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.



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