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.
Thursday, June 16, 2011
Monday, June 13, 2011
Infovest21 White Paper: Evolution of Product Structures - Managed Account Platforms, Ucits and Hedge Fund Mutual Funds
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.
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.
Thursday, March 31, 2011
Infovest21 Investor Focus - Survival of the adaptable
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.
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.
Sunday, March 27, 2011
Infovest21 White Paper: Institutions search for structural efficiency....funds of funds take a more solutions-based approach
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'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:
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.
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.
Saturday, March 19, 2011
Infovest21 Marketer Sentiment Survey: Global macro remains their top-rated strategy
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.
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.
Wednesday, February 9, 2011
Infovest21 Sentiment Survey: Managers most positive about oil over next three months
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.
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
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
“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
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