In its just-released Tenth Annual Compensation Results for Hedge Fund Managers with Assets Over $1 Billion, Infovest21 found that five positions have an average total compensation of $1 million or more.
The Chief Executive Officer was the top position with an average total compensation of $1.96 million. The Chief Investment Officer came in second with an average $1.65 million total compensation package. Portfolio Manager, Chief Financial Officer and Director of Sales & Marketing followed with total compensation of $1.30 million, $1.18 million and $1.00 million respectively.
2011 vs 2010 comparison
Lois Peltz, president of Infovest21, commented, "In comparing 2011 and 2010 results, the trend was mixed. Chief Executive Officer, Chief Operating Officer and Portfolio Manager received, on average, a lower total compensation package in 2011 than in 2010 as did some of the mid and junior level positions e.g. Mid-Level Analyst, Junior Analyst and Assistant Controller.
However, some of the investment and infrastructural positions saw increases such as the Chief Financial Officer, Senior Analyst, General Counsel, Comptroller, Director of Operations and Operations/Mid Office.
The total compensation for the Director of Sales and Marketing in 2011 was about the same level as 2010.
Profile
The profile of the hedge fund manager who responded to the 2011 survey, had an average track record of 13.5 years and gained 3.4% during the first half of the year.
Other highlights
• Two-thirds were above their high water mark
• 76% had assets between $1-4.9 billion
• 85% of the respondents said their assets had increased over the past year
• 74% were stand-alone organizations
• 60% said they had increased their headcount while 7% said they reduced headcount.
• Going forward, 40% of the respondents expect the base salary will increase as a percentage of the total compensation package while 27% expect the base salary will decrease. 13% expect the equity component of the package to increase while 20% expect the equity component to decline.
As would be expected, the $1 billion+ hedge fund managers received higher compensation in all positions surveyed than those hedge fund managers with assets below $1 billion. The greatest differential was in the Chief Investment Officer position while the narrowest differential was in IT.
Methodology
The survey was conducted during September, October and November by phone or email.
23 executive and back office positions were included. Top management positions included Chief Executive Officer, Chief Investment Officer, Chief Financial Officer, Chief Operating Officer and Chief Risk Officer. Investment positions included Portfolio Manager, Senior Analyst, Mid-Level Analyst, Junior Analyst and Director of Research. Sales and marketing positions included Director of Sales and Marketing, Director of Investor Relations and Client Services. Legal/Compliance positions were General Counsel and Compliance Director/Manager while financial positions included Controller, Assistant Controller, and Fund Accountant. Director of Operations and Operations/Mid Office comprised the operations positions. Other positions included Head Trader, Trader and IT.
The results are based on data from 15 separate hedge fund management firms, all with assets over $1 billion. In calculating the statistics throughout the survey, we include only those respondents who provided concrete compensation data with dollar figures.
Separate surveys were conducted and results analyzed for those managers with assets over $1 billion and those with assets under $1 billion. Similar compensation results are available for funds of funds.
Infovest21 is an information provider to hedge fund investors, managers, funds of funds and service providers. Led by Lois Peltz, president, the firm provides news, research, surveys, white papers as well as organizes seminars and conferences.
Wednesday, November 23, 2011
Sunday, October 2, 2011
Infovest21 Investor Focus: Consultants Discuss Strategies of Interest During Uncertain, Volatile Periods
With volatility and uncertainty weighing on the current financial climate, consultants tend to prefer strategies that can potentially protect investors in volatile periods.
Roger Fenningdorf, head of manager research, founder and partner at Rocaton Investment Advisors points to defensive or diversification strategies such as being long Treasuries, tail risk hedging, commodities, hedge funds or bank loans.
He expects that modest investor frustration with long-only equities and expectations for low fixed income yields should continue to encourage pension interest in hedge funds. With historically low interest rates, he expects the global push into higher risk products to grow.
Fenningdorf also likes strategies in the illiquid space that can take advantage of the aftermath of the credit crisis such as distressed and opportunistic real estate, and distressed strategies in residential mortgages.
In an environment with zero interest rates, pension consultants say their clients have become more globally oriented than before. Chris Abbruzzese, director of research and analytics at Americh Massena says, in the short term, they are interested in distressed opportunities in Europe as macroeconomic turbulence and regulatory changes create mispricings in the corporate debt market. A relative scarcity of capital may make it more difficult for highly leveraged European companies to refinance their debt.
He expects this opportunity to play out over the next four or five years.
Fenningdorf also sees opportunities in Europe. He says Europe will have challenges over the next few years that are likely to provide many profitable opportunities i.e. consumer receivables, corporate credit and real estate – most of it distressed.
Craig Adkins, senior alternative investment research analyst at DiMeo Schneider & Associates, also highlights distressed opportunities in Europe as well as those managers who can take advantage of volatility in emerging markets. He also likes event driven strategies as corporations have a lot of cash on their balance sheets that eventually has to find a home. He also likes long/short equity because it can benefit from volatility in the market.
Abbruzzese also points to material economic dislocations in agriculture, water and energy markets due to long term demographic trends and short term resource scarcity issues.
Funds of funds versus direct investing versus multi-strategy
Adkins points to pensions investing more directly with hedge funds as it will remove a layer of fees and allow the pensions to control who their managers are and the degree of liquidity. Adkins also likes multi-strategy funds because they can be opportunistic and allocate quickly according to their best ideas.
Darren Spencer of Russell Investments says the choice of funds of funds or investing directly with a hedge fund depends on the individual pension’s circumstances. “Funds of funds can be an efficient way to implement the portfolio. For example, some large corporate pensions may have only two to three people responsible for managing the pension and may not have sufficient internal investment resources to build direct investment programs themselves,” he points out.
Emerging managers
Pensions are also becoming more comfortable with emerging managers. Adkins says he may start to bring smaller managers to pension clients if the key business risks are low.
And on September 22, California Public Employees’ Retirement System said it was investing $100 million in seed money with Toronto-based Breton Hill Capital, a global macro hedge fund. This marked CalPERS’ first seed investment with a hedge fund manager. The investment is part of CalPERS absolute return strategies program which was started in April 2002 and has $5.3 billion invested in it as of mid-year 2011. CalPERS also has about $500 million invested with customized funds of funds that focus on emerging managers.
Roger Fenningdorf, head of manager research, founder and partner at Rocaton Investment Advisors points to defensive or diversification strategies such as being long Treasuries, tail risk hedging, commodities, hedge funds or bank loans.
He expects that modest investor frustration with long-only equities and expectations for low fixed income yields should continue to encourage pension interest in hedge funds. With historically low interest rates, he expects the global push into higher risk products to grow.
Fenningdorf also likes strategies in the illiquid space that can take advantage of the aftermath of the credit crisis such as distressed and opportunistic real estate, and distressed strategies in residential mortgages.
In an environment with zero interest rates, pension consultants say their clients have become more globally oriented than before. Chris Abbruzzese, director of research and analytics at Americh Massena says, in the short term, they are interested in distressed opportunities in Europe as macroeconomic turbulence and regulatory changes create mispricings in the corporate debt market. A relative scarcity of capital may make it more difficult for highly leveraged European companies to refinance their debt.
He expects this opportunity to play out over the next four or five years.
Fenningdorf also sees opportunities in Europe. He says Europe will have challenges over the next few years that are likely to provide many profitable opportunities i.e. consumer receivables, corporate credit and real estate – most of it distressed.
Craig Adkins, senior alternative investment research analyst at DiMeo Schneider & Associates, also highlights distressed opportunities in Europe as well as those managers who can take advantage of volatility in emerging markets. He also likes event driven strategies as corporations have a lot of cash on their balance sheets that eventually has to find a home. He also likes long/short equity because it can benefit from volatility in the market.
Abbruzzese also points to material economic dislocations in agriculture, water and energy markets due to long term demographic trends and short term resource scarcity issues.
Funds of funds versus direct investing versus multi-strategy
Adkins points to pensions investing more directly with hedge funds as it will remove a layer of fees and allow the pensions to control who their managers are and the degree of liquidity. Adkins also likes multi-strategy funds because they can be opportunistic and allocate quickly according to their best ideas.
Darren Spencer of Russell Investments says the choice of funds of funds or investing directly with a hedge fund depends on the individual pension’s circumstances. “Funds of funds can be an efficient way to implement the portfolio. For example, some large corporate pensions may have only two to three people responsible for managing the pension and may not have sufficient internal investment resources to build direct investment programs themselves,” he points out.
Emerging managers
Pensions are also becoming more comfortable with emerging managers. Adkins says he may start to bring smaller managers to pension clients if the key business risks are low.
And on September 22, California Public Employees’ Retirement System said it was investing $100 million in seed money with Toronto-based Breton Hill Capital, a global macro hedge fund. This marked CalPERS’ first seed investment with a hedge fund manager. The investment is part of CalPERS absolute return strategies program which was started in April 2002 and has $5.3 billion invested in it as of mid-year 2011. CalPERS also has about $500 million invested with customized funds of funds that focus on emerging managers.
Infovest21 Investor Focus: Role of Hedge Funds in Small/Medium Sized Endowments
Larger endowments have been investing in hedge funds for a long time and will continue to do so. Some have allocated a large chunk of their portfolios to hedge funds. According to National College and University Business Officers, the average endowment allocated 52% to alternatives in fiscal year 2010. Wilshire finds that endowments and foundations with assets greater than $500 million allocated 21.2% of their portfolio to alternatives in the second quarter of 2011 compared with 11.4% in the first quarter. The allocation to alternative for all sized foundations and endowments was 6.2% in the second quarter.
Increasingly, smaller and medium-sized endowments are starting to allocate to hedge funds. The endowment’s smaller size allows them to make investments that are small in size, yet have a potentially meaningful impact on the fund. The endowment’s smaller size also provides the opportunity for the endowment to invest with small and mid-sized managers.
Lehigh University, with assets of $1 billion, allocates 30% of its portfolio to hedge funds. Lehigh University’s chief investment officer Peter Gilbert observes, “These smaller managers that we are able to invest with are generally undiscovered by the broader institutional investment universe. They tend to be very entrepreneurial, nimble and able to take advantage of unexploited investment niches and opportunities. The managers may be focused on any number of different asset classes and strategies such as emerging markets, opportunistic credit, hedge funds and venture capital.”
Lehigh doesn’t view hedge funds as an asset class but rather a tool that can be used for different investment purposes. “We look at hedge funds in context of the portfolio and hire hedge fund managers to perform a specific function within that portfolio context. It is not about finding the best hedge fund manager but finding the most appropriate manager for the required role,” adds Gilbert.
Another endowment, which allocates about 15% of its $200 million portfolio to hedge funds and which prefers being anonymous, says it uses hedge fund managers in its alternatives bucket and in its long-only bucket. “If we have a long/short hedge fund manager which is 60% net long, we would prefer using that manager than a traditional long-only manager.” They like hedge funds because they preserve capital and are more flexible than long-only managers.
Having a good consultant is also critical for the small and medium-sized endowment as the consultant does considerable due diligence. Also if the small endowment can’t meet the manager’s requirement investment, it can use the consultant’s capacity with the manager.
Smaller endowments say they are generally too small on a relative basis to have their own managed account. Some pointed to liquidity as a potential problem.
Other small endowments argue that hedge funds are not appropriate for smaller endowments. For example, Philip Jackson of Arkansas State University, says large endowments have the resources and human resources to perform due diligence. The large endowments have chief investment officers and a staff whereas smaller endowments do not.
Increasingly, smaller and medium-sized endowments are starting to allocate to hedge funds. The endowment’s smaller size allows them to make investments that are small in size, yet have a potentially meaningful impact on the fund. The endowment’s smaller size also provides the opportunity for the endowment to invest with small and mid-sized managers.
Lehigh University, with assets of $1 billion, allocates 30% of its portfolio to hedge funds. Lehigh University’s chief investment officer Peter Gilbert observes, “These smaller managers that we are able to invest with are generally undiscovered by the broader institutional investment universe. They tend to be very entrepreneurial, nimble and able to take advantage of unexploited investment niches and opportunities. The managers may be focused on any number of different asset classes and strategies such as emerging markets, opportunistic credit, hedge funds and venture capital.”
Lehigh doesn’t view hedge funds as an asset class but rather a tool that can be used for different investment purposes. “We look at hedge funds in context of the portfolio and hire hedge fund managers to perform a specific function within that portfolio context. It is not about finding the best hedge fund manager but finding the most appropriate manager for the required role,” adds Gilbert.
Another endowment, which allocates about 15% of its $200 million portfolio to hedge funds and which prefers being anonymous, says it uses hedge fund managers in its alternatives bucket and in its long-only bucket. “If we have a long/short hedge fund manager which is 60% net long, we would prefer using that manager than a traditional long-only manager.” They like hedge funds because they preserve capital and are more flexible than long-only managers.
Having a good consultant is also critical for the small and medium-sized endowment as the consultant does considerable due diligence. Also if the small endowment can’t meet the manager’s requirement investment, it can use the consultant’s capacity with the manager.
Smaller endowments say they are generally too small on a relative basis to have their own managed account. Some pointed to liquidity as a potential problem.
Other small endowments argue that hedge funds are not appropriate for smaller endowments. For example, Philip Jackson of Arkansas State University, says large endowments have the resources and human resources to perform due diligence. The large endowments have chief investment officers and a staff whereas smaller endowments do not.
Sunday, August 28, 2011
Infovest21 White Paper: Institutional Assets Continue to Flow to Hedge Funds
Institutional inflows into hedge funds/funds of funds have been strong over the past year as some institutions have come into the space for the first time while others increased their existing hedge fund allocations. Others have issued Requests for Proposals for managers, funds of funds or specialized hedge fund consultants.
Some institutional investors are looking to diversify their portfolios while others are taking advantage of perceived attractive beta and alpha opportunities as downside protection. Others are trying to boost their returns due to funding shortfalls.
Lois Peltz, president of Infovest21, observes that in the past year, several institutions made their first foray into hedge funds, such as Connecticut Retirement Plan & Trust Fund, El Paso County Retirement Plan, Kansas City Police Employees’ Retirement System, Los Angeles County Employees’ Retirement Association, Massachusetts Water Resources Authority Retirement System, New York City Police, New York City Employees’ Retirement, New York City Fire, San Jose Federated City Employees’ Retirement System, Vermont State Retirement System and West Palm Beach Firefighters’ Pension.
Other institutions have increased their allocations such as Alaska Retirement Management Board, City of Danbury, Metro Nashville, North Carolina Retirement System, Ohio State Employees’ Retirement System, Orange County Retirement System, Sacramento County Employees’ Retirement System, San Mateo County Employees’ Retirement Association.
A number of the largest pension allocators to hedge funds have increased their target allocation to hedge funds. For example, Texas City and District increased the cap from 15% to 20% while New Jersey State Investment Council increased it from 10% to 15%. Texas Teachers Retirement System upped the target from 5% to 10%. Illinois Teachers’ Retirement System increased the cap from 5% to 8%.
Many pensions have rebalanced their portfolios – firing some hedge funds/funds of funds while replacing them with others.
RFPs and searches are out (or expected soon) for Ohio School Employees’ Retirement System, Orange County Employees’ Retirement System, Seattle City Employees’ Retirement System, State-Boston Retirement System and State of Wisconsin.
Meanwhile, a few pensions have been redeeming allocations to hedge funds e.g. PennSERS, Delaware Public Employees Retirement System, or avoiding them altogether after a bad experience e.g.Ohio Bureau of Workers Compensation.
Some interesting trends in the past fiscal year include:
Strong overall portfolio returns in FY2011…Pension underfunding remains a factor motivating pensions to allocate to hedge funds
A strong stock market helped pension plans’ returns in FY2011. Returns in the 20%-23% range have been recorded by a number of systems including Alaska Permanent Fund, CalPERS, CalSTRS, Florida Retirement System, MassPRIM and New York City Pension Funds. In many cases, these are the strongest gains in 20+ years. However, 10-year returns are still below the required level. For example, CalPERS’ 10-year return is 5.36% while CalSTRS is 5.7%.1
Wilshire Associates says the annual return in the next 15 years will be 6.5%.2
Using government accounting standards, the aggregated underfunding for US state and local governments is about $1 trillion. But if using corporate accounting standards, the shortfall is about $2.5 trillion. A third approach, often used by economists who consider even the private accounting standards too lenient, yields a $3.5 trillion answer.3
The bill for retirement benefits is already straining budgets and is competing for resources with other critical needs such as education, infrastructure and health care.
To close the funding gap, some states have increased the retirement age and length of service requirements while others increased employee contribution requirements. Some systems lowered their discount rate assumptions. Some pensions are looking to hedge funds as a means to close the funding gap.
Momentum continues toward direct investing
Institutions are increasingly allocating directly to hedge funds rather than take the funds of funds route, especially if they have in-house capability to select hedge funds. Relatively poor fund of funds performance in 2008 and 2009, some funds of funds getting caught allocating to Madoff and other Ponzi schemes, the pressure for lower fees, institutions and their consultants acquiring more knowledge and expertise on hedge funds as well as some hedge funds becoming more institutional in nature have encouraged some institutions to invest directly with hedge funds.
Recent examples include Massachusetts Pension Reserves Investment Management’s pilot program to allocate assets directly with hedge funds. The pension plans to allocate to 20 hedge funds managers in the fourth quarter. Ohio Public Employees Retirement System, which initially used funds of funds, plans to invest $1.2 billion directly to hedge funds.
There is no standard approach for pensions which are direct allocators to hedge funds. Some use outsourced chief investment officers while others use consultants or fund of funds advisors to support their direct allocating efforts. 4
First time users tend to prefer funds of funds
Some pensions, mostly first time allocators, prefer funds of funds. Recent examples include Connecticut State Employees’ Retirement System, El Paso County Retirement Plan, Kansas City Police Employees’ Retirement System, Los Angeles County Employees’ Retirement Association, Massachusetts Water Resources Authority Employees’ Retirement System, Metro Nashville, New York City Pension Funds, North Carolina Retirement Funds, Orange County and Vermont State Retirement System.
Smaller pensions which lack resources to select or access direct hedge fund investments may continue to have funds of funds as their core investment. Some institutions continue with the core-satellite approach where the core allocation is to a fund of funds supplemented by a number of single strategy funds. Others seek more specialized funds of funds in place of, or in addition to, a diversified fund of funds mandate.
Hiring consultants for those pensions allocating directly to hedge funds
As more pensions consider investing directly with hedge funds, they are in need of a specialized hedge fund consultant. For example, the Maryland State Retirement Agency issued a Request for Information seeking a consulting firm to advise the staff on its absolute return portfolio.
MassPRIM hired Cliffwater in April 2011 as its hedge fund consultant while Texas Employees Retirement System hired Albourne. CalSTRS hired Lyxor Asset Management as a consultant for its global macro hedge fund portfolio.
Fee reductions
Pensions have also been keeping a strict eye on fees – one reason that a number are taking the direct hedge fund route over funds of funds. For instance, New Jersey negotiated a $40 million fee savings in alternative investment fees. Texas County & District Retirement System and CalPERS also were among those pensions taking steps to limit fees.
Growth potential with corporate plans
Whereas public pension funds comprise a larger number investing in hedge funds, the largest growth potential is with private corporate plans. The private sector started investing later than public pensions and endowments. Recent activity shows select corporate pensions are starting to make large allocations to hedge funds.
Japan corporate pension funds are now more closely examining hedge funds. Surveys indicate that typically 2-5% of the corporate pension goes to hedge funds but that percentage could increase to 10-15% over the next two years.
European pension interest in hedge funds is strong
European-based pensions have the greatest appetite for new commitments. One survey found that 45% are seeking new opportunities.
Smaller endowments looking closer at hedge funds/funds of funds
On the endowment front, some smaller endowments e.g. Wilfrid Laurier University, are starting to look at and invest in hedge funds. Previously, large endowments had generally been the sole users of hedge funds/funds of funds.
Some endowments seed
Meanwhile, some of the larger endowments who have been allocating to hedge funds for a while are seeding hedge fund managers e.g. University of London seeded a Calamos fund.
Sovereign Wealth Funds’ allocations to hedge funds stay flat
Surveys indicate that SWFs’ allocations to hedge funds are about 36% of their portfolio – about the same as last year.
Infovest21's annual white paper examines trends on a global basis. The white paper looks at recent (June 1, 2010 to June 30, 2011) hedge fund interest and activity by pensions, endowments, sovereign wealth funds. Summary highlights of recent activity as well as plans for moving ahead are provided for a sampling of institutions.
Institutional activity is examined in North America, Europe, UK and Japan. Special emphasis is placed on the largest allocators i.e. those allocating $1 billion or more to hedge funds. The white paper also provides a survey of smaller institutions making allocations as well as those issuing RFPs or conducting searches. Those institutions deciding not to allocate or who have reduced their hedge fund allocation are also listed.
Some institutional investors are looking to diversify their portfolios while others are taking advantage of perceived attractive beta and alpha opportunities as downside protection. Others are trying to boost their returns due to funding shortfalls.
Lois Peltz, president of Infovest21, observes that in the past year, several institutions made their first foray into hedge funds, such as Connecticut Retirement Plan & Trust Fund, El Paso County Retirement Plan, Kansas City Police Employees’ Retirement System, Los Angeles County Employees’ Retirement Association, Massachusetts Water Resources Authority Retirement System, New York City Police, New York City Employees’ Retirement, New York City Fire, San Jose Federated City Employees’ Retirement System, Vermont State Retirement System and West Palm Beach Firefighters’ Pension.
Other institutions have increased their allocations such as Alaska Retirement Management Board, City of Danbury, Metro Nashville, North Carolina Retirement System, Ohio State Employees’ Retirement System, Orange County Retirement System, Sacramento County Employees’ Retirement System, San Mateo County Employees’ Retirement Association.
A number of the largest pension allocators to hedge funds have increased their target allocation to hedge funds. For example, Texas City and District increased the cap from 15% to 20% while New Jersey State Investment Council increased it from 10% to 15%. Texas Teachers Retirement System upped the target from 5% to 10%. Illinois Teachers’ Retirement System increased the cap from 5% to 8%.
Many pensions have rebalanced their portfolios – firing some hedge funds/funds of funds while replacing them with others.
RFPs and searches are out (or expected soon) for Ohio School Employees’ Retirement System, Orange County Employees’ Retirement System, Seattle City Employees’ Retirement System, State-Boston Retirement System and State of Wisconsin.
Meanwhile, a few pensions have been redeeming allocations to hedge funds e.g. PennSERS, Delaware Public Employees Retirement System, or avoiding them altogether after a bad experience e.g.Ohio Bureau of Workers Compensation.
Some interesting trends in the past fiscal year include:
Strong overall portfolio returns in FY2011…Pension underfunding remains a factor motivating pensions to allocate to hedge funds
A strong stock market helped pension plans’ returns in FY2011. Returns in the 20%-23% range have been recorded by a number of systems including Alaska Permanent Fund, CalPERS, CalSTRS, Florida Retirement System, MassPRIM and New York City Pension Funds. In many cases, these are the strongest gains in 20+ years. However, 10-year returns are still below the required level. For example, CalPERS’ 10-year return is 5.36% while CalSTRS is 5.7%.1
Wilshire Associates says the annual return in the next 15 years will be 6.5%.2
Using government accounting standards, the aggregated underfunding for US state and local governments is about $1 trillion. But if using corporate accounting standards, the shortfall is about $2.5 trillion. A third approach, often used by economists who consider even the private accounting standards too lenient, yields a $3.5 trillion answer.3
The bill for retirement benefits is already straining budgets and is competing for resources with other critical needs such as education, infrastructure and health care.
To close the funding gap, some states have increased the retirement age and length of service requirements while others increased employee contribution requirements. Some systems lowered their discount rate assumptions. Some pensions are looking to hedge funds as a means to close the funding gap.
Momentum continues toward direct investing
Institutions are increasingly allocating directly to hedge funds rather than take the funds of funds route, especially if they have in-house capability to select hedge funds. Relatively poor fund of funds performance in 2008 and 2009, some funds of funds getting caught allocating to Madoff and other Ponzi schemes, the pressure for lower fees, institutions and their consultants acquiring more knowledge and expertise on hedge funds as well as some hedge funds becoming more institutional in nature have encouraged some institutions to invest directly with hedge funds.
Recent examples include Massachusetts Pension Reserves Investment Management’s pilot program to allocate assets directly with hedge funds. The pension plans to allocate to 20 hedge funds managers in the fourth quarter. Ohio Public Employees Retirement System, which initially used funds of funds, plans to invest $1.2 billion directly to hedge funds.
There is no standard approach for pensions which are direct allocators to hedge funds. Some use outsourced chief investment officers while others use consultants or fund of funds advisors to support their direct allocating efforts. 4
First time users tend to prefer funds of funds
Some pensions, mostly first time allocators, prefer funds of funds. Recent examples include Connecticut State Employees’ Retirement System, El Paso County Retirement Plan, Kansas City Police Employees’ Retirement System, Los Angeles County Employees’ Retirement Association, Massachusetts Water Resources Authority Employees’ Retirement System, Metro Nashville, New York City Pension Funds, North Carolina Retirement Funds, Orange County and Vermont State Retirement System.
Smaller pensions which lack resources to select or access direct hedge fund investments may continue to have funds of funds as their core investment. Some institutions continue with the core-satellite approach where the core allocation is to a fund of funds supplemented by a number of single strategy funds. Others seek more specialized funds of funds in place of, or in addition to, a diversified fund of funds mandate.
Hiring consultants for those pensions allocating directly to hedge funds
As more pensions consider investing directly with hedge funds, they are in need of a specialized hedge fund consultant. For example, the Maryland State Retirement Agency issued a Request for Information seeking a consulting firm to advise the staff on its absolute return portfolio.
MassPRIM hired Cliffwater in April 2011 as its hedge fund consultant while Texas Employees Retirement System hired Albourne. CalSTRS hired Lyxor Asset Management as a consultant for its global macro hedge fund portfolio.
Fee reductions
Pensions have also been keeping a strict eye on fees – one reason that a number are taking the direct hedge fund route over funds of funds. For instance, New Jersey negotiated a $40 million fee savings in alternative investment fees. Texas County & District Retirement System and CalPERS also were among those pensions taking steps to limit fees.
Growth potential with corporate plans
Whereas public pension funds comprise a larger number investing in hedge funds, the largest growth potential is with private corporate plans. The private sector started investing later than public pensions and endowments. Recent activity shows select corporate pensions are starting to make large allocations to hedge funds.
Japan corporate pension funds are now more closely examining hedge funds. Surveys indicate that typically 2-5% of the corporate pension goes to hedge funds but that percentage could increase to 10-15% over the next two years.
European pension interest in hedge funds is strong
European-based pensions have the greatest appetite for new commitments. One survey found that 45% are seeking new opportunities.
Smaller endowments looking closer at hedge funds/funds of funds
On the endowment front, some smaller endowments e.g. Wilfrid Laurier University, are starting to look at and invest in hedge funds. Previously, large endowments had generally been the sole users of hedge funds/funds of funds.
Some endowments seed
Meanwhile, some of the larger endowments who have been allocating to hedge funds for a while are seeding hedge fund managers e.g. University of London seeded a Calamos fund.
Sovereign Wealth Funds’ allocations to hedge funds stay flat
Surveys indicate that SWFs’ allocations to hedge funds are about 36% of their portfolio – about the same as last year.
Infovest21's annual white paper examines trends on a global basis. The white paper looks at recent (June 1, 2010 to June 30, 2011) hedge fund interest and activity by pensions, endowments, sovereign wealth funds. Summary highlights of recent activity as well as plans for moving ahead are provided for a sampling of institutions.
Institutional activity is examined in North America, Europe, UK and Japan. Special emphasis is placed on the largest allocators i.e. those allocating $1 billion or more to hedge funds. The white paper also provides a survey of smaller institutions making allocations as well as those issuing RFPs or conducting searches. Those institutions deciding not to allocate or who have reduced their hedge fund allocation are also listed.
Infovest21Special Research Report: The growing importance of branding in hedge fund manager growth
In general, hedge fund managers have not yet made conscious branding decisions. In fact, most firms in the hedge fund space have ignored branding.
When it does occur, branding in the industry is often driven by the personality of the manager. Therefore, the product, i.e. the investment management service, is inextricably tied to that personality by default rather than a conscious strategic effort to create a brand.
But as institutions continue to be the driving force in the hedge fund industry and the main provider of assets, more managers strive to be of “institutional quality.”
Brand is very important in the institutional market place. Most of the institutional money has flowed to the largest hedge fund managers over last two years as they are seen as the managers with the strongest brand.
Institutions view these managers as a safe place to put their money. They are seen as asset managers, not just hedge fund managers.
Many institutional investors are more attracted to a firm’s sustainable infrastructure rather than a high rate of return.
Branding is relevant to any size manager. Smaller managers have a greater need for branding than larger managers. Part of branding will be achieved by educating investors about a strategy or sector. The manager can become a go-to resource for that specific niche.
As hedge fund managers attempt to build their stature as institutional asset managers, they often focus upon their perceived branding in the marketplace and how it enhances their overall acceptance to larger investors. Analyzing their branding forces hedge fund managers to review a wide range of issues: from their company name to their mission statement to their investment objectives to the associations they have built in their service providers.
Marketing and public relations experts say a number of activities should be taken. Branding includes everything from how they answer the phone to marketing materials to the website to corporate personality. Branding is making the name of your company stand for something that is positive in the client’s mind. It includes the name, logo, tagline, website, core message, road show, and what people write about the company. It is not just the products and deliverables.
That message needs to be linear and concise and clearly articulate the differential advantages of the hedge fund across the various factors used to analyze hedge funds.
Some point to the mutual fund industry as a model as it has a longer history. “It used to sell performance. Then in the late 1990s, everyone wanted to know what Peter Lynch of Fidelity thought. Now, they no longer sell individuals and sell performance less. They sell an institutional name. Who knows who manages the individual mutual funds? It is the brand, more than the individual manager. People want the brand of trust.”
Other thoughts on branding
Brand is different than the actual quality. Hopefully, they are the same but there are a lot of good firms that don’t do a good job of articulating what they do and their brand in the market place is below the quality of the fund they offer. Other firms have a very good brand but the underlying product isn’t at the same level as people’s perception of that firm. This may be true for many of the largest managers.
A brand can also be negative. For example, accusations of insider trading or other negative press reduces high quality perception that a firm wants to have.
Some marketers take a contrarian view and say there are no hedge fund brands. They say hedge funds grow because they are institutional and generate superior performance. They argue that a hedge fund can try to brand, but without performance it will eventually lose assets regardless of the customer’s identification with the fund. Rather than branding, they focus on differentiation.
Building a brand is a slow process. A consistent high quality message needs to be heard over time. If the manager delivers what he says, over time, the brand will develop.
In its special report, Infovest21 provides a number of case studies that illustrate how managers, in different circumstances, achieved their specific branding goals. While the report focuses primarily on hedge fund managers, a section is provided on branding as it relates to service providers.
When it does occur, branding in the industry is often driven by the personality of the manager. Therefore, the product, i.e. the investment management service, is inextricably tied to that personality by default rather than a conscious strategic effort to create a brand.
But as institutions continue to be the driving force in the hedge fund industry and the main provider of assets, more managers strive to be of “institutional quality.”
Brand is very important in the institutional market place. Most of the institutional money has flowed to the largest hedge fund managers over last two years as they are seen as the managers with the strongest brand.
Institutions view these managers as a safe place to put their money. They are seen as asset managers, not just hedge fund managers.
Many institutional investors are more attracted to a firm’s sustainable infrastructure rather than a high rate of return.
Branding is relevant to any size manager. Smaller managers have a greater need for branding than larger managers. Part of branding will be achieved by educating investors about a strategy or sector. The manager can become a go-to resource for that specific niche.
As hedge fund managers attempt to build their stature as institutional asset managers, they often focus upon their perceived branding in the marketplace and how it enhances their overall acceptance to larger investors. Analyzing their branding forces hedge fund managers to review a wide range of issues: from their company name to their mission statement to their investment objectives to the associations they have built in their service providers.
Marketing and public relations experts say a number of activities should be taken. Branding includes everything from how they answer the phone to marketing materials to the website to corporate personality. Branding is making the name of your company stand for something that is positive in the client’s mind. It includes the name, logo, tagline, website, core message, road show, and what people write about the company. It is not just the products and deliverables.
That message needs to be linear and concise and clearly articulate the differential advantages of the hedge fund across the various factors used to analyze hedge funds.
Some point to the mutual fund industry as a model as it has a longer history. “It used to sell performance. Then in the late 1990s, everyone wanted to know what Peter Lynch of Fidelity thought. Now, they no longer sell individuals and sell performance less. They sell an institutional name. Who knows who manages the individual mutual funds? It is the brand, more than the individual manager. People want the brand of trust.”
Other thoughts on branding
Brand is different than the actual quality. Hopefully, they are the same but there are a lot of good firms that don’t do a good job of articulating what they do and their brand in the market place is below the quality of the fund they offer. Other firms have a very good brand but the underlying product isn’t at the same level as people’s perception of that firm. This may be true for many of the largest managers.
A brand can also be negative. For example, accusations of insider trading or other negative press reduces high quality perception that a firm wants to have.
Some marketers take a contrarian view and say there are no hedge fund brands. They say hedge funds grow because they are institutional and generate superior performance. They argue that a hedge fund can try to brand, but without performance it will eventually lose assets regardless of the customer’s identification with the fund. Rather than branding, they focus on differentiation.
Building a brand is a slow process. A consistent high quality message needs to be heard over time. If the manager delivers what he says, over time, the brand will develop.
In its special report, Infovest21 provides a number of case studies that illustrate how managers, in different circumstances, achieved their specific branding goals. While the report focuses primarily on hedge fund managers, a section is provided on branding as it relates to service providers.
Infovest21 survey finds family offices allocate 26% of their portfolio to hedge funds
Infovest21’s just-released family office survey provides a snapshot look at the typical family office organization in today’s environment. About 60% were single family offices while 40% were multiple family offices. The family offices were primarily US-based. The average asset size of the typical family office was $2.2 billion. The interviews took place during July.
Among the highlights are:
Hedge Fund/Fund of Funds Allocations
• On average, the family offices allocated to 23 hedge fund managers.
• On average, family offices allocated about 26% of their portfolio to hedge funds.
• The average allocation to funds of funds was quite small at 1.0%.
Views on Hedge Funds
Lois Peltz, president of Infovest21, commented: “Almost two-thirds of the family offices viewed hedge funds “very favorably” while 20% viewed hedge funds “somewhat favorably” while 8% were neutral and 4% viewed hedge funds negatively.”
She added: “Family offices were also divided on their views of the current hedge fund environment: Almost 40% of the families said few investment opportunities existed while 31% said many investment opportunities existed. 23% said excellent talent was available while 15% said talent wasn’t available.”
Manager Selection and Strategies Allocated To
The three most important selection criteria cited in manager selection were performance, experience and reputation.
About 46% of the families allocate to equity long/short, distressed, and event driven. About 42% allocate to emerging markets.
Over 30% of the typical family offices’ portfolio is allocated to managers with assets between $500 million and $999 million. Another 25% is allocated to managers with assets between $100 and $499 million while 18% of the managers have assets below $100 million.
Fees
The average fee structure paid to a hedge fund was 1.6% management fee and 18.9% incentive fee. The average management fee and incentive fee for funds of funds was 1.0% and 7.8% respectively.
Almost 60% of the families said the fees have stayed the same compared with last year while 20% said they are paying a lower management fee and another 20% said they are paying a lower incentive fee. Another 20% said they are paying higher management fees and another 16% are paying higher incentive fees.
Almost half of the family offices say they have not been able to negotiate favorable terms with managers.
Family offices’ largest concern with hedge funds is managers making up their own rules.
Single versus Multiple family office responses
A number of significant differences can be found when comparing single family offices responses with those of multiple family offices. Some highlights include:
• Single family offices have more experience with hedge funds as seen in terms of years investing with hedge funds.
• Multiple family offices are larger proponents of hedge funds than single family offices.
• For single family offices, performance is the most important criteria in selecting a manager. However, for multiple family offices, experience is the key component
• Very little overlap exists in the strategies that the single and multiple family offices are considering for the first time. Global macro was cited by 20% of the single family offices while the largest percentage of multiple family offices, 38%, cited emerging markets.
Among the highlights are:
Hedge Fund/Fund of Funds Allocations
• On average, the family offices allocated to 23 hedge fund managers.
• On average, family offices allocated about 26% of their portfolio to hedge funds.
• The average allocation to funds of funds was quite small at 1.0%.
Views on Hedge Funds
Lois Peltz, president of Infovest21, commented: “Almost two-thirds of the family offices viewed hedge funds “very favorably” while 20% viewed hedge funds “somewhat favorably” while 8% were neutral and 4% viewed hedge funds negatively.”
She added: “Family offices were also divided on their views of the current hedge fund environment: Almost 40% of the families said few investment opportunities existed while 31% said many investment opportunities existed. 23% said excellent talent was available while 15% said talent wasn’t available.”
Manager Selection and Strategies Allocated To
The three most important selection criteria cited in manager selection were performance, experience and reputation.
About 46% of the families allocate to equity long/short, distressed, and event driven. About 42% allocate to emerging markets.
Over 30% of the typical family offices’ portfolio is allocated to managers with assets between $500 million and $999 million. Another 25% is allocated to managers with assets between $100 and $499 million while 18% of the managers have assets below $100 million.
Fees
The average fee structure paid to a hedge fund was 1.6% management fee and 18.9% incentive fee. The average management fee and incentive fee for funds of funds was 1.0% and 7.8% respectively.
Almost 60% of the families said the fees have stayed the same compared with last year while 20% said they are paying a lower management fee and another 20% said they are paying a lower incentive fee. Another 20% said they are paying higher management fees and another 16% are paying higher incentive fees.
Almost half of the family offices say they have not been able to negotiate favorable terms with managers.
Family offices’ largest concern with hedge funds is managers making up their own rules.
Single versus Multiple family office responses
A number of significant differences can be found when comparing single family offices responses with those of multiple family offices. Some highlights include:
• Single family offices have more experience with hedge funds as seen in terms of years investing with hedge funds.
• Multiple family offices are larger proponents of hedge funds than single family offices.
• For single family offices, performance is the most important criteria in selecting a manager. However, for multiple family offices, experience is the key component
• Very little overlap exists in the strategies that the single and multiple family offices are considering for the first time. Global macro was cited by 20% of the single family offices while the largest percentage of multiple family offices, 38%, cited emerging markets.
Tuesday, June 28, 2011
Infovest21 Survey: 60% of institutions surveyed see hedge funds as a possible solution to underfunding problems
In its just-released institutional investor survey, Infovest21 found that almost 60% of the respondents say hedge funds are a possible solution for their underfunding problem.
Lois Peltz, president of Infovest21, noted, “Institutional investors are primarily looking to hedge funds for non-correlated returns. Potential for higher returns, diversification, and downside protection were cited to a lesser extent.”
Other findings of the survey are:
Hedge funds are a mainstream investment
The average institution allocated 29.2% to hedge funds while funds of funds are allocated 11.4%. This represents a 2.3% increase for hedge funds but no change for funds of funds compared with 2009 levels.
Over the next 12 months, the institutions expect their allocations to increase to 35.5% for hedge funds and 16.2% for funds of funds.
Almost one-half of the respondents have been allocating to hedge funds for over ten years.
Over 40% of the respondents said they are using equities to fund hedge funds. Fixed income and cash were each cited by almost 30%.
Allocate most often to long/short equity and multi-strategy….more considerations being given to managed futures and distressed
Of the 23 strategies asked about, institutional investors allocated most frequently to equity long/short and multi-strategy. Respondents, however, had mixed views on multi-strategy funds with almost 40% saying their view was dependent on the asset allocator.
Country specific funds, activists, asset based lending and mortgage-backed securities are out-of-favor while managed futures and distressed are being considered for the first time by a large number of institutional investors.
Consultant’s specialty expertise
In selecting a consultant, almost two-thirds of the respondents said the primary selection factor was specialty expertise followed closely by experience.
Fraud remains major concern
Institutions’ largest concerns with hedge funds are fraud and then poor performance.
Fee pressure to continue
Downward pressure is likely to continue on hedge fund fee structures as almost 40% of the institutions said the management fee is too high while 30% said the incentive fee was too high.
Competitive products
If the institutional investor decided not to use hedge funds going forward, they would replace them most often with private equity. In descending order, hedge fund replication products, commodities, real estate and hedge fund indices were also cited.
Contact Infovest21 for the full survey results, general@infovest21.com or call 212-686-6440
Lois Peltz, president of Infovest21, noted, “Institutional investors are primarily looking to hedge funds for non-correlated returns. Potential for higher returns, diversification, and downside protection were cited to a lesser extent.”
Other findings of the survey are:
Hedge funds are a mainstream investment
The average institution allocated 29.2% to hedge funds while funds of funds are allocated 11.4%. This represents a 2.3% increase for hedge funds but no change for funds of funds compared with 2009 levels.
Over the next 12 months, the institutions expect their allocations to increase to 35.5% for hedge funds and 16.2% for funds of funds.
Almost one-half of the respondents have been allocating to hedge funds for over ten years.
Over 40% of the respondents said they are using equities to fund hedge funds. Fixed income and cash were each cited by almost 30%.
Allocate most often to long/short equity and multi-strategy….more considerations being given to managed futures and distressed
Of the 23 strategies asked about, institutional investors allocated most frequently to equity long/short and multi-strategy. Respondents, however, had mixed views on multi-strategy funds with almost 40% saying their view was dependent on the asset allocator.
Country specific funds, activists, asset based lending and mortgage-backed securities are out-of-favor while managed futures and distressed are being considered for the first time by a large number of institutional investors.
Consultant’s specialty expertise
In selecting a consultant, almost two-thirds of the respondents said the primary selection factor was specialty expertise followed closely by experience.
Fraud remains major concern
Institutions’ largest concerns with hedge funds are fraud and then poor performance.
Fee pressure to continue
Downward pressure is likely to continue on hedge fund fee structures as almost 40% of the institutions said the management fee is too high while 30% said the incentive fee was too high.
Competitive products
If the institutional investor decided not to use hedge funds going forward, they would replace them most often with private equity. In descending order, hedge fund replication products, commodities, real estate and hedge fund indices were also cited.
Contact Infovest21 for the full survey results, general@infovest21.com or call 212-686-6440
Subscribe to:
Posts (Atom)