Liechtenstein's Prince Helps Lure $2.5 Billion to Hedge Funds

[FaGal]

Liechtenstein's Prince Helps Lure $2.5 Billion to Hedge Funds
quote.bloomberg.com - April 12, 2005


Liechtenstein's Prince Hans-Adam II made his first foray into hedge funds by investing in Long-Term Capital Management LP. Instead of retreating when LTCM collapsed in 1998, his family firm, LGT Capital Partners, put $2.5 billion more into such funds -- including money from outside investors.

In all, LGT Capital has swept in $6 billion for investment in buyout firms and hedge funds, unregulated investment pools that bet on falling as well as rising prices. Unlike royals who devote their time to ceremonies and charities, Prince Hans-Adam, 60, heads the foundation that owns LGT Group, parent of LGT Capital.

``Prince Hans-Adam is unique in running this kind of business,'' says Bob Houston, editor of Royalty Monthly magazine in London. ``He's the only one who has a proper job.''

LGT Capital's hedge-fund business, which reduces risk by spreading its money among multiple funds, helped the firm prosper when Hans-Adam battled parliament for more power and police probed allegations of money laundering in the country of 34,000 people. Now LGT is pushing to expand.

Pfaffikon, Switzerland-based LGT is seeking more institutional clients to compete with Man Group Plc and UBS AG, Europe's biggest hedge-fund managers. The political conflict was settled in Hans-Adam's favor two years ago and the Financial Action Task Force, an intergovernmental anti-money-laundering body, in 2001 ruled that Liechtenstein was in compliance with international reporting regulations.

``They have a good story and history behind them,'' says Roberto Veronico, vice director of UniCredito Pension Fund Italy, which has about 22 million euros ($29 million) in LGT Capital's hedge funds. ``The results are consistent.''

Funds of Funds

LGT Capital's biggest fund has outperformed similar funds of funds, as they are called, run by its largest rivals over the past three years.

LGT's $478 million Castle Alternative Invest fund, whose biggest investments include the New York-based hedge fund Caxton Global Investments, gained 26 percent after fees during the period, LGT Capital says. Man Group's $1.5 billion RMF Absolute Return Strategies I and UBS's $4.8 billion GAM Diversity Inc. each returned 22 percent. The average fund of funds rose 20 percent, according to Chicago-based HFR Group.

London-based Man Group is the largest manager of funds of hedge funds in Europe, with $43 billion in assets. UBS is second at $37 billion.

Liechtenstein, wedged between Austria and Switzerland, is a constitutional monarchy. The prince and parliament share power, according to the principality's Web site. Prince Hans-Adam, who remains head of state, in August ceded most power to his son, Prince Alois, 36. The 25-member parliament is headed by Prime Minister Otmar Hasler.

`Investing Like the Prince'

The House of Liechtenstein, which has ruled the country for almost 300 years, formed LGT Capital to manage the family's money, and first accepted outside funds in 1996. The firm uses the slogan ``investing like the prince'' on its Web site and offers clients the chance to put their money in the so-called Princely Portfolio.

``They are very credible and quite successful,'' says Joe Seet, a partner at Sigma Partnership, a hedge-fund consulting firm in London.

The firm's ties to the royal family have helped it win clients among wealthy families from Scandinavia to Switzerland and Austria, says Jacob Schmidt, a director at Allenbridge Group Plc in London, which provides research on fund managers.

``The family has access to all the serious money in central Europe,'' Schmidt says. He declined to identify any of LGT Capital's clients. Thomas Weber, 43, a partner at LGT Capital, also declined to name any individuals who invest with the firm.

Still, LGT Capital's assets lag behind those of firms such as Lyxor Asset Management and HFR Group, which opened later. Paris- based Lyxor, a unit of Societe Generale SA, has collected $27 billion since 1998, and HFR has taken in $3.5 billion since 2001.

Move to Switzerland

To close the gap, the firm's six-member executive team, led by Chief Executive Officer Roberto Paganoni, has attracted institutional investors such as Deutsche Bank AG's Italian pension fund, Zurich-based Swiss Life Holding, the University of Hong Kong and Milan-based UniCredito Italiano SpA.

The new business has also reduced the proportion of LGT Capital's assets that come from the princely family, increasing the firm's credibility as an independent money manager. Family money now makes up less than 15 percent of LGT Capital's hedge- fund assets, compared with more than half a few years ago, says Tycho Sneyers, LGT Capital's head of business development.

LGT Capital in 2001 asserted its independence by moving its headquarters about 60 kilometers (38 miles) to Pfaffikon from Vaduz, Liechtenstein's capital, Weber says. The move also helped the firm attract investment professionals from abroad.

Rembrandt to Raphael

``There are a lot of players who want to be pre-eminent in Europe,'' says John Godden, managing director of HFR Europe in London, which oversees $3.5 billion of hedge-fund assets. ``We would consider LGT a strong competitor.''

Tucked into an Alpine valley studded with medieval castles, Liechtenstein was created as a principality within the Holy Roman Empire in 1719 and became independent when the empire dissolved in 1806. While the country remained neutral, the princely family lost 80 percent of its wealth after World War II, when its holdings in Czechoslovakia were nationalized, says Hans-Martin Uehlinger, a spokesman for LGT Group.

Much of what remained was the family's art collection, which includes works by Rembrandt, Raphael and van Dyck.

The House of Liechtenstein rebuilt its financial assets as the country transformed itself into a financial center with low taxes that persuaded thousands of companies to open offices in the principality. Holding companies and investment funds domiciled in Liechtenstein pay a tax equal to 0.1 percent of their invested capital, instead of corporate income taxes, according to the government Web site.

Tax Haven

The family's business interests are held by Vaduz-based LGT Group, whose chairman is Prince Philipp, 58, Prince Hans-AdamsĘs brother. In addition to LGT Capital Partners, the group owns LGT Bank, a private bank, LGT Capital Management, LGT Trust and STG Schweizerische Treuhandgesellschaft in Basel, Switzerland, a private bank and consulting firm acquired from Swiss Life in 2003. The group sold its mutual-fund unit, LGT Asset Management, to London-based Amvescap Plc in 1998 for $1.3 billion.

Company officials won't say how big the family fortune is. Prince Hans-Adam declined to be interviewed for this story.

Liechtenstein's tax laws have also attracted attention from the Organization for Economic Cooperation and Development, which put the country on a list of uncooperative tax havens in April 2002. The Paris-based OECD is trying to negotiate a settlement, says Nicholas Bray, a spokesman for the organization.

The country's police raided LGT Bank in 2000 after a German intelligence report alleged that banks and politicians in Liechtenstein were involved in money laundering, Uehlinger says. Neither LGT Capital nor any employee was found to be involved in money laundering and the prince was never questioned, he says.

Republic of Microsoft

Liechtenstein has since hired more officers to ensure banks comply with financial rules, increased cooperation with other countries and passed a law requiring banks to know the beneficiaries of every account. In March 2001, the government created a special unit to investigate financial crimes.

The Paris-based Financial Action Task Force, created in 1989 under the auspices of the Group of Seven industrialized countries, removed Liechtenstein from its list of non-cooperative countries in June 2001.

The princely family has also been embroiled in political quarrels.

In 2001, Prince Hans-Adam said the government should offer to sell Liechtenstein to Microsoft Corp. Chairman Bill Gates if voters rejected constitutional changes giving the prince more power. The amendments, which allow the monarch to dismiss governments, were approved two years later, with support from 64 percent of voters. No offer was ever made to sell the country.

Long-Term Capital

Even before the prince quarreled with parliament, LGT was investing in hedge funds. The investments began when a professor who acted as an adviser to Prince Hans-Adam told him about Long- Term Capital, founded in 1993 by former Salomon Brothers Inc. bond trader John Meriwether.

``The initial move into hedge funds might be seen as a high risk strategy, as we did not have experience in hedge funds and we did an undiversified investment in an intransparent fund,'' Weber says.

Long-Term Capital made up 10 percent of LGT Capital's first fund of funds and was the catalyst for other hedge-fund investments, Weber says.

Meriwether's fund returned about 40 percent a year in 1995 and 1996, then lost $4 billion in 1998 after Russia defaulted on domestic debt. As an early investor, LGT Capital's return averaged at least 10 percent a year even after the collapse, Weber says.

Tighter Controls

Long-Term Capital hasn't been the only problematic investment.

In 1996, LGT Capital invested in Julian Robertson's Tiger Management LLC, which had enjoyed two decades as one of Wall Street's best-performing stock pickers. The firm sold its holding three years later as Tiger lost 19 percent of its net assets.

``In Tiger, we were too late,'' Weber says. ``We should not have experienced the drawdown that we did.''

Such failures prompted LGT Capital to implement stricter policies for weeding through potential investments, Weber says.

An 11-member committee now approves allocations to hedge funds based on the firm's research, interviews and background checks of money managers. No members of the princely family sit on the committee.

Blow-ups like Long-Term Capital haven't damped the firm's enthusiasm for hedge funds.

``We understood that the hedge-fund crisis wasn't the end of the world,'' Weber says. ``The industry wasn't going under and it was still worth investing in.''


To contact the reporter for this story:
Samantha Lafferty in London at slafferty@bloomberg.net.

To contact the editors responsible for this story:
Frank Connelly at fconnelly@bloomberg.net