business we have
today, versus the business that we are growing in alternatives.”
For example, with shorting, portfolio managers
may end up with higher idiosyncratic risks. “Youhave to think about tactics on a shorter time horizon,” Sullivan said. To bridge the gap, Wellington
is adding hedge fund analysts, among other things.
The firm thinks it can effectively mimic the advantages of a boutique hedge fund and combine thatwith the benefits of the firm’s scale, corporate access, and its relationships with Wall Street. But itneeds to manage it all, and that includes making
sure that staffers don’t have to battle over resources.
“Because of Wellington’s structure — large scale,one P&L — there are competing priorities for what
is most important to develop,” Sullivan said. “Andbecause of the firm’s structure, there is a lot of alignment and ability to navigate that, but it does requireintention. We need to be clearer with our strategy
and why it will deliver on our ambition. It forces
rigor around the analysis and ultimately makes us
attractive to talent and to investors.”(#S0108964) Reprinted with permission from the October 19, 2022 online edition of Institutional Investor. © Institutional Investor, LLC. 2022.
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