Credit Suisse: Hedge fund investors expect industry AuM growth, further fee compression
Hedge fund investors remain generally optimistic about the year ahead, according to the ninth annual Credit Suisse Hedge Fund Investor Survey, and broadly expect to maintain or increase their hedge fund exposures in the coming year. This year’s report, entitled Shifting Tides, is undertaken annually by the bank’s hedge fund capital services group. Key highlights:
- Investors forecasting a 3.5% increase in new inflows during 2017. This occurring as the industry begins the year at an all-time high for assets under management of $3.018 trillion.
- Investors are making headway in the push for better alignment of terms, with 61% of respondents reporting that they had at least one manager in their portfolio with a hurdle rate, while 57% said their management fees were lowered in the past 12 months.
- Sector funds: Investors reflected a pivot from broad based Equity strategies towards sector focused ones. Top Equity Sector strate-gies include Healthcare (#5) with 16% net demand, Financials (#7) with 15% net demand and TMT (#12) with 10% net demand. Net demand for Equity Long/Short Fundamental declined, falling from #5 last year to #13 this year.
- Quantitative/systematic: Other strategies identified by investors for potential allocations in 2017 include systematic strategies like Equity Market Neutral – Quantitative (#4) with 17% net demand and Global Macro – Systematic (#6) with 15% net demand. This is a continuation of the trend from last year’s survey highlighting increased investor interest in quantitative strategies.
- Ongoing commitment: 87% of investors indicated that they would maintain or increase their hedge fund exposures in the coming year. This is identical to last year, when 87% of investors also indicated that they would be maintaining/increasing their hedge fund allocations.
- Target returns: Only 30% of investors said that their hedge fund portfolios had met or exceeded their expectations this year, down from 45% last year. Looking forward, investors shared that they were targeting annual returns of 7.2% for their hedge fund portfo-lios in 2017, above the industry average returns of 5.5% last year.
- New launches: There remains significant appetite for start-up funds, with slightly less than half (44%) of respondents reporting in-vesting in a start-up fund last year. Of those who allocated to a new launch last year, about 75% reported receiving discounted or founders’ share class terms.
- Key factors in selecting hedge funds: The top three factors indicated for selecting hedge funds in an institutional portfolio were re-turns after fees, non-correlation with other investments, pedigree of risk takers and core team stability. Investors also considered risk management skills to be a very important factor in manager selection as well.
- Drivers of redemptions: As in years past, mostly idiosyncratic factors drove redemptions – 80% of investors redeeming cited individ-ual manager underperformance, while another 52% cited changes at manager (whether style drift or investment professional turno-ver, among others).
Hedge funds are cutting their fees: surveys
Investors disappointed by hedge funds’ poor returns and managers eager to pull in fresh money are seeing eye to eye: the industry’s once-hefty fees are being rolled back. Two separate global surveys suggest that nearly three-quarters of investors and the same amount of managers have negotiated fee structures that have made the traditional fees a thing of the past. Typically, hedge funds have charged an annual management fee of 2% on assets plus a performance fee of 20% on gains earned by the funds.
The new surveys gave no figures on how far the cuts have gone. But last year, hedge fund research firm Preqin found that newer funds now charge a 1.5% management fee and a 19% performance fee.
A survey conducted by information group HFM and Citco Fund Services, found that 72% of polled managers said they are introducing new fee structures to attract investors at a time when raising new money is increasingly difficult. The two groups surveyed 225 managers in September 2016. In the United States, home to the bulk of the world’s hedge funds, the number is even higher with 78% of polled man-agers saying they are ready to negotiate on fees, underscoring their willingness to “innovate,” the survey said. “The funds who can adapt their fees, liquidity and other offering terms to what investors want will put themselves in a strong position in 2017 and beyond,” said Greg Fenlon, head of alternative investor services at Citco Fund Services.
Hedge funds: The 2017 outlook
Giving her 2017 outlook, Lisa Fridman, global head of Research at Paamco, estimates that with uncertainty around Brexit negotiations and upcoming elections in Europe, volatility may increase in the coming months. “We believe diversification across strategies and return drivers is important. We see opportunities in trading oriented strategies and approaches which maintain flexibility to deploy capital on dislocations. “With respect to fundamentally driven strategies, we believe 2017 should present opportunities for active investment man-agers to deliver alpha through long and short security selection while limiting directional exposure,” she says.
33-year-old hedge fund star James Levin awarded $250 million pay package amid Och-Ziff stock debacle
Billionaire Dan Och’s hedge fund firm has promoted 33-year-old James Levin and handed him a $250 million pay package. Levin started out working for Treasury Secretary Steve Mnuchin’s Dune Capital hedge fund and graduated from Harvard with a computer science degree, according to Levin’s bio on Och-Ziff’s web site. The pay package is designed “to incentivize Mr. Levin for the services, contributions and leadership he provides and to ensure the future continuity of the company,” Och-Ziff said.
The hedge fund firm said it had experienced $13 billion in investor redemptions in the last 13 months, leaving the firm managing $33.6 billion. The stock has plunged by more than 70% in the last two years as the company dealt with a massive bribery scandal in Africa, resulting in Och-Ziff making a $412 million payment to resolve charges from US prosecutors and regulators.
China’s hedge fund elite live in their own private village
Hedge funds didn’t exist in the world’s second-largest economy five years ago. Now they have their own private village.
Nestled between the Qiantang River and Jade Emperor Hill, the village of Yuhuang Shannan feels a world removed from the surrounding metropolis of Hangzhou. The city of 9 million is hectic and loud, while this gated community—on the same site where emperors in the Song dynasty prayed for good harvests centuries ago—is quiet and green, exuding the feeling of a laid-back, high-end oasis.
Like Greenwich, Conn., the leafy town an hour’s drive north of Wall Street, Yuhuang Shannan, about an hour from Shanghai by high-speed train, has become a big hit with the hedge fund crowd. So big, in fact, that local authorities turned the entire village—until recently a hub for the design industry—into an exclusive enclave for China’s aspiring masters of the universe.
These days, resident money managers and their guests are the only ones allowed past the guarded entrance to Yuhuang Shannan. Inside, villa-style office buildings offer rows of trading terminals and waterfront views. There’s a private elementary school partly staffed by non-Chinese teachers, a modern medical center, and a club for after-work schmoozing—all designed with discerning financiers in mind. Even local government officials are eager to please, standing ready to help the funds raise cash from state-run investors and navigate the bureaucracy.
Opec decides to go on speaking terms with hedge funds
Cartel chief to meet managers once denounced as speculators who distorted oil market
Opec once decried hedge funds as a malign influence on the oil market. Now it is seeking their opinion. Mohammad Barkindo, secretary-general, said he was meeting fund managers while in Houston for an energy conference this week, along with US shale executives and other figures in energy circles. The oil exporters’ cartel had for a long time denounced “speculators” that distort the price of crude but financial participants have become too large a presence to ignore. “Times have changed; the industry has changed,” Mr. Barkindo told reporters at the CERAWeek by IHS Markit conference. “We are more globalized, and the impact of the financial markets on oil continues to be magnified. And in this world, we believe that we should adapt to these new changes and therefore reach out.”
Hedge funds expected to perform better in 2017, says Deutsche Bank survey
Close to three quarters of investors expect their hedge fund portfolios to perform better in 2017 versus 2016, according to Deutsche Bank’s 15th annual Alternative Investment Survey. Performance-based gains are expected to drive industry assets to reach USD3.14 tril-lion by year-end, says Deutsche Bank’s poll of 460 hedge fund investors representing almost USD2 trillion in hedge fund assets.
The survey reveals that 2016 marked another year in which significant return dispersion shaped hedge fund performance. On average, investors’ top quartile funds returned 11.22% in 2016, while respondents’ bottom quartile managers were down 6.86%.
Manager selection has become of crucial importance in the success of a hedge fund portfolio, and investors are increasingly diverting capital to a smaller number of consistent alpha generators.
Herding hurts liquidity
Misclassified fund draws huge assets, then falters
A cautionary tale about reading the prospectus: The Catalyst Hedged Futures Strategy Fund was up 6.2% last year, head and shoulders above the average managed futures fund, which fell 2.8%. Performance like that caught investors’ eyes. The fund’s assets soared from $1.2 billion in 2015 to $2.2 billion at the end of 2016. Just one problem: It wasn’t a managed futures fund.
“It was miscategorized,” said Morningstar analyst Jason Kephart, noting that Morningstar analysts don’t cover the fund. The Catalyst fund uses put and call options on Standard & Poor’s 500 stock futures, with the aim of reducing volatility and overall correlation to the blue-chip index. Morningstar moved the fund into the options writing category Feb. 1, Mr. Kephart said. Presumably, the fund’s name had something to do with its mislabeling, since it had “futures” in it. And when the fund converted from a hedge fund to an open-end fund in September 2013, Morningstar didn’t have an options writing category, said Jerry Szilagyi, CEO of Catalyst Capital Advisers.
Article by Bruno J. Schneller, CAIA & Miranda Ademaj – Skenderbeg Alternative Investments
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