state of the industry
feature state of the industry survey
1
What do you expect the aver age net of fees return for hedge funds to be by the end of 2011? With most industry indices struggling to stay in positive territory YTD, and June looking unlikely to reverse the recent downward trend, lofty predictions for year-end returns have, by and large, been checked. While around a quarter of those polled plumped for above 10%, the majority remained cautiously optimistic, with half of respondents voting for 5-10%.
Negative returns 0% - 5%
24.3%
5% - 10%
50%
10% - 15% Over 15%
STATE OF THES UINDUSTRY R V E Y
2.9%
21.4%
1.4%
It’s half-time in the procession to year-end and, with a notable amount of drama already behind us, as good a time as any to reintroduce HFMWeek’s State of the Industry readers’ survey. Compiling the thoughts of 70 industry professionals, from managers and investors to service providers and commentators, the next four pages offers a wealth of predictions from the people best-placed to make them By tony griffiths
2
WHAT WILL The topperforming hedge fund str ategy of 2011 be? While not quite the draw it once was, emerging markets is clearly still striking a chord, topping HFMWeek’s latest strategy poll with 18.6% of the vote. There was little to split the five next most popular strategies: distressed, long/short equity and macro, each with 14.3%, followed by CTA and the strategy du jour – event driven. Only 1.4% voted for merger arbitrage.
16 h f m w e e k . co m
Emerging markets
18.6%
Distressed credit
14.3%
Long/short equity
14.3%
Macro
14.3%
Commodity/CTA
12.9%
Event driven
12.9%
Fixed income arbitrage
7.1%
Relative value
2.9%
Convertible arbitrage
1.4%
Merger arbitrage
1.4%
14 -20 j u l 201 1
38.6% 32.9%
This was a two horse race. Clearly considering May’s crash a blip, pollsters voted commodities as the likely best-performing asset class for 2011 (38.6%), followed closely by equities (32.9%). The remaining three – cash, bonds and real estate – gained little traction, finishing with 12.9%, 10% and 5.7% respectively.
12.9%
Demands for significantly greater position transparency and reporting
72.9%
Insistence on third-party administrators
72.9%
Insistence on well-known and established auditors/admins and prime brokers Better standards of corporate governance – hedge fund boards etc
70%
44.3%
Pressure on hedge fund and fund of hedge funds fees
34.3%
Insistence on multiple prime brokerage relationships
32.9%
Greater interest in a fund’s use of expert networks
Below $3.2trn
14 -2 0 j u l 2 01 1
Between $3.2trn and $3.5trn
Re al es ta te
20%
As of April , total hedge fund assets were estimated at $3.2trn. At the end of Q4 2011 industry assets will be: 4.3%
nd s
40%
Greater interest in background checks on portfolio managers and hedge fund staff
5
5.7%
Invited to choose as many options as they liked, respondents to the investor due diligence question spread their answers broadly. However, three demands stood out: transparency (72.9%), third-party administrators (72.9%) and well-known service providers (70%). Only ‘a greater interest in expert networks’ failed to gain significant support (20%).
Which due diligence areas are investors currently most interested in?
4
Bo
Ca s
h
es it i
Co m
m
od i
t ie s
10%
Eq u
3
In long-only terms, WHAT WILL THE topperforming asset cl ass in 2011 BE?
55.7%
Above $3.5trn
40%
The thawing investment environment has not been lost on the survey’s respondents, with the vast majority (95.7%) expecting an increase in industry assets at year-end. Using HFMWeek’s AuA survey total of $3.2trn, most (55.7%) think the year-end total will fall between $3.2trn and $3.5trn, but, encouragingly, 40% expect more than $3.5trn.
h f m w e e k . c o m 17
feature state of the industry survey According to HFR , there were 935 new l aunches in 2010. How many will there be in 2011?
6
8
What trends do you expect to drive the hedge fund industry over the rest of 2011?
A growing number of larger launches
12.9%
Continued demand for managed accounts
38.6%
37.1%
30%
A wave of Ucits launches
25.7%
00 13
More merger activity between hedge funds and service providers
24.3%
Calls for increasing regulation of the industry
48.6%
Greater investment in hedge fund replicator products
11.4%
The convergence of the hedge fund and long-only worlds
41.2%
Ab ov e
0 30 -1 00 11
90
0-
Be lo w
11
90
00
0
7.1%
Another question allowing for multiple options, current trends threw out a clear winner. No surprises here – almost 50% of respondents opted for regulation. The continuing convergence of the long-only and hedge-fund worlds (40%) was also popular, as was managed accounts (38.9%). Replica products and, perhaps surprisingly, launches propped up the list.
Launch activity has gone from strength-to-strength in recent quarters, so it’s little surprise to see the majority of respondents expecting an increase on last year’s total of 935 start-ups. In fact, almost a third (32.8%) expect a bumper crop of over 1100. However, recent news of liquidations has tempered expectations somewhat, with 30% voting for less than 900.
7
In terms of recruitment, which area is likely to see the most activity over the next six months?
9 20%
25.7%
m P an o ag rtf em oli en o t pr Ope of ra es ti sio on na al ls leg Co m al p pr lia of n es ce sio an na d ls
m Sale ar s ke an tin d g
Ucits funds from US managers Ucits funds from European managers
4.3%
Ucits funds from Asian managers Offshore funds from US managers
30%
Offshore funds from European manager
4.3%
Offshore funds from Asian managers
25.7%
14.3%
There seems to be little doubting where the recruitment drive is going to focus during the rest of the year – over 55% of respondents expect compliance and legal professionals to form the majority of new recruits. Sales and marketing and operations followed, while only 4.3% said they thought portfolio managers would lead the way. 18 h f m w e e k . co m
Which t ype of hedge fund will see the biggest rise in l aunches in 2011?
15.7%
55.7%
4.3%
30%
The ‘onshore versus offshore’ debate continues to rage. While some firms remain cautious about offshore’s long-term future during the regulatory uncertainty, HFMWeek’s respondents are clearly convinced by its short-term viability. In terms of launches this year, 30% expect offshore vehicles with US managers to lead the way, followed by offshore Asian managers.
14 -20 j u l 201 1
Which investors are likely to account for the majority of inflows in 2011?
10 42.9%
21.4%
18.6%
11.4%
2.9%
2.9%
0%
11
Public pension funds
High-net-worth individuals and private bank platforms
Private pension funds The margin of victory may be surprising but few will be shocked to see public pension funds top predictions for the year’s biggest investor. The more interesting nugget can be found at the other end of the spectrum. Not a single respondent voted for funds of hedge funds –not a devastating blow, but further proof that there remains work for the sector to do.
Sovereign wealth funds
Endowments/foundations
Insurance companies
Funds of hedge funds
Where will the bulk of 2011’s investment come from?
57.1%
15.7%
5.7%
21.4 %
US
Europe
Mena
Asia
As HFMWeek has learned via recent meetings with the industry’s capital introduction teams, the US is where the majority of the investment action is happening. Unsurprisingly, survey respondents have had similar experiences, voting the country’s investors most likely to account for the majority of the year’s inflows. Cautious Europeans, meanwhile, trailed Asia. 14 -2 0 j u l 2 01 1
12
What are the biggest challenges facing hedge fund managers over the next six months?
The demands of incoming regulation
41.4%
Market volatility
27.1%
Attracting fresh capital
24.3%
Meeting high watermarks
4.3%
New standards of corporate governance
2.9%
Rising inflation
0%
As with opinion over industry trends, the theme of regulation dominates expectations for the challenges ahead, picking up over 40% of the vote. Market volatility is still a worry, placing second on 27.1%, followed by that perennial challenge – attracting investment. Clearly considered a misnomer, rising inflation failed to attract a single vote. h f m w e e k . c o m 19
1
What do you expect the aver age net of fees return for hedge funds to be by the end of 2011? With most industry indices struggling to stay in positive territory YTD, and June looking unlikely to reverse the recent downward trend, lofty predictions for year-end returns have, by and large, been checked. While around a quarter of those polled plumped for above 10%, the majority remained cautiously optimistic, with half of respondents voting for 5-10%.
Negative returns 0% - 5%
24.3%
5% - 10%
50%
10% - 15% Over 15%
STATE OF THES UINDUSTRY R V E Y
2.9%
21.4%
1.4%
It’s half-time in the procession to year-end and, with a notable amount of drama already behind us, as good a time as any to reintroduce HFMWeek’s State of the Industry readers’ survey. Compiling the thoughts of 70 industry professionals, from managers and investors to service providers and commentators, the next four pages offers a wealth of predictions from the people best-placed to make them By tony griffiths
2
WHAT WILL The topperforming hedge fund str ategy of 2011 be? While not quite the draw it once was, emerging markets is clearly still striking a chord, topping HFMWeek’s latest strategy poll with 18.6% of the vote. There was little to split the five next most popular strategies: distressed, long/short equity and macro, each with 14.3%, followed by CTA and the strategy du jour – event driven. Only 1.4% voted for merger arbitrage.
16 h f m w e e k . co m
Emerging markets
18.6%
Distressed credit
14.3%
Long/short equity
14.3%
Macro
14.3%
Commodity/CTA
12.9%
Event driven
12.9%
Fixed income arbitrage
7.1%
Relative value
2.9%
Convertible arbitrage
1.4%
Merger arbitrage
1.4%
14 -20 j u l 201 1
38.6% 32.9%
This was a two horse race. Clearly considering May’s crash a blip, pollsters voted commodities as the likely best-performing asset class for 2011 (38.6%), followed closely by equities (32.9%). The remaining three – cash, bonds and real estate – gained little traction, finishing with 12.9%, 10% and 5.7% respectively.
12.9%
Demands for significantly greater position transparency and reporting
72.9%
Insistence on third-party administrators
72.9%
Insistence on well-known and established auditors/admins and prime brokers Better standards of corporate governance – hedge fund boards etc
70%
44.3%
Pressure on hedge fund and fund of hedge funds fees
34.3%
Insistence on multiple prime brokerage relationships
32.9%
Greater interest in a fund’s use of expert networks
Below $3.2trn
14 -2 0 j u l 2 01 1
Between $3.2trn and $3.5trn
Re al es ta te
20%
As of April , total hedge fund assets were estimated at $3.2trn. At the end of Q4 2011 industry assets will be: 4.3%
nd s
40%
Greater interest in background checks on portfolio managers and hedge fund staff
5
5.7%
Invited to choose as many options as they liked, respondents to the investor due diligence question spread their answers broadly. However, three demands stood out: transparency (72.9%), third-party administrators (72.9%) and well-known service providers (70%). Only ‘a greater interest in expert networks’ failed to gain significant support (20%).
Which due diligence areas are investors currently most interested in?
4
Bo
Ca s
h
es it i
Co m
m
od i
t ie s
10%
Eq u
3
In long-only terms, WHAT WILL THE topperforming asset cl ass in 2011 BE?
55.7%
Above $3.5trn
40%
The thawing investment environment has not been lost on the survey’s respondents, with the vast majority (95.7%) expecting an increase in industry assets at year-end. Using HFMWeek’s AuA survey total of $3.2trn, most (55.7%) think the year-end total will fall between $3.2trn and $3.5trn, but, encouragingly, 40% expect more than $3.5trn.
h f m w e e k . c o m 17
feature state of the industry survey According to HFR , there were 935 new l aunches in 2010. How many will there be in 2011?
6
8
What trends do you expect to drive the hedge fund industry over the rest of 2011?
A growing number of larger launches
12.9%
Continued demand for managed accounts
38.6%
37.1%
30%
A wave of Ucits launches
25.7%
00 13
More merger activity between hedge funds and service providers
24.3%
Calls for increasing regulation of the industry
48.6%
Greater investment in hedge fund replicator products
11.4%
The convergence of the hedge fund and long-only worlds
41.2%
Ab ov e
0 30 -1 00 11
90
0-
Be lo w
11
90
00
0
7.1%
Another question allowing for multiple options, current trends threw out a clear winner. No surprises here – almost 50% of respondents opted for regulation. The continuing convergence of the long-only and hedge-fund worlds (40%) was also popular, as was managed accounts (38.9%). Replica products and, perhaps surprisingly, launches propped up the list.
Launch activity has gone from strength-to-strength in recent quarters, so it’s little surprise to see the majority of respondents expecting an increase on last year’s total of 935 start-ups. In fact, almost a third (32.8%) expect a bumper crop of over 1100. However, recent news of liquidations has tempered expectations somewhat, with 30% voting for less than 900.
7
In terms of recruitment, which area is likely to see the most activity over the next six months?
9 20%
25.7%
m P an o ag rtf em oli en o t pr Ope of ra es ti sio on na al ls leg Co m al p pr lia of n es ce sio an na d ls
m Sale ar s ke an tin d g
Ucits funds from US managers Ucits funds from European managers
4.3%
Ucits funds from Asian managers Offshore funds from US managers
30%
Offshore funds from European manager
4.3%
Offshore funds from Asian managers
25.7%
14.3%
There seems to be little doubting where the recruitment drive is going to focus during the rest of the year – over 55% of respondents expect compliance and legal professionals to form the majority of new recruits. Sales and marketing and operations followed, while only 4.3% said they thought portfolio managers would lead the way. 18 h f m w e e k . co m
Which t ype of hedge fund will see the biggest rise in l aunches in 2011?
15.7%
55.7%
4.3%
30%
The ‘onshore versus offshore’ debate continues to rage. While some firms remain cautious about offshore’s long-term future during the regulatory uncertainty, HFMWeek’s respondents are clearly convinced by its short-term viability. In terms of launches this year, 30% expect offshore vehicles with US managers to lead the way, followed by offshore Asian managers.
14 -20 j u l 201 1
Which investors are likely to account for the majority of inflows in 2011?
10 42.9%
21.4%
18.6%
11.4%
2.9%
2.9%
0%
11
Public pension funds
High-net-worth individuals and private bank platforms
Private pension funds The margin of victory may be surprising but few will be shocked to see public pension funds top predictions for the year’s biggest investor. The more interesting nugget can be found at the other end of the spectrum. Not a single respondent voted for funds of hedge funds –not a devastating blow, but further proof that there remains work for the sector to do.
Sovereign wealth funds
Endowments/foundations
Insurance companies
Funds of hedge funds
Where will the bulk of 2011’s investment come from?
57.1%
15.7%
5.7%
21.4 %
US
Europe
Mena
Asia
As HFMWeek has learned via recent meetings with the industry’s capital introduction teams, the US is where the majority of the investment action is happening. Unsurprisingly, survey respondents have had similar experiences, voting the country’s investors most likely to account for the majority of the year’s inflows. Cautious Europeans, meanwhile, trailed Asia. 14 -2 0 j u l 2 01 1
12
What are the biggest challenges facing hedge fund managers over the next six months?
The demands of incoming regulation
41.4%
Market volatility
27.1%
Attracting fresh capital
24.3%
Meeting high watermarks
4.3%
New standards of corporate governance
2.9%
Rising inflation
0%
As with opinion over industry trends, the theme of regulation dominates expectations for the challenges ahead, picking up over 40% of the vote. Market volatility is still a worry, placing second on 27.1%, followed by that perennial challenge – attracting investment. Clearly considered a misnomer, rising inflation failed to attract a single vote. h f m w e e k . c o m 19
