The UK And EU Hedge Fund Industries by Preqin
The $1bn Club: The Largest Investors in Hedge Funds
Following on from our feature article last month, Yoosun Chung takes an in-depth look at institutional investors in the $1bn Club allocating at least $1bn to hedge funds, including their significance, investment preferences, changes since last year and new entrants.
Following our May issue of Hedge Fund Spotlight, in which we took a closer look at the largest hedge fund managers in the industry, we examine the largest investors that are currently active in hedge funds – those with $1bn or more allocated to hedge fund investments. Collectively, this pool of investors allocates vast sums of capital to the hedge fund sector; approximately one dollar in every four invested in hedge funds today comes from the coffers of an institution with $1bn or more invested in hedge funds.
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As a result, this group of investors are of great influence within the hedge fund industry. Their investments have come under scrutiny in recent years, particularly as a result of a handful of high-profile institutions, notably starting with CalPERS in September 2014 and latterly NYCERS in 2016, deciding to cut hedge funds from their portfolios entirely. With factors such as fees, performance and ultimately the value of hedge fund investments often cited as a deciding factor in cutting hedge funds from the holdings of some of these large investors, the question that is often asked is: “is this the start of a mass exit from hedge fund investment among the largest investors in hedge funds?”
As this article will reveal, the answer, for now, is “No”. Although a small number of this group have streamlined or cut their hedge fund investments over the past year, more institutions have entered the $1bn Club for the first time in 2016 and more investors in the group have increased their allocations to hedge funds than withdrawn investment. As a result, there are more investors than ever allocating $1bn or more to hedge funds, with a combined sum of capital that is larger than ever before (Fig. 1).
The $1bn Club in 2016
There are currently 238 institutional investors that invest $1bn or more in hedge funds, a net increase of 11 investors since our last $1bn Club report in May 2015. Collectively, this group invests $763bn in hedge funds, a 4% increase from $735bn in May 2015. Over the course of the past year, 40 institutions have entered the $1bn Club, while 29 investors have fallen out of the $1bn Club after reducing or cutting their exposure to hedge funds (Fig. 2). Combined, private and public sector pension funds represent nearly half of new entrants to the $1bn Club. An example is US-based Mars Pension Fund: over the past 12 months, the private sector pension fund has increased its hedge fund allocation from 14% to 24% of total assets, increasing its total investment in hedge funds to $1.1bn.
Public pension funds account for the largest proportion (27%) of total $1bn Club capital (Fig. 3). Although over the past 12 months the decision by NYCERS to cut its $1.5bn hedge fund portfolio made the headlines, other large pension funds have been doing the opposite and increasing their exposure.
For instance, Regents of the University of California and State of Wisconsin Investment Board have both increased their hedge fund allocation by $1.2bn since our previous $1bn Club study in May 2015.
Private sector pension funds represent 16% of the $763bn committed to the hedge fund industry by the $1bn Club. As well as private sector pension funds representing the largest number of new entrants into the $1bn Club, more than half (55%) of existing private pensions have increased their exposure to hedge funds since May 2015 (Fig. 4). Among these is Boeing Company Pension Fund, which added $2.4bn to its hedge fund portfolio over the 12 months to December 2015, and Delta Airlines Pension Fund, which increased its hedge fund allocation by $1.7bn.
North America is home to the most institutions active in hedge funds today, so it is somewhat unsurprising that institutions in this region represent the greatest amount of capital invested in hedge funds by the $1bn Club (62%, Fig. 5). Europe accounts for 23% of the capital committed to the hedge fund industry by the $1bn Club, a slightincrease from 12 months ago (21%). Asia-Pacific represents 10% of $1bn Club capital, even though the number of investors in this region account for just 6% of all institutions in the $1bn Club. Capital allocated to hedge funds from all other regions is dominated by Abu Dhabi Investment Authority, with the sovereign wealth fund committing 97% of the region’s $1bn Club capital share.
$1bn Club vs. All Other Investors
The group of investors that comprise the $1bn Club has established itself over a number of years; the average $1bn Club investor made its first allocation to hedge funds in 2003. These institutions have
signifi cant resources, not only in terms of assets but also in regards to human capital. With such large allocations to hedge funds, the $1bn Club investors often employ dedicated individuals and teams focusing on hedge fund investment in order to build and oversee hedge fund portfolios. As a result of the sophistication and expertise of these investors, they are more likely to create portfolios of single funds themselves – without the need for funds of funds to do this on their behalf – compared with other types of institutional investors (Fig. 6). However, nearly half (47%) of the $1bn Club continue to use funds of hedge funds to some extent within their portfolios, in order to diversify holdings and leverage the expertise that these multi-managers may have in specific areas or sectors, such as emerging managers or emerging markets for example.
The average $1bn Club investor portfolio is diversified across 33 hedge funds; in comparison, smaller investors hold just eight hedge funds (Fig. 7). However, both groups of investors have demonstrated their commitment to the hedge fund asset class over the past 12 months: the $1bn Club’s mean allocation has increased from 15.9% of total assets in May 2015 to 16.8% as of June 2016, while the mean allocation of all other investors has increased from 14.3% to 14.8%. Investors with at least $1bn invested in hedge funds require an average track record of 3.1 years from a hedge fund, shorter than the average requirement of all other investors at 3.8 years. However, due to internal policies or decisions to avoid making outsized investments in a single fund, $1bn Club investors look to invest with larger funds; on average, they require managers have at least $846mn in AUM compared with all other investors, which require $547mn.
With just 238 investors allocating $1bn or more to hedge funds, the $1bn Club represents less than 5% of all institutions tracked by Preqin on Hedge Fund Online. Despite being small in number, they are mighty in influence: combined, the capital that this group invests represents almost a quarter of all the capital at work in hedge funds today. With this in mind, it is understandable why the actions of some high-profile institutions withdrawing capital from hedge funds may draw headlines. These investors are the cornerstone of the asset class and a potential mass exit could indicate worrying times for the industry. However, the signs in 2016 are positive: there are more members of this exclusive club than ever before and their exposure to hedge funds has grown collectively by nearly $30bn over the past 12 months. With big ticket sizes and the continued support of the hedge fund industry, the $1bn Club is likely to remain important, influential and active in the asset class for some time.
The UK And EU Hedge Fund Industries
With the terms ‘Brexit’ and ‘Bremain’ dominating the news in the UK in recent months, we take a look at recent trends in the hedge fund industries of these two regions.
Hedge fund managers based in the UK account for 69% of the AUM of the whole of Europe-based managers, with the remaining EU countries contributing a further 20%. Furthermore, as seen in Figs. 1 and 2, the UK is home to larger hedge fund managers, with the top five UK-based managers all recording total assets over $20bn, a feat not accomplished by any non-UK EU country.
The UK not only attracts a larger proportion of European assets, but a higher number of managers on the whole; 60% of all EU-based fund managers are located in London. It is unsurprising therefore that the launch activity of UK-based managers has been consistently higher than that of other EU-based firms, with more funds entering the industry from UK firms for each of the last sixteen years (Fig. 3).
In terms of fund structure, a larger proportion of UCITS funds have been launched by other EU*-based firms (Fig. 4); however, in terms of absolute numbers, more UCITS funds have been launched by UK-based managers. A much larger proportion of other EU*-based firms operate managed futures/ CTA strategies, which are equally as prevalent as long/short equity strategies among continental managers (Fig. 6).
UK and EU-Based Investors
As seen in Fig. 7, private sector pension funds account for the largest proportion of institutional investors active in the EU hedge fund industry. The greatest differences are the larger proportion of wealth managers based in the UK and the significantly larger proportion of insurance companies located in continental EU countries. Contrasting the distribution of fund manager wealth, the largest hedge fund investors are located in other EU countries (Figs. 8 and 9). Similarly, while there are more investors active in the UK hedge fund market, other EU-based investors allocate a larger amount of assets to the asset class in terms of value (Fig. 10). In keeping with the greater prevalence of the investor type in other EU countries, three of the five largest EU*-based investors are insurance companies, emphasizing their importance in the region.
The most preferred strategy of each investor group is long/short equity, with 62% and 55% of UK-and other EU-based investors indicating a preference for this strategy, respectively. The greatest difference in strategy preference is seen in exposure to distressed strategies; nearly twice as many (39) UK-based investors look to invest in distressed strategy funds than other EU-based investors (20). As expected with the larger proportion of other EU-based managers offering managed futures/CTA strategies, a larger proportion (32%) of other EU-based investors indicate a preference for this strategy compared with their UK-based counterparts (26%).
Editor’s View: Industry News
With this month’s lead article focusing on the hedge fund industry in the EU, in Editor’s View we highlight hedge fund industry activity outside Europe and take a look at recent investments and fund launches.
San Francisco Employees’ Retirement System recently hired New York-based Blackstone Alternative Asset Management to manage its maiden investment in hedge funds. The $20bn public pension fund’s $1bn hedge fund allocation will be split in half, with $500mn placed in Blackstone’s customized fund of hedge funds program and the remaining $500mn allocated through direct investments.
University of Louisville Foundation recently invested $5mn in a long/short equity hedge fund managed by Sylebra Capital Management. The fund primarily focuses on the technology, media and telecom sectors and invests primarily in Asia, but also has allocations in the US and Europe. In 2015, the foundation pulled at least $46mn from ten managers through full or partial redemptions. Sylebra Capital Management is a Hong Kong-based spin-off from global technology specialist hedge fund shop Coatue Management, co-founded by two former Coatue Management partners in 2011.
Philadelphia-based Franklin Square Capital has launched a new feeder fund in their FS Global Credit Opportunities structure. While feeders FS Global Credit Opportunities Fund – A and FS Global Credit Opportunities Fund – D are closed to investors, FS Global Credit Opportunities Fund – T launched in June 2016 is open to new investors. FS Global Credit Opportunities Fund invests in global corporate credit using a primarily event driven, high-conviction approach. The fund seeks to generate an attractive total return, consisting of a high level of current income and capital appreciation, with a secondary objective of capital preservation. Typically, the fund focuses on North America and Western Europe, and on a broad range of debt and equity securities of both public and private companies.
In June 2016, newly established EVA Capital Management launched its first hedge fund, EVA Capital Management Flagship Fund. The New York-based manager is a fundamental, value-based investment firm developed to manage long/short and long-only investment strategies. Critical to EVA Cap’s investment model is a proprietary accounting database rooted in the principals of forensic accounting and economic profit, or economic value added (EVA). EVA Capital Management Flagship Fund is a long/short equity fund that seeks to generate high risk-adjusted returns regardless of the direction or trend of equity markets. The fund employs a proprietary systematic approach to fundamental analysis, stock selection, portfolio construction and risk management. It aims to be market and industry group neutral, and for the strategy to have little to no correlation to other hedge fund products and asset classes.
Chart of the Month
The Preqin All-Strategies Hedge Fund benchmark is at 0.58% YTD (As of 30 April 2016). Where do you predict the benchmark will finish at the end of 2016?
Preqin surveyed over 270 hedge fund managers globally in June 2016 to find out more about their attitudes across a wide range of topics through fundraising in the first half of 2016, their plans for the rest of the year and their views on a variety of macro-economic factors affecting hedge funds today. Our June Chart of the Month is taken from our forthcoming H2 2016 Hedge Fund Manager Outlook, which draws on these surveys and is due out in July. Preqin asked hedge fund managers to predict, at the mid-point of 2016, where the Preqin All-Strategies Hedge Fund benchmark will end up as of December 2016. The results reveal that 45% managers predicted that the hedge fund industry would make gains of 2% or 3% in 2016 and just 6% believe it will be in excess of 5% for the year.
Currently, the Preqin All-Strategies Hedge Fund benchmark has returned 1.55% YTD (as of 31 May 2016), indicating that hedge fund managers see only limited opportunities to make further gains throughout the rest of the year, as markets react to a variety of ongoing challenges from the UK Brexit in Europe, the upcoming US presidential elections and continued concerns on China’s economy. With many investors proving disappointed with returns in 2015 and seeking improvement in 2016 (see Preqin Investor Outlook: Alternative Assets, H1 2016 for more details), if these performance predictions are proved true, the hedge fund industry may continue to see some outflows over the rest of 2016, following Q1 losses of more than $14bn. If you would like to see the full H2 Hedge Fund Manager Outlook when it is released, please register your interest here.
May 2016 saw hedge funds generate their third consecutive month of positive returns, with the Preqin All-Strategies Hedge Fund benchmark up 0.93% for the month. Event driven strategies were once again the top performers, posting a return of 1.59%, overtaking macro strategies funds to become the top performing strategy of 2016 (YTD figure of 3.01% and 2.48%, respectively). However, in the past year, relative value strategies continue to outperform all other strategies, returning 1.87%. After a difficult start to 2016, North America generated another strong month, returning 1.38% in May (following 1.81% in April), driving their 2016 YTD fi gure up to 2.40% (Fig. 1).
In contrast, May proved to be a disappointing month for CTAs, returning -0.98%. However, discretionary CTAs significantly outperformed the Preqin All-Strategies CTA benchmark and their systematic counterparts, returning 1.39% in the month compared to the 1.00% loss of systematic CTAs. This recent outperformance has driven the six month cumulative return of discretionary CTAs above that of all and systematically-traded CTAs (Fig. 2).
Preqin Special Report: CTAs
We present an extract of our recently launched Preqin Special Report: CTAs, looking at fund managers, institutional investors, performance and more.
The Preqin Special Report: CTAs, launched in June 2016, is an in-depth study on the current CTA market, providing insight into active investors in the market, CTA managers and recent performance of CTA strategies.
Since the end of Q2 2015, investors have allocated $31.8bn to CTA strategies, compared with $7.8bn that investors have withdrawn from equity strategies during the same period. This increase in capital inflow to the CTA market has been matched by an increase in the number of investors active in the sector. As seen in Fig. 1, there has been a 112% increase in the number of investors seeking exposure to CTA strategies since 2011.
While CTAs began 2016 with strong performance, significantly outperforming the hedge fund market, lower performance in recent months has seen CTA strategies drop to 0.68% as of May 2016, allowing the Preqin All-Strategies Hedge Fund benchmark, which stands at 1.55% in the same period, to overtake.
There are currently 1,197 CTAs active in the hedge fund industry today; however, with CTAs accounting for a declining proportion of industry launches in recent years (Fig. 2), 2016 could be another year of comparatively low CTA activity despite the growing investor appetite for these vehicles.
Mid-Sized Hedge Fund Managers
Following on from last month’s $1bn Club report, Janet Chambers takes a look at the group of hedge fund managers just outside the $1bn Club: the mid-sized managers that hold $500-999mn in assets under management.
In Focus: US Investors in the EU
With this month’s lead article looking at investors based in Europe, Joseph Lee looks at active investors in the European hedge fund market across the pond.
Fund Searches and Mandates
We look at the strategies and regions hedge fund investors plan to target in the next 12 months, as well as investors planning new investments.
See full PDF below.