Infovest21 Press Releases

Nov 2011 - Five positions top $1M in large hedge fund manager compensation survey

2011-11-23T00:19:00.000-05:00

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.

Infovest21 Investor Focus: Consultants Discuss Strategies of Interest During Uncertain, Volatile Periods

2011-10-02T21:46:00.000-04:00

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.

Infovest21 Investor Focus: Role of Hedge Funds in Small/Medium Sized Endowments

2011-10-02T21:42:00.001-04:00

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.

Infovest21 White Paper: Institutional Assets Continue to Flow to Hedge Funds

2011-08-28T19:04:00.002-04:00

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.

Infovest21Special Research Report: The growing importance of branding in hedge fund manager growth

2011-08-28T18:53:00.001-04:00

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.

Infovest21 survey finds family offices allocate 26% of their portfolio to hedge funds

2011-08-28T18:27:00.002-04:00

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.

Infovest21 Survey: 60% of institutions surveyed see hedge funds as a possible solution to underfunding problems

2011-06-28T19:59:00.001-04:00

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

Infovest21 Investor Focus: Consultants discuss RFPs and define “institutional quality” managers

2011-06-16T10:33:00.001-04:00

Consultants say search activity in hedge funds has been robust in 2010 and 2011.

“Today, there is still interest in long/short equity and increased interest in absolute return strategies as a substitute for fixed income,” says Greg Dowling, a consultant at Fund Evaluation Group, speaking at Infovest21’s investor morning seminar on RFPs. He is seeing interest in credit managers that have much more of a long/short posture versus the longer biased managers that were popular 18 to 24 months ago. The only exception is Europe where managers with loner biased distressed debt skill sets remain popular. While the type of searches has changed as the market opportunity has changed overall search activity still remains robust, adds Dowling.

Earlier in the year, Towers Watson released a report showing similar findings. Its clients’ hedge fund mandates increased 50% during 2010, bringing the level of mandates back to 2008 levels. Mandates for direct hedge funds now account for 60% of all the hedge funds searches with equity, fixed income and insurance strategies being the most popular.

At the release of the report, Craig Baker, global head of research at Towers Watson, said, “We believe in the ability of highly skilled hedge funds to adapt to a changed environment and generate good performance for our institutional investor clients. We believe that the larger institutional funds will continue to move to investing directly rather than via funds of funds. However, funds of funds can still be an ideal solution for many smaller and governance constrained investors.”

Don Steinbrugge of Agecroft Partners, a consultant and third party marketer to institutional investors, says he is seeing widespread demand from institutional investors for commodity trading advisors which is a dramatic change from their past reluctance to allocate to the strategy. Before 2009, very few pension funds allocated to CTAs. They did not understand how the systematic models worked nor could they evaluate which models were superior. Institutional investors were more comfortable with fundamentally driven strategies that were similar to their long-only managers' investment processes.

After Q4 2008, however, pension funds realized their portfolios were not as diversified as they thought and found their managers to be highly correlated. Meanwhile they saw the Barclays CTA Index up 14% over the same period. This caught their attention and they began to take a closer look at CTAs. Institutions also saw that while some hedge funds were gating or suspending redemptions due to liquidity mismatch, CTAs generally offered monthly liquidity to their investors and accurately valued their portfolios as they tend to trade highly liquid, price transparent futures and currencies.

Defining “Institutional Quality Managers”
In defining what is institutional quality, consultants say they put an emphasis on:

• a historical ability to create excess returns over a benchmark
• a repeatable investment process
• separation of duties
• a strong chief compliance officer
• the people – are the same people in place that created the same track record?
• an articulate valuation policy
• risk management
• liquidity management
• quality of service providers
• business continuity
• the size of the assets relative to the strategy and how the assets have changed

Towers Watson’s Neel Mehta wants to understand how the portfolio managers think as opposed to simply how they have made money in the past. “Once we understand the process, we talk about trade examples, macro views on market, and how these translate into returns.”

Massey Quick says they may select a stock out of the portfolio and ask the manager specifically how the stock was identified, who did the research, what made the manager decide to put the stock in the portfolio, why it was sized the way it was.

The consultants are interested in talking to other team members besides the portfolio manager. “Very often you can get more from meeting the analyst than meeting a portfolio manager. You get a different perspective on the manager. We can talk about process and how the manager has traded on past ideas, how the compensation structure actually motivates the analyst. You also have to meet the chief financial officer, the chief executive officer and understand the business plan of the company,” adds Mehta.

Understand what motivates the manager. Often, large managers don’t want to take on enough risk. Think about wider issues such as the correlation between stock price and assets under management and try to calculate how much money is made by growing assets (inflating the stock price) versus generating revenue from the incentive fee on good performance, observes Mehta.

Character and integrity are also important. Investors remember those managers who closed their funds in 2008 because they didn’t want to pay back the draw downs and reopened under a new name.

On the managed futures front, Steinbrugge advocates hiring CTAs with well built out research teams and seeing how much transparency they give investors into the process. This is because CTA models tend to evolve over time. He suggests looking at managers in the mid sized range i.e. $2 billion to $10 billion as this group is large enough to support a substantive research team but not too large where their alpha may be diluted over a growing asset base.

The above is an excerpt from Infovest21's April issue of Investor Focus. The full issue can be obtained by contacting Infovest21 at 212 686 6440.

Infovest21 White Paper: Evolution of Product Structures - Managed Account Platforms, Ucits and Hedge Fund Mutual Funds

2011-06-13T07:15:00.001-04:00

2008 was a watershed event as it reinforced investors’ requirements for increased liquidity and transparency. These characteristics are important features of managed accounts, Ucits and hedge fund mutual funds.

2008 also brought to many investors' attention the fact that their actual risk profile was different from what they thought it was.

Different investors demand different types of access. Typically, the managed account is the domain of the ultra high net worth investor and institutions because of the high managed account minimums for the top quality managers. Mutual funds appeal to the financial adviser who wants to give his retail client diversification. Some see the hedge fund mutual fund as a cost-effective way to gain access to an institutional quality offering with daily liquidity, daily pricing, transparency, a small minimum investment and a timely 1099. These advantages appeal to investors who were hurt by lock-ups and side pockets in 2008.

As the Infovest21white paper details, none of these vehicles are a panacea and challenges exist for each structure. Yet they do reflect evolutionary forces taking place in the hedge fund arena.

Alternative to funds of funds?
Hedge fund managers are increasingly using managed account platforms, Ucits and mutual fund hedge funds to gather assets and diversify their client base.

Some investors see these products as an alternative to funds of funds. “As large institutions leave funds of funds industry, many want to allocate directly to hedge funds but they may have a small staff and may not be equipped to do the stringent due diligence. They can hire a consultant for advisory services. Others, however, may choose to use managed accounts. The investor gets due diligence on the managed account platform and doesn’t have to do the operational due diligence on all the managers they want to hire,” says Martin Gagnon, co-chief executive officer of Innocap.

Some financial planners say they could also see investors moving out of funds of funds and into mutual funds because of value, simplicity of tax issues and greater liquidity.

Some funds of funds, however, disagree and have been actively developing their own managed account platforms as a way to differentiate themselves in a difficult environment. Some are providing a niche such as having smaller managers or strategy-specific managers. One platform provider says early fund of fund adopters of managed account programs will probably grow faster than traditional fund of fund firms.

Outlook

Transparency, risk aggregation, granular information
Institutions will continue to be the driving force behind these evolving products. Institutions’ requirement for transparency will be a major factor going forward.
Managed account platform providers say they are delivering aggregated information to investors more frequently and will continue to enhance what is provided. Investors may eventually be able to see their aggregated exposures on a daily basis. Emphasis is on how to use the data to make improved investment decisions which will ultimately lead to better performance over time.

Managed accounts, providing access to real-time trading, will increasingly be used by some investors as a tool to invest with newer managers.

Major platforms dominate with niche platforms filling a need
The large major managed account platforms are expected to dominate as managed accounts are operationally intensive. Some industry veterans expect to see more banks become involved as they see the platforms providing another source of revenue.

Some expect the platforms to add other sources of revenue as margins get squeezed. This could include providing advisory/risk management services or acting as third party marketers to funds on the platform etc.

A place will exist for independent managed account platforms as they are attractive to banks who don’t have their own managed account platform.

Innovative pricing
In response to fees being pressured downward, both banks and asset manager/independent platforms are looking for ways to become more innovative with their pricing and still maintain some margins. Some platforms will charge investors platform fees while platforms will charge distribution/administrative fees.

Innovative technology: Point click invest
With technology, transparency may eventually be expanded to existing hedge funds (as opposed to just managed accounts). Some platforms are looking at connecting investors and managers online. One platform is currently in the beta phase with “point click invest” where investors will be able to subscribe electronically. Roll-out is expected this summer.

Growing overlap: Managed account platforms complement Ucits and hedge fund mutual funds
Ucits and managed accounts are separate structures but they overlap and may be complementary. A managed account can be used as a basis for Ucits vehicles, index products, structured products etc.

For those who want to do a Ucits-type product, it is much easier to base that product off of a managed account where there is independent liquidity, transparency and control of actual assets. “A managed account platform in an independent vehicle that has daily transparency, daily valuations, excellent governance and risk management. Managers want to get all those elements in one place,” says Caleim Parkes of MSS Consultancy.

“Investors are realizing that managed accounts and Ucits are not a binary choice. They are part of a continuum of solutions. Ucits are one investment option in the spectrum of investment solutions. There are a number of hedge fund strategies that are not suitable for Ucits e.g. fixed income arbitrage,” adds Gabriel Bousbib of Gottex.

Some investors e.g. sovereign wealth funds in Middle East, don’t need Ucits vehicles. They are happy to invest in an offshore structure. Other investors like French insurance companies aren’t willing to invest unless it is a Ucits format.

Similarly, managed accounts and mutual funds are more likely to overlap when managed account platforms provide the manager access that mutual funds require.

Regulatory clarity required

Other managed account platform providers are a bit more hesitant on the growing overlap of these products. They feel regulatory clarity is needed before they add Ucits. “Our platform is onshore and we could easily transform it into Ucits. We have the tools to do it but we haven’t. You need to make sure all the rules comply with Ucits regulation. Some convergence exists between Ucits and the Alternative Investment Fund Managers Directive (AIFM). We need some clarity with AIFM which we will have in coming months. I hope European regulators will get together and there will be some convergence between Ucits and AIFM to offer the public a better product," comments Gagnon.

Regulatory clarification is also needed on the managed futures mutual fund side. Interest exists in the industry for the SEC and the CFTC to harmonize rules. A number of funds of funds say they’d offer mutual funds once those regulatory issues are resolved. Issues exist over the lack of transparency on fee structures in some existing managed futures mutual funds.

Infovest21 Investor Focus - Survival of the adaptable

2011-03-31T19:01:00.002-04:00

Large US pensions are increasing direct allocations to hedge funds.

Of the ten US public funds with the largest allocations to hedge funds, Massachusetts Pension Reserves Investment Management and Pennsylvania State Employees’ Retirement System are the only two pensions solely invested in funds of funds. Meanwhile, Pennsylvania Public School Employees’ Retirement System, Virginia Retirement System, The Teachers Retirement System of Texas, New York State Common Retirement Fund and the Texas County & District Retirement System are 100% invested directly in hedge funds.

MassPRIM recently decided that about $500 million of the $3.5 billion allocated to funds of funds will now be diverted to direct allocations in hedge funds. A reassessment will take place by year-end 2011 and the pension will decide whether more should be allocated to hedge funds directly.

MassPRIM says the move will prevent manager overlap, provide transparency and save about $4.2 million in fees. It paid about $30 million in fees to funds of funds. Transparency was also an issue for MassPRIM as it didn’t immediately know the extent of its exposure to Level Global when the hedge fund was raided by the FBI in November 2010. MassPRIM’s funds of funds - K2 Advisors, Rock Creek and Grosvenor Capital - had each allocated to Level Global with $24.7 million, $13.3 million and $10.7 million respectively. Arden Asset Management had invested $11.6 million with Diamondback Capital Management, which was another firm raided by the FBI in November.

Lois Peltz, president of Infovest21, points out that performance is another reason the large US public pension funds are increasingly allocating directly to hedge funds. "The average hedge fund outperformed funds of funds in six of the seven past years. The largest differentials occurred in 2009 and 2010," she said.

At Infovest21 ’s Investor Seminar on Pension Underfunding and Its Implications for Hedge Funds/Funds of Funds,” Don Steinbrugge, chairman of Agecroft Partners, pointed out that over a certain mandate size – perhaps $100 million – pensions will eventually directly allocate to a manager rather than use a fund of funds. “Most of the pensions that have gone direct had done so recently. Approximately 80% have done so in the past three years,” he adds.

A number of surveys support this trend toward direct investing.

• A Pensions & Investments survey found the largest institutional allocations’ direct investment in hedge funds increased 75.6% to $77.8 billion through September 2010. In comparison, investing via funds of funds increased 20.8% to $31.9 billion.
• Cliffwater’s survey found 49% of the US systems invest directly in hedge funds while 33% only invest through funds of funds. Another 18% of the systems do both - invest directly in hedge funds and through funds of funds.

On an asset weighted basis, 64% of hedge fund investments are invested directly and 36% through funds of funds.

Funds of funds take a more solutions-based approach
Yet, most industry observers say funds of funds serve a function and are here to stay. Their role, however, is changing.

“Many funds of funds aren’t adapting; many are in denial. Some won’t negotiate fees or do separate accounts. The Darwinian approach may take form - and in some ways already has - where it's not the strong that survive but the adaptable. The entrepreneurs who, while sticking to their knitting, are constantly evaluating the most effective and efficient methods for delivering the information, for aggregating the data and providing insight on how alpha was generated, how beta was mitigated and the investment instruments appropriate to those decisions,” said Rachel Minard, executive managing director at Optima Fund Management at the Infovest21 Pension Underfunding Seminar.

Most effective are those funds of funds which are changing their business model to accommodate the new institutional obligation of the partnership.

Some funds of funds are taking a more solutions-based approach i.e. developing advisory businesses. Those funds of funds say they find themselves competing against consultants, specialist consultants, wealth managers and multi-strategy funds.

“Some of the better consultants are looking holistically at their investors' portfolios to determine which hedge funds are appropriate versus just hiring a product. People aren’t selling products anymore – they’re selling solutions-oriented programs. That is why many hedge fund specialist consultants are getting so much business now: they empower the institution by their selecting which funds meet the investors' risk and return targets, keeping the discretion squarely with the fiduciary but having this large trough by which to evaluate and cross-reference hedge fund options against their existing holdings,” adds Minard.

“Everything is holistic. You’re not looking just at their [investors’] alternatives but also their by-laws, cash balances, obligatory monies due to shareholders or endowments. Look at every facet and focus on liquidity, capacity, transparency,” says Minard

Various institutional investors are hiring funds of funds for various functions. Some want them to do asset allocation studies while others are looking for risk management. Some want them to identify the most appropriate managers, vet them, set up investment guidelines, do reporting and monitoring.

Some funds of funds are finding themselves moving into the subadvisory business as some pensions are looking for a fund of funds that can facilitate knowledge transfer so the pension may eventually take on the internal management of the hedge fund program.

Infovest21 White Paper: Institutions search for structural efficiency....funds of funds take a more solutions-based approach

2011-03-27T23:55:00.002-04:00

Three major trends continue to impact the hedge fund/funds of funds community - institutionalization, regulation and a challenging asset raising environment.

Infovest21's just-released annual white paper on trends and outlook, looks at each of these trends in detail.

Institutionalization

Pension underfunding, a major concern worldwide, is leading to increased institutional interest in hedge funds/funds of funds as a possible solution in pensions' search for alpha.

More institutions are becoming comfortable thinking about sources of alpha as opposed to traditional buckets. For example, long/short equity is now becoming part of the equity traditional allocation. Instead of a 5% allocation to alternatives now, 20-30% of traditional equity allocation may be put into long/short equities.

Pension plans are increasingly using hedge fund allocations for both fixed income and equity replacements whereas in the past, hedge funds were usually used as absolute return.

Another related trend is the search for structural efficiency. To achieve this, some pensions are allocating directly to hedge funds, accessing fund managers at a reduced fee and/or combining replication strategies. Other institutional investors are combining long-only managers with hedge fund managers as long-only managers generally can generate alpha at a lower fee level.

Regulation and its implications

A number of regulations are affecting the hedge fund community and having numerous repercussions. For example:

A number of compliance experts expect to see more enforcement actions against advisers for a full host of issues but particularly insider trading. The SEC is becoming more educated to what the risks are, how managers manage their book of business and what some of the conflicts are.

As a result, hedge funds are taking a closer look at their insider trading policies. They are putting together compliance policies on expert networks which they hadn't done before. Lawyers advise managers to have documentation showing what caused them to trade in a particular stock.

The SEC is currently investigating hedge funds, and other financial institutions' dealings with sovereign wealth funds. The SEC is scrutinizing these transactions to see if Foreign Corrupt Practice Act violations have occurred i.e. whether improper practices have been used to influence investment decisions outside the US. There haven't been any cases yet on this but the issue is expected to increase in importance.

In July, US hedge fund managers with more than $150 million in assets will have to register with the SEC. The increased cost of registration and the cost to implement compliance programs will significantly affect smaller hedge funds which are already particularly vulnerable, especially if they are not yet above their high water mark.

Due to the Volcker rule in the Dodd-Frank Wall Street Reform and Consumer Protection Act, proprietary traders continue to spin out of investment banks. The result is more hedge fund launches or talented traders joining hedge funds.

Improved but challenging asset raising environment

While improving, asset raising remains challenging and more difficult than most managers expected. While launches are increasing from the past few years' doldrums, new launches tend to be relatively small in size.

Consequently, seeders are in big demand which has resulted in more seeding platforms being set up and more specialization occurring. Institutions are starting to show more interest in emerging managers and seeding funds.

Momentum is growing in Asia as investors and seeders search for new managers and higher rates of return.

Inflows generally are going toward high transparency, liquid products such as managed accounts/funds of one and Ucits. Retail products such as mutual funds using hedge fund strategies are gaining in popularity.

The asset raising environment is also impacting the evolution of funds of funds. The medium-to-larger sized funds of funds increasingly find themselves competing against consultants, wealth managers, multi-strategy funds and specialist consultants. Some funds of funds are developing advisory businesses.Some are also moving into the subadvisory business as some pensions are looking for a fund of funds that can facilitate knowledge transfer so they may ultimately become more active in the internal management of its hedge fund program.

The above are excerpts fromInfovest21's white paper: Major Trends Occurring in 2011 - Implications for Hedge Funds/Funds of Funds.

Infovest21 Marketer Sentiment Survey: Global macro remains their top-rated strategy

2011-03-19T16:58:00.002-04:00

40% of the marketers surveyed in the just-released Infovest21 Marketer Sentiment Survey say the current asset raising environment is “slightly strong” compared with 30% who say it is “flat.” While 20% label it the asset raising environment as “slightly weak,” another 10% say it is “very strong.”

When asked about the asset flow to medium-sized managers, 83% of the marketers said it was still slow with most of the assets still flowing to larger mangers. Only 17% said it was slightly strong.

Global macro continues as top-rated strategy

With 1 representing the highest ranking and 15 the lowest, marketers continue to rate global macro the strategy attracting the most interest from investors. It had a score of 2.9. In the prior two quarterly sentiment surveys, global macro also attained the top spot.

Long/short moved up to the second spot with a score of 4.0 Activists climbed to the third spot from close to the bottom of the list last quarter with a score of 4.3.

Lois Peltz, president of Infovest21, commented,"Strategies having a higher ranking this quarter i.e. attracting more investor interest were long/short, multi-strategy, merger arbitrage, energy, activists and stat arb. Meanwhile, multi-strategy, fixed income arbitrage, convertible arbitrage and asset based lending had lower rankings this quarter."

Rankings for global macro, managed futures, market neutral, and statistical arbitrage were about unchanged from last quarter.

Global macro 2.9
Long/Short 4.0
Activist 4.3
Energy 4.7
Emerging markets 4.9
Managed futures 5.3
Merger arbitrage 6.9
Multi-Strategy 6.9
Market neutral 7.0
Fixed income arb 7.0
Distressed 7.1
Statistical arb 9.3
Convertible arb 9.4
Asset based 9.9
Short bias 10.0

The above are excerpts from Infovest21’s quarterly sentiment survey of marketers. Full results appear in the current issue of Investor Focus.

Infovest21 Sentiment Survey: Managers most positive about oil over next three months

2011-02-09T17:36:00.001-05:00

Results of Infovest21 ’s quarterly sentiment indicator survey conclude that managers’ views on most markets are slightly positive over the next three months.

In one case, NYMEX Oil, 50% of managers felt the market would move up significantly. In twelve markets, the majority of the managers view the markets as moving up slightly while in one market, the majority of managers expect the market to be down slightly.

The twelve markets in which the majority of managers felt the markets would move up slightly, ranked by percent, are: Yen (72%), 30-Year Fixed Mortgage Rate (56%), Consumer Price Index (53%), Nikkei 225 Stock Average (50%), FTSE 100 Stock Average (44%), Comex Gold (39%), Pound (39%), Euro (38%), DJ Stoxx (33%), 10 Year Treasury (28%), S&P500 (28%) and Dow Jones Industrial Average (28%).

In the DJ Corporate Bond Index, over half of the managers felt the market would move down slightly over the next three months.

Geography and sectors
In ranking geographic market opportunities, 39% of the managers felt the US had the highest level of market opportunities followed by China as cited by 17% of the managers. Canada, Latin America and South America tied for third place at 11% each.

Within Asia, the managers ranked China, Hong Kong and then India as the top three locations with the most interest.

Looking at sectors, commodities, energy/basic materials, and technology garnered the most interest as cited by 28%, 22% and 17% of the managers respectively.

Full results appear in the current issue of Investor Focus.

Infovest21 Press Release: Flow of prop traders to hedge funds expected to continue

2011-02-09T17:17:00.002-05:00

Proprietary trading desks at large banks have always been a source of talent for hedge funds. Many successful hedge fund managers had been proprietary traders – Dan Och of Och-Ziff, Eddie Lambert of ESL Investments, Eric Mindich of Eton Park Capital Management and Dinakar Singh of TPG-Axon Capital to name a few. In fact, prop traders account for most of the largest-ever hedge fund launches.

“The exodus from prop desks to hedge funds has gone on for over the past ten years. Throughout the years, however, different motivations have pushed prop traders to hedge funds. For example, in 2008 and 2009, a number of investment banks pared proprietary trading following losses during the financial crisis. Prop traders left for hedge funds in 2009 in an effort to escape increased oversight of compensation and trading constraints,” comments Lois Peltz, president of Infovest21, and author of its just-released special research report on the topic.

Since 2010, prop traders have been squeezed out of large investment banks due to the Volcker rule provision in the Dodd-Frank Wall Street Reform and Consumer Protection Act. First announced in January 2010, President Obama signed the Act into law in July 2010.

While a number of prop traders have already joined hedge funds or are in the process of starting their own, more spin outs are expected.

Some say the best traders have already been picked off. “The most marketable go first. Goldman’s Principal Strategies Group is done – they are all done. Goldman took them off the payroll on December 31, 2011. They are no longer employees unless they transferred into another role in Goldman. Many were offered other roles,” says a former Goldman employee.
But as others point out, there are more proprietary traders than at Goldman Sachs. “If regulation continues on the trend it has been, it is inevitable that more prop traders will emerge from banks in 2011. Some investment banks have been quick off the mark, others have not. Most are waiting to see specific rules elaborated by regulators and then they’ll make their decision,” says the head of a seeding operation.

An equity analyst observes that where the law is clear, the investment banks are adhering i.e. closing down the units or spinning them off. However, where ambiguity exists, they’re holding off in that regulators may take a broader approach.

“Many talented prop traders are still left. Not all banks have closed their prop desks – it may take a number of years for some banks to be in compliance,” says a principal at a multi-strategy platform.

Bank of America’s proprietary fixed income desk is one of the large remaining prop desks that hasn’t yet announced plans to spin off or close. Bank of America got the desk when it bought Merrill Lynch.

Infovest21’s just-released research report, “”Prop trader spin outs and their impact on hedge funds,” is 46 pages and includes information on:
*Various options available to today's prop traders
*Where prop traders are going
*Comparison to earlier generation of prop traders
*Differences between hedge fund managers and prop traders
*Implications for hedge fund managers and seeders
*Listing and table of current and earlier prop trader spin-outs to hedge funds

For additional information, call:
Lois Peltz, Infovest21
212 686 6440

Infovest21 Survey: Funds of funds add more nimble managers, prefer small to medium-sized managers

2011-02-09T16:10:00.002-05:00

In its just-completed survey of funds of funds, Infovest21 found that over the past year, funds of funds’ most frequent change, as cited by 41% of those surveyed, was adding more nimble managers to their underlying portfolios. Another 38% said they became more liquid/provided more liquidity.

Lois Peltz, president of Infovest21, comments, "While one-third of the funds of funds don’t have a preferred asset under management range for underlying managers, the average range of those that have a preference ranged from about $140 million on the low end to $1.4 billion on the high end."

Other highlights of the survey included:

• The average asset size of the fund of funds organization responding was $1.7 billion. The respondents said, on average, at least $1.4 billion is needed to “survive and thrive.”

About one-half have seen an increase in assets under management while 18% have seen a decrease over the past year.

• High net worth/family offices make up over one-half of the average investor base while financial institutions comprise 18% and pensions 14%. Foundations, endowments and sovereign wealth funds comprise the remainder.

• Over 60% of the average fund of funds investor base is located in the US with another 18% coming from Europe and 5% from the UK. Japan, Asia, Middle East, Canada and Australia account for the remainder.
• The average return/volatility target for 2011 is 11.8%/7.7%.

• The average fee structure is a 1.1% management fee with a 6.1% performance fee.

• Almost two-thirds have considered a strategic partnership while almost one-half considered acquiring another entity. Another 30% have considered merging or have merged with another firm. Adding to assets and/or distribution channels was the main motivation in these efforts.

• Funds of funds’ largest concerns about the hedge fund industry are loss of investor confidence, too much focus on larger hedge fund managers and negative industry reputation.

Sixty-two funds of funds completed the survey during January 2011.

The entire Infovest21survey results are available in a just-released 45 page report.

Infovest21 Survey: Funds of funds have mixed views about their future…feel most positive about event driven/special situations

2010-12-22T18:24:00.002-05:00

In Infovest21's just-released sentiment survey of funds of funds, one-half of the respondents were positive on the outlook for funds of funds while the other half were neutral.

Those who were neutral cited continued consolidation as well as more funds of funds moving to consulting and other related services as they seek new revenue sources. Those that were positive highlighted improving asset inflows.

Lois Peltz, president of Infovest21, said, “All the funds of funds in the survey easily differentiated themselves against their peers. Responses included focusing on smaller emerging managers, being long-term focused, regionally oriented, niche strategy oriented or having a concentrated portfolio.”

Strategy outlook
When asked about their outlook of 22 strategies over the next three months, the majority of funds of funds felt “somewhat positive” about 13 strategies. Those strategies receiving the highest ratings were distressed, event driven/special situations, foreign exchange, global macro and volatility arbitrage. In each of these strategies, 54% of the funds of funds felt “somewhat positive. 50% of the funds of funds felt “somewhat positive” about managed futures.

Looking out over the next 12 months, fund of funds’ sentiment became even more positive for event driven/special situations. 38% of the funds of funds, the majority of those responding for that strategy, felt “very positive” about the strategy. 38% also feel “very positive” about emerging markets but the majority, 46%, feel “somewhat positive” about emerging markets.

Full survey results are available in the November issue of Investor Focus. Infovest21 conducts this survey every three months. This period, over 60% of the respondents had assets between $100 and $499 million while one-quarter had assets between $500 million and $999 million. Another 8% had assets over $1 billion while another 8% had assets below $100 million.

Infovest21 Investor Focus: Seeding Momentum Builds for 2011

2010-12-22T18:19:00.002-05:00

A number of seeding transactions have occurred over the past few weeks. Some are one-off allocations while others are part of a platform. For example:

 Keith Meister is being seeded with $250 million by Soros Fund Management. Meister, who had been principal executive officer and vice chairman of Icahn Enterprises, will take an activist approach. He has served on a number of boards including Federal Mogul Corp and Motorola.

 Patrick Wolff, a managing director at Clarium Capital, is starting Grand Master Capital Management with the first hedge fund launch scheduled for January 1. The fund will focus on a macro-informed long/short equity strategy. Clarium’s Peter Thiel is seeding the firm with $50 million that will be committed for three years.

 Brummer & Partners has seeded former Millennium Management portfolio manager Scott Collison who is starting Orvent Asset Management in Singapore. The event driven fund will start in January with about $150 million in seed capital from Brummer.

 Investcorp and Ballast Capital Management have formed a strategic partnership. Ballast, which specializes in long/short equity, is joining Investcorp’s single manager platform. Ballast is led by Robert Kaynor, chief investment officer, and Ryan O’Sullivan, president. At launch, Ballast will have eight people on its team. Kaynor and two other team members, Mason Stark and Joanna Wald, had previously worked together at Ramius LLC.

The Universities Superannuation Scheme, one of UK’s largest pension plans which has over £30 billion in assets, is considering investing in a seeding fund, reports Financial News. It is currently looking at a number of choices and a decision is expected in early 2011.

USS will have co-investment rights with the seeding fund and also participate on the advisory board of the hedge fund(s) in which the seeding fund invests. The UK scheme will use the stakes to implement improved governance of the hedge fund(s) in which the seeding fund invests, aiming to make a positive impact on the industry and to benefit all investors.

Luke Dixon, the portfolio manager for absolute return strategies at USS, told Financial News that the allocation to the seeded fund would be larger than that made to traditional hedge funds.

At the end of March 2010, USS’ absolute return strategies amounted to £607 million ($977 million), considerably higher than £245 million ($395 million) in March 2009, according to the 2010 annual report. Since then, USS has revealed that the hedge fund portfolio has climbed to £950 million ($1.53 billion) with 15 managers.

A number of new incubators are in the works. For example, The Harvest Fund was formed in early 2010 to develop and manage a private special situation investment platform. The private equity-like structure provides growth capital to promising newly independent hedge firms run by pedigreed teams with expertise and capabilities to build institutional caliber firms. A first closing is planned for early 2011. The fund expects to make five to six allocations over the following 12 to 18 months.

Harvest Fund is an affiliate of Moody Aldrich Partners, a privately held investment firm founded in 1988. Moody Aldrich Partners is owned by Eli Kent, William Moody, Amory Aldrich, Eyk Van Otterloo, Jeremy Grantham and Michael Pierre. MAP manages equity investment strategies for large investors through separate accounts. Eli Kent and Chris Kelley are co-founders and managing partners of Harvest Fund.

Wilshire Associates is assisting with key aspects of the platform including investment manager and operational due diligence, risk management, separate account platform services and distribution support.

Eli Kent says, “Our platform is structured to be flexible and highly scalable in order to offer co-investment opportunities to our larger clients and to potentially partner with the right institution and/or strategic partner to accelerate growth.”

Additional information on seeding in the hedge fund community is available in Infovest21’s just-released issue of Investor Focus. The issue contains interviews with Weston Capital Management, Alternative Asset Managers and Stride Capital. Samplings are provided of hedge funds seeded in 2010 and a Who’s Who of Tiger Seeds.

Infovest21 's Just Released Investor Focus: What investors should look at in selecting a seeding platform

2010-12-13T15:27:00.001-05:00

About 25-30 seeding platforms are active today, say a number of seeders. This is down from about 50-90 between 2006 and 2008.

Investors should look at the seeder’s experience – that is the key factor, says Robert Discolo of PineBridge Investments. “You need people who’ve been doing this for a long time and during different cycles. They have to have a lot of relationships and experience. Due diligence of emerging managers is very different from due diligence on regular funds because you have limited data to work with.”

He says investors should also look at prior seeds’ experience and performance. Investors also need to look at the worse-case scenarios – how many problems and how many blow-ups have there been. Also look at risk controls the seeders have in place and how they monitor it.

Seeders provide their IRR which is a construct from the private equity world. It is an indicator of the investor’s economic return; it is based on cash flow. “…if a seeder gives money to a manager and then pulls it back after three or four years, the seeder still has a revenue share. The IRR can’t go down because there is no money at risk. The additional increases in IRR are based on the profit share for each individual manager,” adds Discolo.

Another veteran seeder suggests that other metrics be examined besides IRR such as gross return, net return, cumulative draw down, the amount of assets distributed, unrealized value and total value. Fee income is another important metric which reflects the manager’s ability to gather assets i.e. distributions relative to paid-in capital.

Institutions and seeding
Institutions are increasingly looking at seeding arrangements.
In the summer of 2010, Rock Creek won a mandate from New York State Common Retirement Fund to manage the first installment of the pension’s new emerging manager program. Rock Creek is playing a key role in developing the emerging manager hedge fund portfolio, focusing on newer firms, firms with assets totaling less than $500 million, and women- and minority-owned fund management companies.

At that time, the $132.6 billion pension fund has about $5 billion committed to emerging managers. Of that, about $2 billion was in private equities and $3 billion in public equities. The pension is now developing a similar program in its real estate portfolio.

Other pensions with emerging manager programs include New York City Retirement System, California State Teachers Retirement System and California Public Employees’ Retirement System.

As of September 30, 2010, CalPERS had $1.3 billion in its MDP programs, close to $600 million in the emerging manager funds of funds program (which is part of the external manager program via FIS and Leading Edge), about $539 million in the fund of emerging hedge fund program (which is part of the Risk Managed Absolute Returns Strategies program). In the latter program, CalPERS had about $143 million with PAAMCO’s fund of emerging funds, $201 million with Rock Creek fund of emerging funds and $194 million with 47 Degrees North.

CalPERS’ Performance - Emerging Manager Fund of Funds
FIS Group
Inception date: Feb 2008
AUM $M: $269
YTD Return(%):0.87
Last 1 Year Return(%): 2.08
Last 3 Year Return (%): N/A
Since Inception Return (%): -0.11

Leading Edge Investment Advisors

Inception Date: March 2008
AUM $M: $298
YTD Return (%): -0.63
Last 1 Year Return (%): 0.76
Last 3 Year Return (%): N/A
Since Inception Return (%): -0.70

Source: CalPERS Global Equity Program Review, Oct 18, 2010

Excerpt from just-released Infovest21 Investor Focus

Infovest21 Fund of Funds Compensation Survey: CIO tops large funds of funds compensation study at $1.3M

2010-12-06T23:39:00.003-05:00

For funds of funds with more than $1 billion in assets, the Chief Investment Officer was the top paid position, who, on average, received total compensation of $1.3 million.

Director of Research and Chief Operating Officer had average total compensation between $600,000 and $999,999.

Director of Sales & Marketing and Chief Financial Officer had total compensations in the $400,000 to $499,000 range.

Senior Analyst and Operational Due Diligence had total compensation between $200,000 and $299,999.

The IT Director, Controller, Mid-Level Analyst, Client Services and Junior Analyst had total compensation between $100,000 and $199,999.

Lois Peltz, president of Infovest21, observed, "In comparing 2010 results with 2009 results, the trend was mixed. Top management – Chief Investment Officer, Chief Financial Officer and Chief Operating Officer - received a higher total compensation package than in 2009. The Junior Analyst, Director of Research and Controller also had higher compensation in 2010 compared with 2009."

The Senior and Mid-Level Analysts, Director of Sales & Marketing and Director of Investor Relations had lower compensation in 2010 than in 2009.

Wide diversions exist in compensation particularly at the highest levels. And as occurred in the prior two years, some of the funds of funds’ personnel did not receive either a bonus or a salary.

Profile of Respondents
The average fund of funds in the survey had $4.1 billion in assets, 53 employees and was up 5.9% for the first half of the year. Over 80% of the respondents were stand-alone organizations.

Other highlights

• 54% of the funds of funds in the 2010 sample were above their high water mark compared with only 12% in 2009.

• Whereas 30% of the funds of funds contained costs in 2009, two-thirds did not in 2010.

• Over 50% said there had been no change in headcount in 2010 compared with 36% in 2009.

• Performance and asset flow were cited as the two largest factors affecting compensation as cited by 23% and 38% respectively.

• Funds of funds have more stable expectations on changes in next year’s compensation package. Almost 70% do not expect any change in the compensation package.

Methodology
Infovest21 conducted its ninth annual compensation survey for $1B+ funds of funds during October, November and December 2010. In-depth interviews were conducted by phone.

The results are based on data from 25 separate funds of funds management firms 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.

For the large funds of funds (over $1 billion), 23 executive and back office positions were examined -

Top management
Chief Executive Officer
Chief Investment Officer
Chief Financial Officer
Chief Operating Officer
Chief Risk Officer

Investment
Portfolio Manager
Assistant Portfolio Manager
Senior Analyst
Mid-Level Analyst
Junior Analyst
Director of Research
Operational Due Diligence

Sales and Marketing
Director of Sales & Marketing
Director of Investor Relations
Client Services

Legal/Compliance
General Counsel
Compliance Director/Manager
Operational Due Diligence

Financial
Fund Accountant
Controller
Assistant Controller

Operations
Director of Operations
IT Director

For Chief Executive Officer, Chief Risk Officer, Portfolio Manager, Assistant Portfolio Manager, Assistant Portfolio Manager, Director of Investor Relations, General Counsel, Compliance Director, Assistant Controller, Fund Accountant and Director of Operations, not enough data points were provided for 2010 base salary or bonus to allow calculation of 2010 total compensation.

Separate surveys were conducted and results analyzed for hedge fund managers with assets above $1 billion, hedge funds with assets below $1 billion, and funds of funds with assets below $1 billion.

Infovest21's 9th Annual Survey:CEO and CIO top compensation survey for small to medium sized hedge funds

2010-11-28T18:03:00.002-05:00

For hedge fund managers with less than $1 billion in assets, the Chief Executive Officer and Chief Investment Officer were the top two paid positions in the $600,000+ range.

Five positions have total compensation between $400,000 and $499,999 – Head Trader, Compliance Director, Senior Analyst, Chief Operating Officer and Director of Sales and Marketing.

Three positions – Portfolio Manager, Chief Financial Officer and Mid-Level Analyst - had total compensation of between $190,000 and $350,000.

Client Services and Operations/Mid-Office had total compensation below $100,000.

Lois Peltz, president of Infovest21 , observed,"In comparing 2010 results with 2009 results, the general trend in 2010 is higher. The Chief Executive Officer, Chief Investment Officer, Portfolio Manager, Senior Analyst and Director of Sales and Marketing are higher while the Chief Financial Officer and the Operations/Mid-Office Trade Support are lower."

Profile of Respondents

The average manager in the survey had $305 million in assets, 14.5 employees and was up 3.5% for the first half of 2010. 96% of the respondents were stand-alone organizations.

Other Highlights

• Asset flow was cited as the number one factor affecting compensation in 2010 compared with performance in 2009.

• Two-thirds of the managers are above their high water mark in 2010 compared with only one-third in 2009.

• In 2010, 96% of the managers were stand-alone organizations compared with 92% in 2009, 100% in 2008 and 79% in 2007.

• Managers are less optimistic about the compensation package. About 25% expect the base salary will increase as a percentage of the total package while 14% expect the equity component will increase as a percentage of the total package. 50% expect no change.

In 2009, 80% of the managers did not expect any relative change to the compensation structure while 40% expected the basic salary to increase in the total package while 32% expected the equity component of the total portfolio to increase.

• As would be expected, the general trend is that the larger the hedge fund, the higher the compensation. Total compensation for the Senior Analyst, however, was the about the same for the $1 billion+ hedge fund managers and those managers below $1 billion.

Methodology

Infovest21 conducted its ninth annual compensation survey of hedge funds. The survey was conducted during September, October and November 2010. In-depth interview were conducted by phone. Separate surveys were conducted and results analyzed for those managers with assets over $1 billion and those with assets under $1 billion.

For the small-to-medium-sized manager (under $1 billion), 21 executive and back office positions were included - Chief Executive Officer, Chief Investment Officer, Chief Financial Officer, Chief Operating Officer, Chief Risk Officer, Portfolio Manager, Assistant Portfolio Manager, Senior Analyst, Mid-Level Analyst, Junior Analyst, Director of Research, Director of Sales and Marketing, Director of Investor Relations, Client Services, General Counsel,
Compliance Director/Manager, Controller, Fund Accountant, Director of Operations,
Operations/Mid Office, and Head Trader.

The results are based on data from 30 separate hedge fund management firms, all with assets under $1 billion. In calculating the statistics throughout the survey, we include only those respondents who provided concrete compensation data with dollar figures.

For Chief Risk Officer, Assistant Portfolio Manager, Junior Analyst, Director of Research, Director of Investor Relations, General Counsel, Fund Accountant, Controller, and Director of Operations, not enough data points were provided for 2010 base salary or bonus to allow calculation of 2010 total compensation.

Excerpts from Infovest21's Ninth Annual Compensation of Hedge Fund Managers with Assets Under $1 Billion.

Four related compensation surveys:
Hedge Fund Managers - Assets above $1B
Hedge Fund Managers - Assets below $1B
Funds of Funds- Assets above $1B
Funds of Funds- Assets below $1B

Infovest21's Compensation Survey: CEO and PMs top compensation survey for largest hedge fund managers

2010-11-28T17:50:00.002-05:00

For the largest hedge fund managers i.e. those with over $1 billion in assets, the top paid positions in 2010 were Chief Executive Officer and Portfolio Manager. Both positions had total compensation over $2 million. Chief Operating Officer and Director of Sales and Marketing had total compensation over $1 million.

Chief Financial Officer and General Counsel had total compensation between $500,000 and $599,999.

Eight positions - Senior Analyst, Mid Level Analyst, Controller, Junior Analyst, Director of Operations, Assistant Controller, Client Services and Operations/Mid Office - had total compensation of between $100,000 and $499,999.
Lois Peltz, president of Infovest21, noted: "Compared with 2009 survey results, top management positions were generally higher (e.g. Chief Executive Officer and Chief Operating Officer) as were most investment positions (e.g. Portfolio Manager, Senior Analyst, Mid-Level Analyst, Junior Analyst), sales and marketing positions (Director of Sales and Marketing and Client Services), and operations positions (Director of Operations and Operations/Mid Office)."

Compensation was lower for Chief Financial Officer, Fund Accountant and General Counsel.

Infovest21 conducted its ninth annual executive compensation survey of hedge funds during September, October and November 2010. In-depth interviews were conducted by phone. Separate surveys were conducted and results analyzed for those managers with assets over $1 billion and those with assets under $1 billion. Results for those managers with assets below $1 billion will be released next week.

For the large (over $1 billion) managers, 23 executive and back office positions were included - Chief Executive Officer, Chief Investment Officer, Chief Operating Officer, Chief Financial Officer, Chief Risk Officer, Director of Research, Portfolio Manager, Assistant Portfolio Manager, Senior Analyst, Mid-Level Analyst, Junior Analyst, General Counsel, Compliance Director, Director of Sales and Marketing, Director of Investor Relations, Client Services, Fund Accountant, Controller, Assistant Controller, Director of Operations, Operations/mid-office, Head Trader and Trader.

The results included data from 25 separate hedge fund management firms. In calculating the statistics throughout the survey, only those respondents who provided concrete compensation data with a dollar figure were included. For Chief Investment Officer and Chief Risk Officer, not enough data points were provided for 2010 bonuses to allow calculation of 2010 total compensation.

Profile of Respondents

The average manager in the survey had $3.8 billion in assets under management, 72 employees and was up 12.4% for the first half of the year. About 80% of the managers were independent stand-alone organizations.

Other highlights:

➢ Performance and asset flow were cited as the two largest factors affecting compensation - 39% cited performance and 24% highlighted asset flows. The same two factors were also cited in the 2009 survey.

➢ 55% of the managers in the 2010 sample were above their high water mark compared with 39% in 2009.

➢ In 11 positions, the average bonus outweighs the average base salary. The ratio was highest for Portfolio Manager at over 12 times.

➢ In 2010, hedge fund organizations kept headcount stable. About 55% did not change headcount compared with 36% in 2009.

Of those that reduced headcount, the average number cut was 9.3 people compared with 21.6 people in 2009.

Of those that added people, the average number added in 2010 was 5.4 people compared with 4.4 in 2009.

Excerpt from: 2010 Annual Compensation Survey For Hedge Fund Managers With Over $1 Billion in Assets

Separate compensation surveys available for:
• Hedge funds with assets under $1 billion
• Funds of funds with assets above $1 billion
• Funds of funds with assets below $1 billion

The reports detail base salary, bonus and total compensation for 23 executive and back office positions. High, low, average and median are provided for each position. Manager profile, factors affecting hiring/compensation, compensation for large versus smaller managers, comparison to prior years included.

Other topics include:
• positions where hiring is occurring
• head count changes
• impact of fund size on results
• impact of fund performance on results
• impact of location on results

How Infovest21Compensation Surveys Differ From Others:
• Current data based on interviews in the industry today
• Objective coverage - survey conducted by objective information provider
• Universal coverage - survey is global in scope, covering wide range of organizations
• Includes qualitative commentary on various positioons
• 9th Annual Survey - seen as the industry standard
• Each report is approximately 60 pages

Infovest21's Special Research Report: Acquisition of minority stakes is most likely M&A approach for hedge funds while mergers between smaller funds of funds is expected

2010-11-28T17:20:00.003-05:00

The pace of hedge fund mergers and acquisitions transactions quickened in 2010, particularly those involving minority stakes. Transactions this year have generally been more strategic compared to the transactions done in 2008 which were generally done at distressed prices and for survival. Investment bankers describe the tone as cautious and careful.

Freeman & Co predicts the number of alternative manager deals will outpace those of traditional manager deals in 2010 for the first time as firms consolidate, are acquired by larger strategic firms or are spun out by banks facing regulatory issues. Smaller asset managers are being acquired by larger alternative managers and other traditional managers/financial institutions that have the benefit of distribution, brand name and/or size and scale.

Through June 30, 2010, alternative asset management deals were up 108% to 52 transactions year-to-date compared with 25 transactions for the same time a year ago. Freeman projects that alternative manager deals should exceed 100 this year with acceleration in the second half of the year due to pressure from the Volcker Rule and other international regulatory initiatives.

In comparison, traditional manager deals totaled 31 in the first half of 2010 and may only reach 70-75 for the year.

For hedge fund managers, acquisitions of minority stakes is the most likely expected approach going forward. In the fund of funds community, mergers between small funds of funds is expected, say investment bankers.

High profile transactions

This year, three high profile transactions were Man’s purchase of GLG, RBC’s acquisition of BlueBay and Credit Suisse’s minority stake of York Capital. Man’s offer price was 55% higher than GLG’s share price, Man paid 12.5x GLG’s 2010 EBITDA. RBC paid a 29.3% premium for BlueBay.

Buyers are prepared to pay up for growth opportunities. If you look at multiples, recent transactions suggest 10-12x EBITDA versus EBITDA’s long term range which has been 9-11x. Distressed deals during the crisis were at 5x EBITDA, says Manuel Arrive at Fitch Rating.

Investment bankers emphasize that each transaction needs to be examined on a case-by-case basis. EBITDA/multiples can’t be extrapolated from these large transactions to other hedge funds due to the size and scale. “None of them are the same size or scale as Man/GLG. Man gained access to all of GLG products and clients and can cross-sell their products. Many reasons exist to why that value was what it was but it doesn’t fit conventional thinking of just putting a multiple on it,” says one boutique investment banker.

Public stock prices of hedge funds are a good background reference to start with. Asset size, stickiness of assets, number of clients, performance, number of distribution channels and geographic range are some of the factors to consider in evaluating each case, says Eric Weber of Freeman & Co.

Excerpt from Infovest21 Special Research Report - M&A/Consolidation in the Hedge Fund Community

Infovest21 Investor Focus: US family offices looking more to managers in Asia and Europe

2010-11-10T15:40:00.001-05:00

An increasing number of US family offices are looking to Asian and European hedge fund managers. One reason is their non-correlation with US hedge fund managers.

Christine Jurinich, partner and member of the investment committee at Offit Capital Advisors,points out “In 2008, there were some specific strategies or even an outlier of a manager in a specific style that preserved capital in 2008 through a combination of hedging, managing exposures tactically or security selection. We have found that there are talented hedge fund managers, some in Europe, for example, that were in strategies such as long/short equity, volatility or fixed income that just did a better job than funds in the tri-state area. We believe that some of these, as well as some funds in Asia, South America and Europe can diversify the return stream, although clearly in 2008 Asian exposurein particular had large losses and was very long biased. That being said, there are long/short equity funds that also were down slightly to positive in 2008 also outside the tri-state area that are off the radar, that diversify the return stream and don’t own APPL for example, which is what we are looking for.”

Another New York family office points out that they are focusing on Asia and emerging managers. “We are taking a broader view on where investment opportunities are and are not just focused in the US.”

Another reason for looking abroad is that some US families feel vulnerable to the US dollar and dollar returns. “US based investors are concerned about the US dollar as a store of value, even with positive nominal returns, value of these dollars could erode over time. So non-dollar investments offer the opportunities for real gains that are derived from the currency and the underlying asset exposure," observes Jurinich.

Anthony Gordon of the Gordon Family Office says he is looking for a healthy dose (20-30%) of multi-currency cash allocations in the Group of 10 and emerging markets. “Investing across borders is the way to go today.” He is keen on Brazil, Russia, India and China and other countries who supply the large economies of Korea, Mexico, Indonesia, Nigeria, South Africa, Vietnam and Australia. Not only because of their “higher potential growth but also the assessment of the sheer amount of work currently required to restore confidence in the US financial and political system.”

He adds that quantitative easing by the Federal Reserve may do little to spur consumer demand unless unemployment and poverty is reduced.

Excerpts from
Infovest21's September Investor Focus.

Infovest21 White Paper:Assessing the operational due diligence function at funds of funds

2010-11-10T15:34:00.001-05:00

“Some funds of funds’ operational due diligence teams that were proactive and negotiated better terms in side letters, likely enjoyed better performance and liquidity in the fall of 2008/early2009. And those who were organized and savvy enough to challenge some of the fund restructurings that occurred during that same time period also probably earned their fees. An ounce of prevention really was worth a pound of cure,” says Julia Herr, a hedge fund lawyer who headed the operational due diligence team at a large US-based fund of funds.

Over the past several years, many funds of funds have been reassessing how to conduct operational due diligence. Different variations exist.

Infovest21 interviewed a number of experts in the area including operational due diligence specialists, consultants, attorneys, certification specialists, prime brokers and recruiters to determine, among other things, what qualities an investor should look for in assessing a fund of funds’ operational due diligence team. The findings, which are detailed in its just-released white paper, include:

• Dedicated and independent
Operational due diligence has be separate and independent from investment due diligence, says Daniel Celeghin at Casey Quirk. “End-investors should look closely at the operational due diligence team at a fund of funds. How does it relate to the investment due diligence team? Is there overlap? Are they independent?” Celeghin emphasizes that operational due diligence at a fund of funds should be a dedicated role. “It isn’t an added responsibility for an investment team member, the risk manager or the chief operating officer.”

• Qualified talent
Operational due diligence professionals require a combination of skills as they encompass a variety of areas including hedge fund operations, accounting, legal review of the offering documents and governance structures and incentives. “It can be challenging if not impossible for a single person to pull it all together. Some may have strength in one area and general knowledge in another. An effective operational due diligence group must have all the bases covered,” says Herr.

• Veto power
Some investors look for an operational due diligence veto. Celeghin says, “The operational due diligence head is a dedicate role where absolute veto power exists. If the founder of the firm pounds his fist on the table, what the operational due diligence individual says at the end of the day is the ultimate decision. It is not so much the decision to hire but the decision not to hire. A manager may check all the boxes from the investment perspective but the operational due diligence head can veto.”

Herr says that investors should recognize that many firms define “veto” differently. What’s more important for investors to understand is what veto really is, who has it and what the firm’s incentive and reporting structures are.

• To outsource or not to outsource?
Herr points out that many firms may outsource because it provides an insurance policy – someone to fire in the event of a disaster. Outsourcing can also be a popular choice where it can be charged to the fund. If done in-house, it may be more difficult to allocate those costs.

She says that outsourcing can also serve a complementary role i.e. supporting one’s team or providing a second opinion.

Another large institutional fund of funds says it doesn’t outsource operational due diligence because the process is highly integrated to the investment process. “We use quantitative/qualitative research, portfolio, risk, operational due diligence and legal. They all collectively play a role. As long as you have the right controls in place, you won’t want any of those functions to be a “lap dog” to the hiring process. You want to exercise judgment if you can roll that into an approach. You get a balance of integrity, independence versus insight."

Reality: Only 27% have dedicated operational due diligence
Based on Corgentum’s study of approximately 275 funds of funds, 27% had dedicated operational due diligence (i.e. at least one employee’s full time responsibility was dedicated to operational risks), 21% used the shared approach (i.e. operational due diligence was conducted by the investment due diligence team), 28% had a hybrid structure (some combination of the various approaches) and 14% were modular (i.e. the operational due diligence process is categorized into functional components and parsed out among different specialists e.g accounting, lawyer etc).

Corgentum found that 46% of the funds of funds with assets under $1 billion used a hybrid approach while 29% used a shared approach while dedicated frameworks accounted for 14%. For funds of funds over $1 billion in assets, 32% had a dedicated framework while 30% had a shared framework and 23% used a hybrid approach and 234% took a modular approach.

As investors demand more operational due diligence reviews, funds of funds will likely dedicate more resources to operational due diligence in an effort to differentiate themselves among their peers.

Excerpts from just-released Infovest21 White Paper

Infovest21 Marketer Sentiment Survey: 29% expect role of third party marketer to become less relevant

2010-10-27T10:26:00.003-04:00

Almost 29% of the marketers surveyed in Infovest21’s just-released sentiment survey feel the third party marketers’ role will become less relevant. They cited a variety of factors such as pressure on managers’ profits due to increased regulatory and compliance costs, some states’ ban on placement agents, the expanded role of capital introduction services and the general availability of information on hedge funds.

Another 21% see a continued role for third party marketers, particularly with small and medium-sized firms.

Another 21% said the third party marketer must become more knowledgeable, more sensitive to fiduciary needs, and have relationships with more institutional investors.

The remainder didn’t expect any change in the third party marketer’s role or didn’t have a view.

Global macro rated as top strategy

Lois Peltz, president of Infovest21, commented, “Hedge fund marketers found global macro the strategy of most interest to investors for the second consecutive quarter. Emerging markets and long/short equity ranked second and third respectively.”

With 1 representing the highest ranking and 15 the lowest, marketers rated global macro 2.5, emerging markets 3.2 and long/short equity 3.8.

Sentiment Indicator: Marketers Strategy
Score

Global macro 2.5
Emerging markets 3.2
Long/Short 3.8
Distressed 4.5
Managed futures 5.8
Multi-Strategy 6.2
Fixed income arbitrage 6.4
Convertible arbitrage 8.2
Merger arbitrage 8.4
Market neutral 8.6
Energy 8.7
Asset based lending 9.0
Activist 9.2
Short bias 10.9
Statistical arbitrage 11.5

Strategies having a higher ranking this quarter i.e. attracting more investor interest were emerging markets, distressed, long/short, convertible arbitrage, merger arbitrage, market neutral, energy, activist and short biased.

Meanwhile, multi-strategy, fixed income arbitrage and asset based lending had lower rankings this quarter.

Rankings for global macro and statistical arbitrage were about unchanged from last quarter.

The above are highlights from Infovest21’s quarterly sentiment survey of hedge fund marketers. Full results include marketers’ views on eight investor categories and investor interest by geographic location.

Infovest21 's Investor Focus Issue: Defining a family office

2010-10-17T22:57:00.003-04:00

The Securities and Exchange Commission proposed a new rule on October 12 that would help those managing their own family’s financial portfolios determine whether their family offices can continue to be excluded from the Investment Advisers Act of 1940.

The SEC is proposing that a family office be defined as a firm that:

• Provides investment advice only to family members, certain key employees, charities and trusts established by family members, charities and trusts set up by family members, and entities wholly owned and controlled by family members.

• Is wholly owned and controlled by family members

• Does not hold itself out to the public as an investment adviser.

Historically, family offices have not been required to register with the SEC under the Advisors Act because of an exemption provided to investment advisers with fewer than 15 clients. The Dodd-Frank Act removes that exemption, enabling the SEC to regulate hedge fund and other private fund advisers, but includes a new provision requiring the SEC to define family offices in order to exempt them from regulation under the Advisers Act.

Public comments on the proposed definition should be received by the SEC by November 18, 2010. The Dodd Frank Act becomes effective on July 21, 2011.

The SEC has been charged with adopting a definition that is consistent with the SEC interpretation in prior exemptive orders.

Because multi-family offices serve more than the lineal descendants of a single individual, multi- family offices with more than 15 clients are not expected to qualify for the “family office” exemption and are likely going to need to register as investment advisers with the SEC or their home state depending on the amount of assets under management. As SEC-registered investment advisers, multi-family offices will have to adhere to the same requirements as other investment managers, including, for example, the requirement to appoint a chief compliance officer and to have written compliance policies and procedures.

Industry observers estimate approximately 2500 to 3000 family offices exist in the US, managing in total over $1.2 trillion in assets. Generally, family offices have at least $100 million in investable assets.

Views on hedge funds
Family offices, which had scaled back their hedge fund investments during the financial crisis and who were angered by gates and frozen redemptions, are slowly investing again. In the aftermath of the Ponzi schemes and fraud cases, they have concerns about the safety of their assets and investment portfolios.

As a result, many family offices are reassessing their portfolio construction, asset allocation and risk management policies.

Based on the family office interviews in the current issue of Infovest21's Investor Focus, we see families are allocating a higher percentage of their portfolio to liquid assets and are accepting lower returns. Some are investing a higher percentage in gold.

Families are also spending more time doing thorough due diligence on topics such as liquidity, lock-ups, side pockets, fees and terms. Due diligence has become more sophisticated. Some conduct identity, background and reputational due diligence as well as operational due diligence. Manager’s controls, procedures and counterparty relationships are assessed. Some family offices have instituted on-site compliance efforts where they test and independently verify practices. Monitoring is occurring at regular intervals.

Some family offices are reexamining portfolio construction and emphasizing risk management. In particular, some are examining tail risk hedging.

The issues contains interviews with:
*RIJO Investments
*Consolidated Investment Group
*Nine Thirty Capital

Other features include:
*Family office and tail risk hedging
*Family office regulatory update
*Sampling of Who's WHo in Family Offices
*Quarterly Sentiment Indicator: Managers

Infovest21 Manager Survey: 31% of managers consider joining a platform while 20% consider selling part of their firm

2010-10-04T14:00:00.001-04:00

In the just-released Infovest21 manager sentiment survey, 60% of the managers surveyed said their assets increased over the past 12 months while 20% said assets had declined and 20% said assets had stayed the same.

Lois Peltz, president of Infovest21, said, “Almost two-thirds of the managers said in light of the largest managers attracting most of the new assets flowing in, they would continue as is. Over 30% of the managers said they have considered joining a platform while 20% have considered selling part of their firm and 15% have considered merging with another firm. Only 8% have considered closing down.” Multiple responses were accepted.

Managers more optimistic over next three months and 12 months
Managers’ views on most markets turned more positive over the next quarter and next 12-month period. In eight markets, the majority of the managers view those markets as moving up slightly while in three markets, the majority are neutral and in six markets, the majority of managers view the markets as moving slightly lower. Last quarter, the majority of managers expected only three markets moving slightly higher while in neutral in seven markets and down slightly in four markets.

In none of the 14 markets asked about, did the managers feel the market would make new highs or move up significantly over the next three months.

In eight markets – the Pound, NYMEX Oil*, Dow Jones Industrial Average, S&P500, DJ Stoxx, 10-Year Treasury*, FTSE 100 Stock Average and Comex Gold – the majority of managers felt the market would be “up slightly” over the next three months.

In six markets, the majority of managers felt the markets would be “down slightly” over the next three months. In rank order, they are: Euro, Yen, 30-Year Fixed Mortgage Rate*,10-Year Treasury*, DJ Corporate Bond Index, and Nikkei 225 Stock Average.

In three markets, the majority of managers feel the markets will be neutral. These include: Consumer Price Index, NYMEX Oil*, and 30-Year Fixed Mortgage Rate*. Last quarter, the majority of managers felt seven markets would be neutral over three months.
*tied

Looking out over the next 12 months, manager sentiment has also improved. The majority of managers did not feel any market would make new highs or move “up significantly.” In ten markets, the majority of managers felt the markets would move “up slightly” while in four they were neutral and in one market, the perception was that the market would move “down slightly” and in one other market, the view was the market would move “down significantly.”

Infovest21 conducts the manager survey on a quarterly basis. This quarter, 64 managers responded.

Infovest21 Investor Sentiment Survey: Investors “neutral” to “negative” on UCITS funds

2010-08-30T20:22:00.002-04:00

Investors “neutral” to “negative” on UCITS funds
In Infovest21's just-released quarterly sentiment survey of investors, 30% of the investors said they are “somewhat negative” or “very negative” on UCITS funds compared with 15% who view them as “somewhat positive” or “very positive.” One-half of the sample said they were neutral on UCITS funds.

Lois Peltz, president of Infovest21, observed, "Those taking a neutral stances said they were taking a wait-and- see approach to see if UCITS performed, what jurisdictions adopt it or what the tracking error looks like through a market cycle. Criticism included more assets leading to more hot money, not all strategies being compatible with liquidity structures, not a proxy for due diligence, and the regulatory wrapper gives a false sense of security."

Investors most positive about global macro over the next three months and 12 months

Of the 22 strategies asked about, the majority of investors felt "neutral" about 13 over the next three months, "somewhat positive" about eight, and "somewhat negative" about one. In the prior quarter, investors were "somewhat positive" about 12 strategies and “neutral" about 8.

In eight strategies, the majority of investors felt "somewhat positive." In rank order, these are: global macro (90)%, event driven/special situations (65%), distressed (55%), foreign exchange (50%), multi-strategy (50%), merger arbitrage (45%), mortgage backed (45%), and volatility arbitrage (40%).

In 13 strategies, the majority of investors felt "neutral." In order, these are: convertible arbitrage (60%), energy (60%), ETFs (60%), activists (55%), sector (55%), market neutral (50%), asset based lending (45%), emerging markets (45%), equity long/short (45%), managed futures (45%), short biased (40%), statistical arbitrage (35%), and fixed income arbitrage (35%).

In only one strategy, PIPES, did the majority of investors (55%) feel "somewhat negative."

Looking out over the next 12 months, investor sentiment becomes more positive. In no market did the majority of investors feel "very positive"
while in 11 markets, the majority of investors felt "somewhat positive" and in 10 markets, the majority of investors felt "neutral." In one market, the majority of investors were "somewhat negative." Last quarter, none of the investors felt “very positive” about any market over the next 12 months, the majority of investor felt “somewhat positive” in 13, “neutral” in 10 and “negative” about two.

The majority of investors were "somewhat positive" in global macro (88%), event driven/special situations (76%), distressed (59%),
multi-strategy (59%), energy (53%), emerging markets (47%), foreign exchange (47%), managed futures (47%), merger arbitrage (47%), equity long/short (41%) and volatility arbitrage (41%).

The majority of investors were “neutral” about market neutral (71%), convertible arbitrage (65%), activists (62%), ETFs (59%), mortgage backed (59%),
statistical arbitrage (53%), short biased (47%), and sector (47%).

In one market - PIPES - the majority of investors (59%) felt "somewhat negative."

Methodology: Infovest21 conducts this survey on a quarterly basis. This quarter, one-half of the investors responding were funds of funds while 25% were family offices and another 25% were consultants and pensions.

Highlights fromInfovest21’s July Issue of Investor Focus: UCITS funds of funds – a game-changer?

2010-08-30T17:17:00.001-04:00

UCITS has been a game-changer in the alternatives space, observes Thanos Ballos of Strategic Investments Group. The firm launched the Active Trading Fund with the Permal Group.

The UCITS III hedge fund industry has grown with lightning speed from about nothing 18 months ago to over 500 UCITS hedge funds today with the pace of expansion accelerating. Estimates are that assets in hedge fund UCITS are about $45-55 billion while Eurekahedge puts assets even higher, closer to $100 billion with close to over 990 funds.

Eurekahedge says UCITS hedge funds account for 7% of total hedge fund assets but attracted 20% of the net inflows in 2010.

UCITS III funds comply with the European Union directive. The acronym stands for Undertakings for Collective Investment in Transferable Securities

The UCITS structure sits very well with institutional portfolios, observes Ballos. “Institutional and family offices investors wanted a regulated, liquid, multi-advisor fund, offered within the UCITS framework, with the added safety of independent risk controls.”

Philippe Dupuy of Alternative Advisors agrees. “UCITS funds offer investors an investment vehicle that satisfies almost all expectations and requirements they’ve been fighting for and struggling to get from offshore unregulated funds - liquidity and transparency.”

The liquidity aspect allows institutional investors to better time their investments according to their macro views, allowing them to tactically allocate.

Dupuy says the nature of the underlying investment is, by definition, more liquid because of strict rules about gating or side-pockets. “Note that side pockets are not allowed in France, allowed only for daily funds in the UK, and negotiated on a case-by-case basis in Luxembourg. In a liquidity crisis, we will get out, though probably not as quickly as anticipated, as gates can be imposed on UCITS funds.”

Bi-monthly liquidity is the minimum requirement but the majority of funds have daily or weekly liquidity.

Chris Rule of Key Asset Management observes that equity long/short is the most developed strategy within the UCITS world. Less liquid strategies such as distressed investing are absent from the UCITS III hedge fund universe and are likely to remain so.

Caution required
Despite the advantages, industry veterans caution investors when looking at new UCITS funds and at UCITS wrapped hedge fund strategies. Not all hedge funds are suitable for the structure. The underlying fund needs to be liquid. Equity long/short and managed futures can fit in a UCITS structure easily while distressed and fixed income arbitrage don’t easily fit.

“Some managers are just surfing the Newcits wave and launching a UCITS even though their core strategy is not transferable, thus moving away from their core competencies,” says Dupuy.

Some strategies are “shoe horned” into a UCITS structure that may not fit well. If so, investor may be buying products that are riskier than they thought. UCITS funds promise liquidity which make it reassuring for investors. A major concern is that the liquidity of some underlying investments may not be sufficient to allow UCITS funds to provide daily liquidity.

A liquidity mismatch may exist between the instruments they invest in and the liquidity they offer investors,” says Dupuy.

Others point out that some managers will change their strategies i.e. reduce leverage or invest in more liquid assets to fit into the UCITS structure.

They argue that negative selection bias exists. Managers who can’t attract assets themselves may rely on big demand for UCITS III funds to attract investors.

Another danger is attracting institutional investors into a retail product as both groups have different objectives. When institutional investors redeem their large investments, it could move prices and hurt smaller retail investors.

Some critics point out that few UCITS hedge funds are larger than $25 million.

Critics also point out that UCITS III hedge funds often underperform hedge funds because of higher fees. UCITS funds tend to have lower margins because of higher operating costs and distribution costs. Operational requirements are higher as daily net asset values are needed rather than monthly.

Eurekahedge statistics show traditional hedge funds outperformed UCITS III hedge funds over the past three years. This is because traditional hedge funds use leverage. Furthermore, event driven and distressed debt that performed well in 2009 are not largely represented in UCITS III funds.

Eurekahedge statistics also show that UCITS III hedge funds performed better than funds of funds.

Argument for UCITS III funds of funds
The argument for the UCITS fund of funds approach is that because there are so many alternative funds either in UCITS, or looking at UCITS, it is difficult to sort out the good from the bad. That makes a very strong case for the multi-advisor fund approach, adds Ballos. The fund of funds as the investment manager is responsible for manager selection, due diligence and asset allocation.

Dupuy adds that a UCITS fund of funds provides a great advantage over the traditional funds of funds. “We can truly act as best-of-breed multi-manager and turn our portfolio around very quickly; something that an offshore funds of funds could not do, having to give sometimes three months’ notice on a quarterly fund. This is valid also for institutional investors.”

“The liquidity and transparency offered by UCITS gives us a lot of flexibility in the way we can manage our portfolio. We can be more opportunistic than a traditional fund of funds would be,” adds Dupuy.

Dupuy points out that the UCITS fund allows the UCITS fund of funds manager and institutional investors the ability to closely monitor what the underlying manager does, the risk he is taking, identify where and why he is making or losing money and enables them to identify style drift, increased liquidity risk, concentration risk, etc.

Outlook
Despite the criticisms and caveats, many are very optimistic about the future of UCITS funds as well as funds of funds. The number of UCITS III funds is expected to skyrocket as tighter regulation of hedge funds occurs globally.

US managers are starting to jump aboard the UCITS trends as it is one way around EU law threatening to freeze US managers out of Europe. York Capital Management’s UCITS fund is up and running while Paulson & Co, Traxis and Peter Schoenfeld Asset Mgt are among those expected to start imminently.

Because EU law requires UCITS managers to be domiciled in the EU, some managers are taking the bank platform route with the likes of Bank of America Merrill Lynch, Deutsche Bank and Morgan Stanley.

“I am convinced that for some strategies, UCITS will replace traditional hedge funds,” Dupuy concludes.

The above is an excerpt from the current issue of Infovest21's Investor Focus which interviews:
• Thanos Ballos of Strategic Investments Group
• Omar Kodmani of the Permal Group
• Philippe Dupuy of Alternative Advisors and
• Chris Rule of Key Asset Management.

Other features include:
Sentiment Indicator: Investors
Overview of UCITS structures
UCITS Indices
Sampling of UCITS funds of funds
Sampling of UCITS platforms
Who’s Who in UCITs

Infovest21 White Paper: Institutional Investors Enter Next Phase in Hedge Fund Investing

2010-08-17T16:44:00.001-04:00

Institutions want the highest and most timely disclosure of information from hedge funds as seen by their move toward customized vehicles and managed accounts.

They have raised the bar in areas such as liquidity and transparency. Institutions generally want greater liquidity from their hedge fund managers i.e. funds with shorter lock-up periods. They generally prefer conservative strategies and reduced leverage. As a result, they are searching for hedge funds which can produce lower annualized returns than requested before e.g. 6-7%.

Institutional investors are increasingly differentiating alternative investments by liquidity and risk.

Rather than separating hedge funds out as a separate asset class, some industry experts expect pension funds to use hedge fund managers within their existing equity and fixed income buckets as a best-of-breed solution.

They want fees based on long term rather than short term performance.

Fall-out from 2008 financial crisis
The global financial crisis of 2008 resulted in some institutions putting their hedge fund allocation plans on hold while others re-evaluated their portfolios and asset allocation. Pension & Investments estimated institutional inflows into hedge funds in 2009 were $21.51 billion, down 49% from 2008 and down 68% from 2007. It was not until the fourth quarter of 2009 that inflows started and were estimated at $12.4 billion.

Hedge Fund Asset Flows P&I
($B)
Q1 2009 3.8
Q2 2009 4.5
Q3 2009 0.8
Q4 2009 12.4
Source: Pensions & Investments

Despite disappointing hedge fund performance in 2008, the Madoff Ponzi scheme and other scandals, gates and related illiquidity issues, institutional investors continue to find hedge funds attractive – realizing they performed better than most other investments during 2008.

According to Russell Global Survey, the average institutional allocation to hedge funds was 4.2% in 2009 and is expected to increase to 5.7% by 2012.

Recent activity
In the past year, several institutions made their first foray into hedge funds, such as California State Teachers Retirement, Denver Employees Retirement Fund, Florida State Board of Administration, Kentucky Retirement System, State of Wisconsin Investment Board, Employees’ Retirement System of Texas and Vermont Pensions. In Europe, Ireland’s National Pension Reserve is on brink of making its first allocation.

Other institutions have increased their allocations such as Arizona Public Safety, Chicago Teachers Pension Fund, Illinois Teachers Retirement, Iowa Public Employees, Kern County Employees Retirement, New Hampshire Retirement, New York State Common Retirement Fund, Ohio School Employees Retirement System and West Virginia Investment Board. In Europe and UK, British Telecom, APK, ATP, Clywyd Pension Fund, UK Universities Superannuation Scheme and West Midlands are among those increasing hedge fund allocations.

RFPs and searches are out (or expected soon) for Chicago Policemen’s Annuity & Benefit Fund, Connecticut Investment Council, Los Angeles Police & Fire, Ohio Public Employees Retirement System, San Antonio Fire & Police, San Bernardino County, Santa Barbara County, and Texas Permanent School Fund. In Europe, searches are on for AP1, Fife Council, Lincolnshire Pension and Waltham Forest.

Some institutions, despite filing lawsuits in connection with hedge funds e.g. Amaranth’s collapse, Madoff-related cases or WG-related cases, continue to allocate to hedge funds. Two examples are Iowa Public Employees Retirement System and San Diego County Employees Retirement Association.

Momentum grows toward direct investing
Another trend is institutions allocating directly to hedge funds rather than take the funds of funds route. Relatively poor fund of funds performance in 2008 and 2009, 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 Boeing, South Carolina Retirement System and Pensioenfonds Zorg en Welzijn.

Yet some pensions are searching for funds of funds e.g. Ohio Public Employment Retirement System, Croyden and Lincolnshire Pension. 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.

Growth potential
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.

In the endowment space, growth is limited with the larger endowments as they were early and heavy adopters of hedge funds. The main opportunity is a new manager replacing an existing manager or with smaller endowments increasing their allocations. Following the 2008 financial crisis, endowments are no longer copying the Harvard and Yale models but reassessing what is best for their specific needs.

Outside the US
It appears that European institutions have terminated or reduced hedge fund allocations more than their US counterparts. Lack of diversification, lack of transparency during the financial crisis as well as poor performance during 2008 are often-cited reasons. Some institutions in this category are Unipension (Denmark), VER (Finland), Ilmarinen Mutual Insurance (Finland), TNO (The Netherlands), Nedlloyd Pension (The Netherlands), AP2 (Sweden), BLVK (Switzerland), Luzern Pension (Switzerland) and Tate Gallery (UK).

Nevertheless, European pension plans as a whole are still looking to increase their exposure to hedge funds/funds of funds. According to an IPE survey, the average European institution has about 2.3% of its portfolio in hedge funds. Swiss pensions have the highest average allocation at about 6%. While most European institutions have increased their allocations, Italy was the exception and almost halved it.

Japanese pension funds have become more cautious of hedge funds. Estimates are that hedge funds account for 7-9% of Japanese pensions; a 2% reduction occurred in the past year. Hedge funds’ role seems to be changing from a fixed income substitute to a middle-risk type asset. Japanese pension fund preference is for low risk and transparent products.

Other trends
Other interesting trends include more focus on due diligence. While the weighting of the various attributes varies among investors, focus is increased on operational due diligence and risk management policies, notes Don Steinbrugge of Agecroft Partners.

Lois Peltz Lois Peltz, president of Infovest21, observes, “Some institutions are taking a more active role in seeding hedge fund managers because they hope the best hedge fund managers will spin out as bigger independent firms. The rationale is that by getting involved early on with a hedge fund manager, the institutional investor has more control over its assets and can better control its investment cost. It creates the possibility of locking in and aligning interests early on with top teams without paying high compensation costs.”

The above information is an excerpt from Infovest21’s just-released Institutional Interest/Allocation in Hedge Funds, an annual white paper examining trends on a global basis. The white paper looks at recent hedge fund interest and activity by pensions, endowments, sovereign wealth funds. Commentary is also provided on consultants, corporate pensions and insurance companies. For each institution, summary highlights of recent activity are provided as well as plans for moving ahead.

Institutional activity is examined in North America, Europe, UK, Japan and Australia. Special emphasis is place on the largest allocators i.e. those allocating $1 billion or more to hedge funds, as well as the next tier i.e. those allocating between $500 million and $999 million. A survey is also provided of smaller institutions making allocations as well as those issuing RFPs or conducting a search. Those institutions deciding not to allocate or who have reduced their hedge fund allocation are also listed.

Infovest21 Investor Focus: The Value-Added of a Fund of Funds

2010-08-17T16:02:00.001-04:00

The financial crisis of 2008, the Madoff Ponzi scheme and other similar frauds, relatively disappointing returns in 2008 and 2009, liquidity mismatch, the pressure on fees, lack of transparency, the growing knowledge and experience of pensions and consultants with hedge fund, as well as increasing institutional requirements for control and transparency have taken a toll on institutional usage of funds of funds.
Various surveys provide statistics showing pensions taking a more direct investing approach to hedge funds rather than the funds of funds route especially those that have in-house capability to select hedge fund managers.

A recent Preqin survey found that of the institutional investors they surveyed, most have been investing since 2001. When these institutions first made their hedge fund investment, 64% selected fund of funds, 24% used a combination of funds of funds and single managers while only 12% allocated to single managers. Today, the survey found 31% of respondents invest directly with single managers, 34% use a combination of single managers and funds of funds, and 35% are now solely invested in funds of funds.

Another example: Towers Watson said it did nine searches for funds of funds in 2009, down about 80% from 43 searches in 2008.

Asset flows
HFR said funds of funds lost $187 billion in assets from the first of 2008 through mid 2010. In the second quarter of 2010, funds of funds had a $2 billion outflow. Only 31% of funds of funds experienced inflows compared with 59% of all single manager funds in the first quarter of 2010. In this same time frame, hedge funds had inflows of $9.5 billion.

Lois Peltz, president of Infovest21, says, “Another way to look at the situation is to determine the percentage of the industry assets funds of funds represent compared with the total hedge fund industry. In 2010, funds of funds represent about 34% of the industry, down from 59.3% in 2005 and 54.5% in 2006. However, funds of funds had been as low as 18.3% of industry assets in 1999 and as high as 78.8% in 1992.”

Increasingly sophisticated investors are asking funds of funds about the value added they provide i.e. what are they doing to justify their fees. Access to top managers means less than it used to as a number of top managers opened up in the past few years to replenish their assets.
Avoiding manager mistakes, providing strong liquidity management, providing specialist or niche products are some of the ways funds of funds are adding value today. Some are moving more assets toward managed accounts so they can provide more transparency, liquidity and control to the investor. Other large funds of funds are going one step further and providing active management.

Excerpt from Infovest21's June issue of Investor Focus.

Infovest21 Marketers: Less optimistic on hedge fund industry. Global macro reclaims top spot.

2010-08-17T15:51:00.005-04:00

In Infovest21's just-released marketer sentiment survey, one-half of the hedge fund marketers surveyed are "somewhat optimistic" for the hedge fund/funds of industry for the next 12 months compared with last quarter when 73% were “somewhat optimistic. In the first quarter of 2010, 90% were "somewhat optimistic." None of the marketers are "very optimistic" for the industry compared with 27% last quarter and 10% in the first quarter of 2010.

Only 12% of the marketers rate the current flow of institutional assets into hedge funds as "somewhat strong" compared with last quarter when two-thirds had that sentiment. 38% of the marketers said institutional flows were “neutral” this quarter while another 38% said it was “somewhat weak.” Last quarter, 18% of the marketers said institutional asset flow was neutral and 9% said it was “somewhat weak.”

When asked about UCITS, over 60% of the marketers said the structure has problems and not the panacea that a lot of people think it is. One-quarter of the marketers felt UCITS are a good vehicle that helps broaden the investor base. The remainder felt the structure was not applicable to US managers.

When asked about managed accounts, one-half said they are “somewhat important” in investor selection of managers while another 12% said they were “very important.” Almost 40% of the marketers said they were of “neutral importance.”

Strategies of interest
With 1 representing the highest ranking and 15 the lowest, global macro reclaimed the top spot with a score of 3.0 as long/short fell to fourth spot with a score of 4.2

Lois Peltz

, president of Infovest21, observed, "Strategies having a higher score this quarter i.e. attracting more investor interest were multi-strategy, fixed income arbitrage and convertible arbitrage. Meanwhile, long/short equity, emerging markets, statistical arbitrage, merger arbitrage, asset based lending, short biased and activist managers had lower scores this quarter. Scores for global macro, managed futures, market neutral, distressed and energy were about unchanged from last quarter. Activist was the lowest ranked strategy - a spot previously held by short-biased funds."

Strategy Score
Global macro 3.0
Multi-strategy 3.2
Fixed income arbitrage 4.0
Long/short 4.2
Managed futures 4.4
Market neutral 5.0
Distressed 5.4
Energy 6.0
Emerging markets 6.2
Convertible arbitrage 7.0
Statistical arbitrage 8.5
Merger arbitrage 9.0
Asset based lending 9.6
Short biased 13.75
Activist 14.25

The quarterly marketer sentiment survey, which appears in the June issue of Investor Focus, also includes marketers' views on specific investor categories such as:
➢ return expectations
➢ concerns
➢ geographic interest

Infovest21 Survey: 80% of family offices view hedge funds favorably

2010-07-12T19:14:00.002-04:00

During May and June, Infovest21 interviewed 30 family offices to get their thoughts on hedge funds and funds of funds.

The survey provides a snapshot look at the typical family office organization in today's environment. We were particularly interested in how the events of 2008 may have impacted their views on hedge funds and funds of funds.

Lois Peltz, president of Infovest21, summarized some of the highlights:

Hedge Fund/Fund of Funds Allocations
➢ On average, the family offices allocated about 32% of their portfolio to hedge funds, up from 25% in 2009.

➢ The average allocation to funds of funds fell slightly to 8.98% in 2010 from 9.02% in 2009.
Views on Hedge Funds

➢ One-third of family offices surveyed viewed hedge funds "very favorably" while 47% viewed them "somewhat favorably." Meanwhile, 17% were neutral and 3% view hedge funds negatively.

➢ After the financial turmoil of 2008, almost 60% of the family offices found hedge funds more correlated to markets than they had previously thought.

➢ Family offices were evenly divided on hedge funds' main function. Almost one-quarter said hedge funds' main function was diversifying a traditional portfolio while the same percentage said hedge funds provide absolute returns. Another 20% said hedge funds provide uncorrelated returns to traditional investments.

Manager Selection
The three most important selection criteria cited in manager selection were performance, reputation and experience.

Asset size was not a criteria for over 40% of the family offices while 9% said it depended on the strategy.

Strategies Allocated To
Over 80% of the families allocate to equity long/short. Distressed, event driven and global macro were the most allocated to strategies.

Fees
The average fee structure paid to a hedge fund was 1.5% management fee and 18.3% incentive fee. To funds of funds, the average management fee was 1.2% and 9.2% incentive fee.

60% of the families said the fees were about the same as last year while 30% said they are paying a lower management fee and 30% said they are paying a lower incentive fee.

********
Excerpts from Infovest21's Family Office Survey: A Snapshot Look at Today's Family Office

Topics covered:

*Views on hedge funds/funds of funds
*Manager selection criteria
*Hedge fund/fund of funds allocations
*Strategies used
*Terms
*Use of managed accounts
*Concerns
*Comparison:Single family office vs multiple family
*Profile of respondents
*Assets under management

Approx 25 pages including graphs and tables. $500

Infovest21 Analysis: Seeding becomes more diverse as industry recovers and evolves

2010-07-10T23:34:00.001-04:00

Due to the expense of starting and running a hedge fund and investors taking longer to do due diligence and investing in smaller amounts,
there is a growing recognition that without an anchor investor, it is hard to launch a hedge fund. Seeding has become critical to the growth of the hedge fund industry.

Deal terms have become favorable to seeders because of the general lack of seed capital available. A huge increase in talent exists because of the lingering threat of the Volcker Rule as well as stress at some hedge funds, resulting in the top tier being of new managers being of very high quality.

"Given the current demand for capital and the level of liquidity, seed capital providers are in a position to be selective. To be viable, teams need to consist of seasoned professionals with portfolio management experience and the ability to prudently operate and grow an alternative investment business. In other words, to obtain seed capital and gather sufficient assets under management, managers need to be reputable and "strategically complete,"says Michael Linn, a start-up specialist.

Expectations are the number of seeders/incubators will increase as there have been more announcements of transactions and seeding operations, says FRM's Patric de Gentile-Williams.Funds of funds as important sources of seed capital to emerging funds, which dried up in 2008 and 2009, are starting to come back.

One seeder observes that the first half of 2010 has been more active than last year. "The pipeline is very strong; eight or nine managers are in [our] pipeline which could lead to a transaction in the next few months."
As previously reported, a number of funds of funds have launched or are in the process of launching funds that are raising money or seed capital. Asset Alliance's Manager Participation Fund, Blackstone's new seeding fund, CYAN Management Group, Larch Lane/PineBridge Investments' Select Plus Fund, NewAlpha Asset Management, Reyl Asset Management's Reyl Accelerator Fund and SkyBridge III to name a few.

Pensions are also becoming more active - APG, which manages the assets of Dutch pension ABP, backed IMQubator. New York State Common Retirement Fund selected Rock Creek to manage the first installment of the pension's new emerging manager program. CalPERS now has $1.6 billion in its Manager Development Programs, $470 million in the emerging manager funds of funds program (which is part of the external manager program), about $450 million in the fund of emerging hedge fund program (which is part of the Risk Managed Absolute Returns Strategies program). In the latter program, CalPERS has about $141 million with PAAMCO's fund of emerging funds, $158 million with Rock Creek fund of emerging funds and $143 million with 47 Degrees North.

Yet some seeders connected to fund of funds say they haven't seeded recently. Part of it is a function of size e.g. they can't allocate $150 million pieces. It is also a function of the changing nature of the business. Others say the economics don't make sense as scalability doesn't exist unless the seeded manager can raise significant assets early on.
Asset raising has been tough in general for the hedge fund industry. While the largest managers have been the beneficiaries of whatever assets have come in, the asset raising situation is much more difficult for smaller and emerging managers.

Man's RMF Global Emerging Managers Fund said in June that it is putting its seeding activities on hold while it focuses more on liquid strategies with short lock-up periods.

As a result, seeding transactions are fewer and far between and the weaker candidates are getting weeded out.

Some industry experts believe that it will be difficult for many seeders, outside of the largest seeding players, to flourish in the current environment. They expect that seeding may revert back to the situation in the 1970s and 1980s when very talented individuals were seeded opportunistically by wealthy individuals and family offices on a one-off basis. This time around, family offices and wealthy individuals will be joined by endowments and some large funds of funds.

"Without having a dedicated business, they can stay in the loop. They don't have to have expensive people and resources dedicated to it without generating results. If an interesting manager comes along, they can look at him," says Simon Lack of SL Advisors.

********************************************
Excerpt from Infovest21's just-released Special Research Report: New Developments in Seeding.

Infovest21 Investor Sentiment Indicator: Funds of funds continue to lose appeal relative to direct investing

2010-06-14T01:38:00.003-04:00

In Infovest21’s just-released quarterly sentiment survey of investors, 31% of the investors said they expect to increase their hedge fund allocation while decreasing their funds of funds allocation. 42% don’t expect any change. None expected to increase the funds of funds’ allocation while decreasing the hedge fund allocation.

These responses reflected a change from the prior quarterly survey when two-thirds of the investors said the expected no change and only 10% expected to increase their hedge fund allocations while decreasing that of funds of funds. At that time, 5% planned to increase their allocation to funds of funds.

Lois Peltz, president of Infovest21, summarized some of the other highlights of the survey:

 44% of the investors feel managers have the upper hand in the relationship between investors and managers while only 19% feel an equal balance exists.

 The largest percentage, 48%, said they do not plan to increase their hedge fund allocation over the next 12 months. Another 15% said they plan to increase allocations significantly and 19% plan to increase slightly.

This reflects a noticeable change from the prior quarterly survey where the largest percentage, 52%, said they planned to increase hedge fund allocations while one-third planned no change.

 While most investors did not feel registration would affect their views or allocations of hedge funds, some interesting observations were made. For example

o Some strategies will be more impacted than others. Those which depend on leverage or riskier securities for return will be less attractive.
o Impact on funds of funds will not be as significant as with hedge funds.
o Smaller managers will be less impacted than larger managers as they will be regulated by states rather than the SEC.
o Some managers may decide to close their funds or partner up with larger organizations rather than register.

 Of the various strategies, investors remain the most positive about event driven/special situation over the next three months - 27% of the investors are “very positive.” Event driven/special situations had the highest rank last quarter as well.

 Of the 22 strategies asked about, the majority of investors felt “somewhat positive” about 12 over the next three months, “neutral” about 8, and “somewhat negative” or “very negative” in two. In the prior quarter, investors were “somewhat positive” about six strategies and “neutral” about 16.

Energy, distressed, event driven/special situations, global macro and multi-strategy were among those strategies investors were “somewhat positive” about.

More optimism on the investor front in the near-term
Of the various strategies, investors remain the most positive about event driven/special situation over the next three months - 27% of the investors are “very positive.” Event driven/special situations had the highest rank last quarter.

In 12 strategies, the majority of investors felt “somewhat positive” which is considerably more than the six strategies cited during the prior quarter. In rank order, these are: energy (62%), distressed (58%), event driven/special situations (50%), global macro (50%), multi-strategy (50%), volatility arbitrage (46%), merger arbitrage (42%), managed futures (42%), equity long/short (42%), emerging markets (42%), fixed income arbitrage (35%) and activists (33%).

In eight strategies, the majority of investors felt “neutral” compared with 17 strategies last quarter. In order, these are: sector (72%), ETFs (58%), convertible arbitrage (54%), mortgage backed (48%), short biased (42%), statistical arbitrage (42%), fixed income (42%) and market neutral (38%).

In two strategies, the majority of investors felt “somewhat negative” or “very negative.” 37% felt “somewhat negative” about asset based lending and 33% felt “very negative” about PIPES.

Methodology: Infovest21 conducts this survey on a quarterly basis.
This quarter, 30 investors responded. Of those, about 41% were funds of funds, 26% were family offices, 26% were consultants and 12% were pensions and endowments.

Infovest21 Investor Focus: Sovereign Wealth Funds realign their portfolios, review investment policies

2010-06-14T01:30:00.001-04:00

Despite their long-term investment horizon, sovereign wealth investors have to meet short term performance goals. Jean-Michel Bourgoin of Amundi Asset Management, a funds of funds manager speaking at a Pensions & Investments webinar says, “SWFs have to report [performance] on a short term basis so they have to change investment policy [in response to a] crisis.”

For example, the Alberta Investment Management Company is realigning its portfolio and reducing its allocation to hedge funds. The reason for the reduction, says assistant deputy minister Rod Matheson of the treasury and risk management division, is that the new senior leadership at AIMCo does not view hedge funds as a stand-alone asset class but rather as a complement to the equity portfolio.

“Many of the fixed income-based hedge funds have been divested and AIMCo is focusing the portfolio on equity strategies that are significantly uncorrelated to the core equity program,” adds Matheson.

Unlike pensions which have specific funding requirements, says John Reisberg of Lazard Asset Management, SWFs have more flexible asset allocation models they can stick to over a longer period of time.

Sovereign wealth funds have been actively investing in the equity markets for at least a decade, and viewed the earlier part of the 2008 economic crisis as a big investment opportunity. After the subsequent drop in book value of many stock investments, SWFs focused mainly on domestic issues in mid 2008 to mid 2009. “They bailed out their own banks and supported their domestic markets. About 40% of deals were domestic. This is a full reversal of strategy implemented for past 10 years,” says Bourgoin.

In mid to year-end 2009, SWFs regained their appetite for foreign investments as they invested about $50 billion, observes Bourgoin. European and North American investors have increased interest in emerging markets.

Governance
According to SWFs interviewed by Infovest21, some are reviewing their organizational structure.

At the New Mexico State Investment Council, the composition of the board has changed and now includes the governor, state treasurer, commissioner of public lands, secretary for the New Mexico department of finance and administration, the chief financial officer for a state university, four public members appointed by the legislative council and two public members appointed by the governor. The state investment officer reports to the council which has discretion over the hiring of investment consultants. This arrangement provides more oversight of investment decisions. Previously, the state investment officer could decide who to hire.

The Alaska Permanent Fund adopted a new investment policy on May 27, 2010. Board chair Steve Frank says, “The updated investment policy does delegate the board’s authority to authorize the hiring and firing of managers to staff…This change makes sense and is in line with how similar funds operate…The board must first authorize a manager search, but then we leave the hiring of managers to the staff that have the time to conduct due diligence visits and comb through performance data.”

Investment outlook
SWFs are an important part of the capital structure.

“They select the best quality and can afford to select the best quality. Size is important. Location does not matter,” says Bourgoin. “They are very demanding in terms of capacity building, they want to learn. They want a manager who can bring them something new.”

He says that in Asia and the Middle East, developing trust and personal relationships is very important. “Visit them regularly, they have to know you.”

Additional content on SWFs are available in Infovest21'slatest issue of Investor Focus.
 Interview with Alberta Heritage Fund and Wyoming Trust
 Table of top 10 largest SWFs
 Sentiment Indicator: Investors
 Sampling: Who’s Who in SWFs

Infovest21 White Paper: It’s all about terms – not fees

2010-05-18T20:25:00.002-04:00

Generally, hedge fund attorneys and accountants haven’t seen a drastic change in hedge fund fees over the past few years. “There has been a scaling back of management fees when assets get to a certain level. I hear about it in individual cases but I’m not seeing in large amounts. I’m not seeing slippage on fees unless the manager can’t raise assets. It’s all about terms. Institutional investors are pushing managers on terms,” says Michael Gray, an attorney at the Chicago law firm of Neal Gerber Eisenberg LLP.

The world has increasingly become bifurcated in the manager community between “the haves” and “the have-nots.” George Mazin, partner at Dechert observes, “The haves” – those managers that have plenty of assets – can have all they want. “The balance of power has shifted back to “the haves.” They are less conciliatory and less willing to make deals. The “have-nots” continue to struggle to raise assets and will be a lot more flexible.”

Major institutional investors continue to drive hedge fund investments. The most demanding investors are clearly the state plans. The rest of the institutional community takes their lead from the state plans.

Ricardo Davidovich from Tannenbaum Helpern Syracuse & Hirschtritt LLP
agrees. “The investor is demanding better terms in exchange for their big ticket. The investments are being negotiated more than in the past. The institutional investor is looking more like seeding deals.”

“Hedge fund documents are definitely moving toward the LPs’ favor but good managers can still command the best terms. It’s on a deal-by-deal basis,” adds Gray.

While hedge fund documents have become more balanced [between investor and manager power] than three or four years ago, they still lag behind private equity fund documents which are more balanced than hedge fund documents, observes another attorney. “Private equity documents have investor driven provisions as investors are in private equity funds for a longer time period. The more institutional investors are driving the terms,” says Irwin Latner of Herrick Feinstein.

In its current white paper, Infovest21 explores the trends in terms from different perspectives – case studies of institutions, some managers designing product to meet institutional investor demands, investor surveys and interviews with attorneys and accountants (who represent diverse manager bases by asset size, client base and geography) who prepare manager documents.

Some specific trends are evident, such as:
 Gates – Most funds have gates. The trend is toward increased use of investor-level gates. Gates are strategy dependent.

 Lock-ups - Some managers will give concessions on the incentive fee in exchange for longer lock-ups. With a two to three year lock-up, the investor may pay a 15-18% performance fee.

Strategy is again an important factor. Funds that are longer term focused will lock up investors longer. Funds that are trading-oriented by nature are less concerned on the lock-up side.

 In Kind Distribution - The documents are being more specific on what can be done to satisfy redemptions. Documents are specifically addressing redemptions in kind, suspensions etc. These actions were taken in 2008 and 2009 on the assumption that managers had the right to do it. Now it is being written into the documents.

 Side Pockets – Some funds are without side pockets if they’re invested in very liquid assets. Some funds have stricter rules on side pockets e.g. if the manager is going to side pocket something, they must do so within a specified time of buying the position. Some funds have modified side pockets - the net effect is that a fund can side pocket an investment but it will not lower the high water mark/carry loss forward. More information is disclosed in their documents.

 Fees and Expenses - Most attorneys and accountants preparing hedge fund documents say fees haven’t changed significantly in the past few years i.e. they are not seeing a change in industry standards. There has been some increased flexibility, more attention to hurdle rates and high water marks, and some customization but not any wholesale change.
Some managers have attracted new assets by carrying over high water marks i.e. no incentive fees are charged on new capital until all losses on old capital have been recovered from old capital profits.

Some have also carried over high water mark to other affiliated funds including funds with different strategies.

Excerpt from:
Infovest21 White Paper: Trends in Fund Terms

*Balance of power/alignment of interest
*Case studies: select managers designing product to meet institutional investor needs
*Gates, lock-ups, in kind distribution, side pockets, most favored nation, key man provision
*Fees and expenses
*Funds of funds and seed capital

20+ pages including graphs and footnotes
Advance Price; $450 through May 23. Thereafter: $500

For additional information, call 212 686 6440

Infovest21’s Latest Issue of Investor Focus: Foundations re-evaluate asset allocation and business models

2010-05-03T22:02:00.001-04:00

The Foundation Center says the recent economic crisis caused the US’ more than 75,000 grant making foundations to reduce their 2009 giving by 8.4% - the largest decline ever tracked by the Foundation Center. Grant dollars fell from $46.8 billion to $42.9 billion. Foundation assets fell 17% in the prior year.

"The economic crisis has not ended for this country's nonprofits, and it will be some time before foundations are in a position to help them return to growth," said Bradford Smith, president of the Foundation Center in a press release. "But funders have made exceptional efforts to lessen the pain faced by the nonprofit community."

The Foundation Center's annual "Foundation Giving Forecast Survey" suggests that 2010 foundation giving will remain flat — a less pessimistic outlook than anticipated a year ago. Should the economic rebound continue, foundation giving may show positive, though modest, gains in 2011.

The survey included responses of about 1,280 large and medium-sized foundations in the US.

The three foundations interviewed in the current issue of Investor Focus – The Commonwealth Fund, El Pomar Foundation and American Legacy Foundation - are postured conservatively as their goal is to continue the foundation into perpetuity. Philanthropic organizations are required to commit a certain portion of their endowments to some type of charitable activity annually. The three foundations are also re-evaluating their asset allocation and business models.

Anthony O’Toole of American Legacy Foundation observes that foundations are reducing their exposure to stocks to reduce the risk if another market decline should occur. Foundations are increasing allocations to real assets to protect their portfolio from inflation and take advantage of the depressed real estate market. He says they are also investing more in private equity. Their goal is to receive quarterly income distributions as well as obtain potential investment upside later.

A Greenwich Associates survey also found that endowments and foundations dramatically increased allocations to passive domestic equities last year in response to liquidity problems caused by the global financial crisis. Allocations to active US stocks declined to 11.5% in 2009 from 22.9% in 2008. Meanwhile allocations to passive domestic equities increased to 16.4% from 5.5% over the same time period.

The study found the shift was even more dramatic among the largest endowments and foundations i.e. those with over $1 billion in assets. Their allocations to active US stocks fell to 9.3% from 22.7% while allocations to passive US equities jumped to 18.9% from 5.0%.

El Pomar Foundation’s Thayer Tutt points to a recent survey which found that 84% of foundations and endowments invested in hedge funds in 2009.

Inside This Issue:
Interviews with American Legacy Foundation, El Pomar Foundation, The Commonwealth Fund
Table: Sampling of largest foundations by asset size
Table: Foundation performance and asset allocation
Book review: No One Would Listen
Sentiment Indicator: Marketers
Sampling of Who’s Who in Foundations
Call Infovest21 for additional information: 212 686 6440

Infovest21 Survey: Managers’ biggest concern is bias toward larger managers despite performance results

2010-04-20T18:08:00.004-04:00

During April, Infovest21 interviewed 60 managers about their strategies, track record, infrastructure, asset base, investor base, portfolio composition, terms, returns and outlook.

The survey, the sixth annual Infovest21 manager snapshot survey, provides a snapshot look at the typical hedge fund manager in today’s environment. Among the most interesting findings are:

 Managers’ biggest concern is bias toward larger managers despite performance. Regulation had been considered the biggest challenge in recent prior annual surveys.

 Highest performance in 2009 came from the smallest managers i.e. those with less than $100 million under management. On average, they generated a 44% return. The average performance for all managers surveyed was 36% in 2009.

 The same percentage of managers, 79%, is registered today as in 2008.

 The main reason managers think their investors allocate to them is their investment approach/strategy. In prior years, the main reason had been performance.

 The average breakdown of the investor base is: 41% high net worth/family office, 18% funds of funds, 14% pensions, 12% other financial intermediaries, 4% foundations, 4% endowments, 3% sovereign wealth funds and 4% other.

Looking ahead to next year, the managers expect to see a decline in the percentage of high net worth investors/family offices with increases in foundations, pensions and endowments.

 Most managers have made changes to their business strategy. Most frequently mentioned was offering more products and services. Also mentioned were becoming more marketing oriented, expanding into new markets and cultivating institutional clients.

Lois Peltz, president of Infovest21, noted, "The average assets per hedge fund firm in the survey dropped from $3.2 billion in 2008 to $2.7 billion today. It is interesting to also note that a big drop occurred in the number of people in the typical organization from 78 in 2008 to 35 today."

-------------------------------
Excerpt from just-released 2010 Manager Snapshot Survey.
26 pages including graphs and tables. Includes results on:

*strategy and track record
*infrastructure
*asset and investor base
*portfolio composition
*terms
*investment returns
*business strategy changes
*concerns about the industry
*comparison of responses by manager asset size
*comparison to prior years

$500.

Infovest21 Investor Focus:Endowments reassess portfolio construction and objectives

2010-04-08T22:55:00.001-04:00

Tom Heck, treasurer of Ball State University, says all institutions, having gone through the past couple of years, are reassessing what portfolio construction will achieve their objective. “Up to a year ago, we were in different stages of following the Yale or Harvard model. Now we all are stepping back and assessing how much volatility we can tolerate in our spending and how that translates back to how much volatility we can tolerate in the portfolio. At the same time, how do we achieve the portfolio return required to achieve our long-term objective?”

Part of the answer is based on their assumptions about each asset class and the managers they can access. Heck points out that Yale can access very top-flight managers in any class which gives them a very different risk/return profile than the average endowment.

Heck says the trick in this environment is how to solve simultaneously multiple equations i.e. the return, risk, and governance equations for a successful portfolio.

Average endowment lost 18.7% in FY 2009
The average endowment lost 18.7% for the year ending June 30, 2009, according to a joint National Association of College And University Business Officers-Commonfund Institute report. The study was based on 842 US endowments, representing $306 billion in assets.

The surveyed endowments allocated 51% to alternatives, 18% to domestic equities, 14% to international equities, 13% to fixed income and 4% to short-term securities/cash/other.

Performance-wise, alternatives lost 17.8%. International equities dropped 27.6% while domestic equities retreated 25.5%. Fixed income returned 3% while short term securities/cash inched up 0.8% - the only two categories with positive results.

Smaller endowments outperformed larger ones for the first time in several years, largely due to their reliance on fixed income investments. The smallest endowments – those with less than $25 million – lost 16.8% in the last fiscal year. They had, on average, 13% in alternatives compared with 9% in 2008.

Those endowments with more than $1 billion had about 61% in alternatives. Of that amount, 40% was in hedge funds, 22% in private equity, 13% in private real estate, 12% in energy and natural resources, 8% in venture capital and 5% in distressed debt funds. The largest endowments lost 20.5% for the year.

Harvard, which lost 29.8%, had the largest drop among the 53 endowments with more than $1 billion. Yale followed closely with a 28.6% setback, resulting in its assets dropping to $16.3 billion.

Sampling of Select Endowment Returns FY 2009 (%)

Harvard -29.8
Yale -28.6
Stanford -26.0
George Washington Univ -21.2
Wellesley -17.0
Virginia Tech -14.0

Endowment Assets under management ($B)
Harvard 26.0
Yale 16.3
Stanford 12.6
George Washington Univ 0.9
Wellesley 1.3
Virginia Tech 0.5

Role in the operating budget
On average, the endowments spent 4.4% of their endowments on operating costs, up slightly from the prior year which was 4.3%. About 43% of the endowments said spending was up while 25% said it decreased and 28% cited no change.

Jonathan Hook, chief investment officer of Ohio State University, observes that people got caught on how much their university relied on the endowment performance. “Each school was a little bit different – some relied on their endowment for a lot of their operating budget and some relied a little. A lot of schools did not take that into account when they planned their asset allocation.”

Hook says their returns were not what they would have liked, but because the university was not reliant on the endowment for a large percentage of their operating budget, it was easier to work through.

Heck points out: “The Yale endowment is responsible for a significant portion of the university’s operating budget, where we at Ball State are not. When you are funding an operating budget, then you are dealing with a constraint in the volatility of spending, and your investments. We are a public institution, and our endowments fund scholarships, lectureships, and other university programs which enhance the university but do not “turn on the lights in the morning.” Our tolerance for volatility and spending is different from what theirs is, and would probably be reflected in a different portfolio construction.”

This situation has led endowments to think more holistically about coordinating their Treasurer/CFO office and endowment office, and how everything works in concert with each other, says Hook.

He believes a higher percentage in alternatives will generate better performance. A one-year time period is not an appropriate barometer in which to measure performance. “Hedge funds held up better than many other asset classes,” he said.

Just released issue of Infovest21Investor Focus: Endowments reassess portfolio construction and objectives
 Interviews with Tom Heck, Ball State University and Jonathan Hook, Ohio State University
 Quarterly Sentiment Survey: Managers
 Updates: Yale University, University of Sydney, University of Toronto Asset Mgt
 TUCS vs Nacubo
 Book Review: Michael Lewis’ The Big Short

Infovest21 Survey: 36% of funds of funds use or plan to increase their usage of managed account platforms

2010-03-29T22:15:00.020-04:00

Following the events of 2008 – the liquidity crisis, the Madoff Ponzi scheme, managers’ freezing redemptions, imposing gates - managed account platforms were talked about as a possible solution. Managed account platforms, to varying degrees, provide transparency, liquidity and control of assets.

Infovest21 conducted two surveys – one of institutional investors and one of funds of funds – to determine current thinking and usage of managed account platforms. The surveys were conducted by phone and email during February and March 2010. 27 institutional investors and 29 funds of funds were surveyed.

Highlights of the findings on funds of funds include:

An even split existed between those funds of funds that current use managed account platforms and plan to increase their usage (36%) and those that say they do not use and have no plans to use managed account platforms (36%).

Another 14% do not use managed account platforms but expect to within the year. Another 7% are in the exploratory phase but don’t have time expectation for when they will be using platforms. 7% currently use platforms but don’t plan to increase usage while 7% were not familiar with the concept.

The most important criteria in determining the platform used was flexibility (31%), followed by flexibility to select managers (25%) and then transparency (25%).

Over 60% of the funds of funds said their experience with managed account platforms has been as expected. Another 11% said the experience was better than expected while 11% said it was worse than expected.

While 18.5% said there were no problems with the platform, the same percentage cited limited manager selection and high implementation costs. Less cited problems, in order, were: higher administrative costs, not run pari passu to the fund, operational issues, high minimums, long set-up time and inability to customize according to specific needs.

Lois Peltz

, president of Infovest21, observed, "When asked what they would like included in platforms that were not current provided, some write-in answers included: lower fees; one platform with a wider range of strategies, improved technology and reporting; more customized reporting and more latitude for customization."

Of the funds of funds responding to the survey, over 80% were US-based, 15% were in Europe and 4% were in Asia. The average assets under management were $3.7 billion. Of those that specified the percentage of assets on managed account platforms in 2010, the average was 30.3%.

Excerpts from Infovest21’s survey: Institutional Investors’ and Funds of Funds’ Views on Managed Account Platforms.
30+ pages including graphs and tables. $500. Call Infovest21: 212 686 6440

Infovest21's Current Issue of Investor Focus: Evolving Pension Views on Hedge Funds

2010-03-13T22:26:00.002-05:00

Hedge funds no longer considered an asset class by some pensions

There has been a clear evolution on how investors look at, analyze and use hedge funds in their portfolios. Institutional investors are no longer treating hedge funds as an asset class, says Daniel Celeghin of Casey Quirk. Rather, they are assessing hedge fund strategies on an investment basis.

"Hedge funds are too diverse to be considered an asset class. The risk/returns are too different for the various strategies ranging from dedicated short sellers to commodity trading advisors to distressed. They may share the same fee structure and share unconstrained approach i.e. none of them have an unconstrained benchmark, none have to be fully invested. That's where the commonalities stop. Unlike traditional managers, hedge funds tend to have the bulk of their net worth in the fund. Because of this alignment, fees, non benchmark constrained mandate, you can't say this is an asset class," Celeghin added.

The financial crisis accelerated this trend. Some investors thought they were hedged and were going to have absolute returns. Many had long/short strategies because they were comfortable with them and they were easier to understand. Long/short equity was down 32% and that was a huge disappointment, adds Celeghin. Other pensions had their portfolio allocated to CTAs and were up for 2008. "Institutional investors realized now the strategies were as different as night and day."

In the current issue of Infovest21\'s Investor Focus, this message comes across with two of the pension interviews. San Bernardino County Employees' Retirement Association says there are looking for long/short equity specialists for a $150 million mandate. That allocation will be part of the long/short equity portfolio, not the hedge fund allocation. Similarly, the State of Wisconsin Investment Board plans to allocate 2% of its assets to multi-asset strategies which will include a diversified absolute return multiple manager hedge fund portfolio.

Hedge fund/fund of funds searches expected to be strong in 2010
A need to shore up funding gaps is reviving pensions' appetites for hedge funds and funds of funds.

A recent survey of 70 North American consultants by eVestment Alliance and Casey Quirk found that managers with strong capabilities in developed and emerging markets stocks, global equities, hedge funds and funds of funds will be in most demand in 2010.The ranking by asset category is:

International/global equity

Hedge funds/funds of funds

Emerging market equity

Core/core-plus fixed income

Commodities

Domestic equity

LDI/long duration fixed income

Real estate

Highlights include:

Interviews: Robert Hjorth of ATP and James Perry of San Bernardino County Employees' Retirement Association

Updates: State of Wisconsin Investment Board, Vermont pensions, Maryland State Retirement and Pension Plan, PSERS, Ohio SERS, Caisse de depot et placement du Quebec.

TUCS Median Performance

Sentiment Indicator: Investors

Sampling of Who's Who in US and European institutions

Infovest21\'s Current Issue of Investor Focus: Outsourced Investment Offices

2010-02-03T21:53:00.002-05:00

Outsourced investment offices say it makes economic sense for an endowment to build its own investment office when assets exceed $1.0 billion.

Cambridge Associates says institutional investors with assets between $100 million and $1 billon are most likely to use outsourced solutions.

“As the assets under management get smaller and smaller, they reach a point where the organization cannot, or chooses not to, afford an in-house office. They need it, but they just have a problem with the cost,” says Michael Bunn of The Endowment Office. “If you can afford to use an investment office, whether it is shared or by yourself, that makes sense. You get a better quality of service and a more customized portfolio. You now see the boards that do it themselves looking for alternatives to the consultants.”

For smaller institutional investors, Bunn highlights two options: outsourcing the CIO approach or using the shared office approach.

The number of US institutional investors outsourcing their chief investment officer functions has doubled in recent years and is expected to grow quickly due continuing internal institutional staff and budget cuts, the desire for institutions to simplify internal operations, a possible need for a quick temporary solution, fiduciary fatigue caused by limited time and resources conflicting with new valuation methodologies and increasing allocation to more complex alternative investments.

A Casey Quirk study predicted that the investment outsourcing market will grow to $510 billion by 2012, representing about 13% of institutional assets and 25% of institutional investors.

With investment outsourcing, the consulting or investment firm assumes responsibility for asset allocation and implementation, acting in the same capacity as a professional investment staff of the largest institutions.

Cambridge Associates says each outsourced CIO relationship they’re involved with is tailored to meet the specific needs of each institution. Some clients have a CIO in place and look to them to act as the outsourced investment staff and support to the work of the CIO and investment committee. Other clients have no CIO or staff in place and hire the outsourced provider to act as the outsourced investment office. While some clients seek to retain authority over manager hiring and firing, others look to the outside provider to provide very directive recommendations.

NewProvidence’s Andrew Vogelstein says, “It is important to understand each institution’s particular and unique set of circumstances including everything from … its finances to limitations set forth in its investment policy statement…We expect and want constructive feedback. Depending on the client, this back-and-forth process can happen quickly, or take time. In the end, the client will have a portfolio designed to suit its unique circumstances.”

Shared office
The shared office is The Endowment Office’s primary business. “The shared office is like any other investment office for any large university endowment. Each investment strategy is different because the investment committees want it customized. The shared office customizes investment strategy across all asset classes, and is a separate account or managed account with its unique custodian, separate relationships with managers. Not all the managers or asset classes are the same for each organization, it depends on the organization,” says Bunn.

Bunn says the shared office is a little more expensive than an outsourced CIO approach but the cost is spread out among multiple organizations at a reduced rate. There are a limited number of endowments that can share an office.

Infovest21\'s Just Released Issue of Investor Focus – Outsourced Investment Offices

Interviews with Cambridge Associates, Partners Capital, New Providence and The Endowment Office Issue also includes:

Side bar: Casey Quirk Outsourcing Survey
Who’s Who: Outsourced Investment Offices
Quarterly sentiment indicator: Marketers

Order your copy by calling Infovest21 212-686-6440. $150 per issue. $1000 for annual subscription

Infovest21 White Paper: Evolving Consultant Business Models and Its Implications for Hedge Funds

2010-01-18T14:42:00.004-05:00

Consultant business models have been evolving rapidly over the last couple of years. Consultants are offering both discretionary consulting and traditional non-discretionary consulting; services and products; and a variety of options including full range consulting to just alternatives to just hedge funds or just project work. “Consultants are taking their research engine and finding different ways to deliver it,” observes Greg Dowling of Fund Evaluation Group, a Cincinatti-based consultant which focuses on foundations and endowments.

Institutional investors are driving some of this change as they are more aware and demand different types of consulting relationships. Many clients may feel they can handle traditional investments on their own and may just want help on the alternative side, says Dowling. Or, after 2008, they may want help on asset allocation or investment policy statements. Some organizations that have limited resources or issues arriving at consensus are becoming more open to outsourcing the actual implementation.

Some of the change is also motivated by consulting being a fairly mature business. Consulting firms are looking for new ways to leverage their investments in technology, reporting, risk management and research.

As pensions outsource more of their investment decisions, the competition between funds of funds and consultants increase. And the lines are increasingly blurring between consultants and funds of funds as more consultants offer funds of funds and more funds of funds offer advice.

Janine Baldridge of Russell Investments says the outsourcing decision is generally based on several criteria: internal versus external investment expertise and resources, ability to access and successfully structure a desired portfolio, and best practice expectations for both investment and operational due diligence processes.

“Clients with fewer internal resources or expertise are more likely to outsource hedge fund selection and construction to fund of funds providers and focus on understanding the investment strategies, risks and return expectations. On the other hand, organizations that have experience in selecting and monitoring hedge funds are able to make timely investment decisions. Those that have expertise in structuring multiple hedge funds are more likely to seek advisory services and retain discretion internally,” she adds.

Baldrige says it is important for sponsors to seek clarity on their desired level of fiduciary liability, discretionary actions and due diligence capabilities from their hedge fund providers. “The range of capabilities and offerings can be quite different between the two model types. An institution hiring a consultant to help them select and structure individual hedge funds likely has very different expectations than an institution hiring a consultant to recommend discretionary funds of fund managers,” adds Baldridge.

Infovest21\'s Just released: Evolving Consultant Business Models and the Implications for Hedge Funds/Funds of Funds

Includes examination of:
How the consultant community is evolving
Specialist versus generalist consultants
The blurring lines between consultant and funds of funds
Potential conflicts of interest
Institutions’ current appetite for hedge fund/funds of funds
The evolution of institutional investing in hedge funds
Table comparing select consultants

Order your copy by calling Infovest21\'s 212-686-6440. 30+ pages including tables and footnotes, $500

Infovest21's Annual Hedge Fund Manager Compensation Survey

2009-12-01T17:52:00.003-05:00

CEO and COO top compensation survey;Results mixed compared with last year

Infovest21 conducted its eighth annual executive compensation survey of hedge funds during September, October and November 2009. Separate surveys were conducted and results analyzed for those managers with assets over $1 billion and those with assets under $1 billion.

For the large (over $1 billion) managers, 21 executive and back office positions were included - Chief Executive Officer, Chief Investment Officer, Chief Operating Officer, Chief Financial Officer, Chief Risk Officer, Director of Research, Portfolio Manager, Assistant Portfolio Manager, Senior Analyst, Mid-Level Analyst, Junior Analyst, General Counsel, Compliance Director, Director of Sales and Marketing, Director of Investor Relations, Client Services, Fund Accountant, Controller, Assistant Controller, Director of Operations and Operations/mid-office.

The results included data from 21 separate hedge fund management firms. In calculating the statistics throughout the survey, only those respondents who provided concrete compensation data with a dollar figure were included.

Total Compensation Due to the financial crisis and uncertainty at some firms, 2009 bonuses were not provided for a few of the positions examined. In those instances – Chief Investment Officer, Chief Risk Officer and Controller - where the sample size was too small, we could not calculate total compensation for 2009.

With that caveat, the top paid positions in 2009, based on the information provided, were Chief Executive Officer and Chief Operating Officer. Both positions had total compensation over $1 million.

Three positions have total compensation between $600,000 and $999,999. They were: Director of Sales and Marketing, General Counsel and Chief Financial Officer.

Twelve positions – Director of Research, Portfolio Manager, Compliance Director, Director of Operations, Senior Analyst, Assistant Portfolio Manager, Mid-Level Analyst, Junior Analyst, Director of Investor Relations, Client Services, Assistant Controller and Operations/Mid-Office – had total compensation of between $100,000 and $399,999.

Fund Accountant had a total compensation below $100,000.

Impacted by the financial crisis, the trend for compensation in 2009 was mixed compared with last year.

Generally, management positions were higher (e.g. Chief Executive Officer, Chief Financial Officer and Chief Operating Officer) but lower for most investment positions (e.g. Portfolio Manager, Assistant Portfolio Manager, Senior Analyst, Mid-Level Analyst, Junior Analyst, Director of Research.) Compensation was also lower for financial positions (e.g. Fund Accountant, Assistant Controller).

Sales and marketing positions were mixed – higher for Director of Sales and Marketing but lower for Client Services. Legal/compliance compensation positions were also mixed – higher for General Counsel but lower for Compliance Director.

Other highlights
In nine positions, the average bonus outweighs the average base salary. In rank order, these are: Chief Operating Office, Director of Sales and Marketing, General Counsel, Chief Financial Officer, Chief Executive Officer, Junior Analyst, Portfolio Manager, Chief Risk Officer and Director of Research.

35% of the managers surveyed said they did not change head count. While 35% increased head count another 30% lowered head count.

In 2009, asset flow and fund performance were cited by 47% and 44% respectively as the factors most affecting compensation.

Many variations on the bonus structure are cited. For those positions where the bonus was based on performance, some patterns were noticeable. For example, firm performance was the predominant factor for the majority of positions including: Chief Executive Officer, Chief Operating Officer, Senior Analyst, Mid Level Analyst, Director of Research, General Counsel, Compliance Director, Assistant Comptroller and Director of Operations.

A full copy of Infovest21\'s $1 billion+ hedge fund manager compensation report is available by calling Infovest21\ at (212) 686-6440 or emailing general@infovest21.com.

The full report details base salary, bonus and total compensation for 21 executive and back office positions. High, low, average and median are provided for each position. Manager profile and factors affecting hiring/compensation are also included. Report also assesses the impact of asset size on compensation results and compares 2009 results to those of 2008 as well as impact of high water mark on compensation results.

Separate compensation surveys are available for:
Hedge funds with assets above $1 billion
Hedge funds with assets below $1 billion
Funds of funds with assets above $1 billion
Funds of funds with assets below $1 billion
UK managers

Each report is $700. Volume discounts available for multiple purchases.

Excerpt from October Issue of Investor Focus: Single vs Multiple Family Offices

2009-11-23T09:56:00.005-05:00

In the current issue of Investor Focus, three family offices are interviewed. Two of the family offices - The Koffler Group and Parly Company – are single offices while one - Rockefeller and Co - is a multi-office.

At one end of the spectrum is Rockefeller and Company, which started about 130 years ago as a family office for the Rockefeller family. It opened up to other families in 1980. It has grown considerably since that time and now has close to $24 billion in assets.

At the other end of the spectrum is The Koffler Group. Terri Chernick, chief investment officer and partner, says they are considering the multi-family model. However, she highlights some issues. First, you need to find families with the same philosophy. Second, the maximum asset size needs to be addressed so as not to affect performance.

Parly Company, while at the single family office end of the spectrum, will sometimes work closely with other family offices to set up bespoke funds. Peter Fletcher, general manager of the family office, says several families pool their assets at times to set up a fund. When they work as a group, they reach substantial size. "We work with a group of 200 families from time to time, but the core group that invests in hedge funds is about five family offices."

Family offices and seeding

A growing number of family offices are seeding hedge fund managers as they see the opportunity for return potential.

Two of the three family offices that Infovest21 spoke with in the current issue of Investor Focus have seeded new managers. For example, the Koffler Group seeded EchoBridge Capital, a short fund, with $20 million in May 2008. The fund has been up about 20% since its launch. Assets now stand at $80 million.

Terri Chernick, chief investment officer and partner at the Koffler Group, says, they seed one manager or so a year and that is only if the manager meets their very high criteria. She is looking for a manager who has substantial investment experience and a true performance history that has been examined by an accounting firm. The Koffler Group will only get involved in seeding when they are early to the fund. They want to bring institutional practices to the funds’ back office.
Chernick says, “We have expertise in this area since we have been in smaller hedge funds for a long time.”

Peter Fletcher, general manager of the Parly Company in Geneva, says they’ve seeded about 25 funds. It is not a business they do but when they see the opportunity, they take it. Their criteria includes making sure the fund is run like a business.

Family offices as seeders are different from most industry seeders. Chernick points out that unlike most seeders, they are willing to invest for the long term. Fletcher says they don’t become shareholders. Rather, in many instances, they take the carried interest or they manager charges them reduced fees.

Other families have also seeded hedge funds in the past year. To name a few:
The Family Office Co, the Bahrain-based multi-family office, seeded 3 Sigma Value Offshore in September.

London-based Iveagh, the investment office of the Guinness family which made its fortune in brewing and which was established as a family office in 1886, also seeds hedge funds. Under a deal that was disclosed in April, Iveagh became a minority shareholder in 47 Degrees North and provides seed capital for new launches for emerging managers and innovative strategies.
Last year, Iveagh agreed to invest in Triple A Partners which provides seed capital to alternative investment managers in Asia.

Excerpt from the just released issue of Investor Focus – Single vs Multiple Family Offices

Interviews with Rockefeller & Company, The Koffler Group, and Parly Company

Issue also includes:

Who’s Who: Family offices and advisors

Book Review: The Greatest Trade Ever Made

Statistics: Institutional investment performance and asset allocation

Quarterly sentiment indicator: investors

Excerpt from Infovest21 Investor Focus: Family Office Advisors - Consolidation of multi-family office groups

2009-11-16T09:24:00.002-05:00

Threshold Group, a wealth management and family services firm headquartered in Gig Harbor, Washington, and Ashbridge Investment Management, a Philadelphia-based family wealth management office, announced in mid-October that they have signed a letter of intent to create a single, independent and family-owned wealth services firm for families under the banner of Threshold Group. The combined entity will have assets of about $2.25 billion.

"The combined entity will benefit from added depth, enhanced service teams and in some cases, reduced distance between client households and relationship managers, said Tim Cavanaugh, vice chairman of Threshold. Threshold’s New York City office will be consolidated in Philadelphia. Its Portland, Oregon office will continue to operate as a client service site.

The combined entity will continue to focus on comprehensive investment advisory services and an integrated range of family office services including financial and tax planning, estate planning, budget and cash flow management, wealth education and family governance.

Threshold, which began in 1999 as a single family office for George and Jane Russell, expanded to other families in 2004. Its current assets under advisement are $1.5 billion. Ashbridge, which has served as the family office for the Grace family in Philadelphia for five generations, has assets of about $750 million. Charlie B Grace Jr, Ashbridge chairman, said, both organizations were independently founded and owned by successful families. “Both our firms have first-hand understanding of families and both have been advocates of purely advisory, open architecture services. Together we have the chance to create broader professional capabilities for our clients and continued sustainability for the longer term.”

Open architecture

As with Russell and Ashbridge, the three firms Infovest21 interviewed in its current issue of Investor Focus – Alpha Capital Management, Hillview Capital Advisors, and The Commonwealth Group - all practice 100% open architecture.

100% open architecture means than 100% of the advisor’s fees comes from clients based on a percentage of assets under management. In some cases, they don’t manage money internally and therefore don’t have conflict of interests with their clients. However, some manage internal funds of funds for their clients.

Moving toward established managers, multi-strategy funds and managed accounts
Other common threads among the family office firms interviewed in this issue are that they are moving away from newer, less established managers and toward established managers with deep teams and deep resources.

A preference seems to exist for multi-strategy managers so that the managers can move capital quickly between strategies and assets. As Bradley Alford of Alpha Capital Management points out, “We now realize it is just not possible [for us] to move around quickly given lockups, quarterly to annual redemptions, long notice periods and gates.”

Some of the family office firms and advisories prefer using managed accounts so “we don’t have to worry about gates, fraud, excessive risk, excessive leverage which makes us sleep better at night,” says Alford.

Despite the advantages of managed accounts, the families mention their higher fees, not all top managers are accessible, and not all strategies are appropriate.

Excerpt from Infovest21\'s September Issue of Investor Focus – Family Office Advisors

Interviews with Alpha Capital Management, Hillview Capital and Commonwealth Group.
Issue also includes:

Who’s Who: Family offices and advisors

Sidebar: Hedge fund distribution platforms

Sidebar: Tax treatment for family offices

Statistics: Single family offices and multi-family offices

Quarterly sentiment indicator: marketers

Excerpt from Infovest21 special report: Managed account platforms represent 2-4% of hedge fund industry assets

2009-10-30T07:54:00.007-04:00

2008 was a notorious year for hedge funds/funds of funds with negative absolute performance, liquidity problems (e.g. lock-ups, gates, redemption suspensions, side pockets, forced liquidations, in-kind redemptions), style drift and manager fraud. Investors’ perception of hedge funds was impacted negatively. Investors clamored for change. Investors demanded and are demanding more control, transparency, liquidity, due diligence and in some cases, customization. Some want more relevant risk management as well as reputable and solid counterparty partners with substantial balance sheets. They want a safer way to invest with hedge funds.

Against this backdrop, managed account platforms were being set up and further developed to respond to clients who wanted a solution to the events of 2008.

Banking groups, asset management groups, funds of funds, independent stand-alone organizations and service providers are the most active groups developing platforms.

Estimates are that about 20 platforms now exist, representing about $30-50 billion. Only a handful of these are over $1 billion in assets under management. With hedge fund industry assets estimated at about $1.3 trillion, managed account platforms represent only about 2-4% of the industry total assets, at most.

Here is a sampling of some of the platforms and their estimated assets under management ($B):

Lyxor 9.5

Deutsche Bank 4.0

AlphaMetrix 2.3

Lighthouse
Investment Ptnrs 2.0

HFR Asset Mgt 2.0

Innocap 1.8

Credit Agricole
Structured Asset
Management 1.6
Source: various industry sources

Many expect this amount to grow. Some investors say they won’t invest in hedge funds that don’t address transparency, liquidity and control issues. Furthermore, some major large funds of funds with assets over $1 billion have publicly said they are or plan to transfer a good amount of their assets into managed accounts. Since the start of 2009, various platforms have observed extremely high growth and asset flows.

The managed account platforms generally feature transparency, liquidity and control to varying degrees. Some such Lyxor are known for its emphasis on liquidity while others highlight consolidated transparency and control.

The client base is evolving fast. “Eighteen months ago, the pre-dominant investors in managed accounts were European-based funds of funds and various structured products. Going forward, we expect the investor base in managed accounts to expand to include US based funds of funds but more importantly institutional investors (pension funds, foundations etc) as the benefits of managed accounts are highlighted along with turn-key solutions” says Deutsche Bank’s Martin Fothergill.

“Many investors are now at a tipping point as they are committed to hedge funds and strategies. They are asking the most efficient way to invest with hedge funds while having the most comfort but still allowing the manager the most flexibility to trade. Managed accounts for many strategies is a viable answer,” adds Michael Kane of Credit Agricole Structured Asset Management.

Most hedge fund specialists concur that managed accounts will be an increasingly large part of the hedge fund industry. A good number of specialists project that managed account platforms will represent 15-20% of total hedge fund universe assets over the next three to five years.

Excerpts from Infovest21 's "Setting Up a Managed Account Platform" Seminar

2009-09-28T23:16:00.005-04:00

At last week’s Infovest21 “Setting Up a Managed Account Platform” seminar, speakers discussed managed account platforms, their advantages and disadvantages, the different features they may offer, whether a fund of funds should build their own platform or use an existing platform as well as the nuts and bolts of setting up a platform.

A managed account, defined by Michael Kane of Credit Agricole Structured Asset Management, consists of segregated assets within a fund or account which is managed by an external hedge fund manager and offers a legal, operational and risk infrastructure. The operational and legal aspects can be considerable. For example, CASAM has 80 people working in the managed accounts group compared with 20 people in the typical fund of funds.

It takes at least $2 billion for a managed account platform to be economically viable, if you want daily dealing net asset values, says Dermot Butler of Custom House Global Fund Services. His firm has set up managed accounts for clients structured as a Malta Master-Feeder Fund, which consists of a series of segregated sub-funds of the master fund, each one a separate SICAV established as separate segregated cells that are contractually and legally separate companies. Each cell or sub-fund is populated by one of the managers He explains that should one fund blow up losing, say 150% of the assets, as happened in Amaranth, the 50% cannot be clawed back from the other sub-funds of the fund company.

Technology is a key factor in creating a managed account platform, says Ron Suber of Merlin Securities. Suber says, “What is so complicated from my experience on a managed account platform is how to aggregate data from the managers and prime brokers and make it consistent, timely and accurate for the managed account platform and ultimate investor.”

Once you have the information - what does the platform provider do with it? How does the platform provider understand risk (for all assets or by strategy, manager and geography), exposure, leverage and concentration? How do investors decide who to allocate to? “Managed accounts do solve for the high majority of transparency, liquidity and control requirements that investors want for most strategies but it is expensive,” Suber adds.

“The point I want to reinforce is: many hedge funds are not ready to handle the trading, operational, risk and technology requirements that come with separate accounts. Many funds still do not have the multi-account, multi-prime trading, risk, performance measurement and allocation tools required to make allocations to their master feeder fund, their LP, their LLC, and now their managed accounts. In many cases, the allocation of money from a managed account has covenants to be within 40 basis points of the main fund or it violates covenants with the investors. Hedge funds should require that their prime broker provide these tools so they can manage their business and focus on alpha generating activities,” Suber concludes.

All platforms do some amount of due diligence of the underlying funds. The quality of the due diligence will depend on the experience and experience of the managed account platform provider. “At ClariTy, we will put a manager on the platform in which the Kenmar Group may not invest through its funds of funds. The level of due diligence performed is the same regardless. If we think the manager is a business risk, that manager will not be on the platform,” says Esther Goodman.

Platforms may also provide position level reporting i.e. concentration, liquidity, and risk reporting. Moreover, some platforms may also offer consolidated reporting across managers in which the client invests, as well as portfolio analysis, Goodman adds.

For the investors that remember the aftermath of the 2008 financial meltdown, hedge fund gates and illiquidity, managed accounts seem to offer some comfort. Liquidity still is dependent on the strategy and platforms can only offer liquidity that matches the liquidity of underlying positions.

Should a fund blow up, who is responsible? The platform should not be the sole source of due diligence for the investor, but it does set guidelines. Kane says, “As the investment manager hiring the hedge fund as the investment adviser, the platform sets trading guidelines and is responsible if limits are breached.”

Question:
What is the growth potential for managed account platforms?

How will their growth affect the growth of funds of funds?

Infovest21 More details coming on regulation

2009-09-21T01:56:00.003-04:00

SEC Chairman Mary Schapiro, speaking at Georgetown University’s McDonough School of Business in Washington DC on Friday, talked about hedge funds and upcoming regulation.

An excerpt from Infovest21 News Provider article:

Schapiro said issues remain regarding hedge fund regulation but predicted that any new hedge fund regulation would require more detailed disclosure to regulators but possibly less for public disclosure. She talked about the tension between the need for transparency and the need for hedge funds to have an investment strategy that is not front run by competitive firms. The SEC is exploring what the requirements might be like and how to balance competitive concerns. One consideration, she said, is the possibility of publicly releasing hedge fund information on a time-delayed basis.

In mid July, the US Treasury Department submitted legislation to Congress that would require hedge funds to register with the SEC. The proposal would require hedge funds, private equity firms and venture capital managers, who have at least $30 million in assets under management, to report assets under management, leverage, off balance sheet holdings, counterparty risk exposures, trading and investment positions, and trading practices on a confidential basis. The Treasury Department said the proposal, part of the Obama administration’s plan to overhaul financial regulation, “would help protect investors from fraud and abuse, provide increased transparency and provide the information necessary to assess whether risks (of the funds)…pose a threat to our overall financial stability.”

Similar proposals have been made by Senators Jack Reed, Charles Grassley and Carl Levin.

For those who are interested in regulation, Infovest21 is holding an afternoon seminar/reception on the topic today in Manhattan. Main topics are:
 Legislation proposal for regulation
 SEC activities
 Trading and Valuation Policies
Speakers:
Benjamin Haskin, Willkie Farr & Gallagher
Martin Lax, McGladrey & Pullen
Jane Stabile, IMP Consulting
Lance Friedler, Sadis & Goldberg

To register, call 212 686 6440 or Infovest21

Infovest21\'s Discussion Blog

2009-09-15T23:27:00.004-04:00

Welcome to Infovest21's discussion blog. The blog may highlight some items from Infovest21’s top news stories, informal/unconfirmed reports not included in the news service, quick polls, photos as well as links to other interesting sites and mention of upcoming events.

We look forward to hearing your comments and observations about hedge fund/fund of fund developments and trends. We hope to address pressing issues facing both investors and managers in the hedge fund space.

Highlights from the day's news:

Institutional results continue to be released. CalPERS reports that hedge funds were flat in Q2 and down 15.3% for the year. For a table of the largest pension allocators to hedge funds, click here

Regulatory initiatives are coming from all fronts. IOSCO just published its best practices for funds of funds.
For managers and funds of funds interested in this topic, a Regulatory Update seminar is taking place in New York City on
September 21.

Lawsuits related to the Madoff Ponzi scheme don’t stop. A class action law suit was filed against Agile Group in Colorado court.

The consolidation trend is alive and well globally. The latest example is Vision Investment Management taking a stake in Harmony Capital.

We’re hearing…
We’re hearing some interesting high water mark variations. Do you have interesting ones to share?

One anonymous source says at least one large established manager is contemplating honoring high water marks that were established at other manager’s funds. If an investor comes to this large manager from a fund that has blown out, the manager says until we recover your loss carry forward (from the former manager), we won’t take an incentive fee. “These large managers believe a phenomenal opportunity exists to pick up some assets by offering that sort of discount to other investors who have experienced pain,” said the unnamed source.

Let us know what you’re hearing and thinking…contact us at general@infovest21.com

Check out our upcoming seminars