hedge funds: trends and insight from the industry and investors

Managed Funds Association May 2014

HEDGE FUNDS: TRENDS AND INSIGHT FROM THE

INDUSTRY AND INVESTORS

Managed Funds Association

Executive Summary

• The hedge fund industry has grown tremendously in the last decade

from $625 billion in assets under management in 2002 to an industry-

record high of $2.7 trillion in the first quarter of 2014.

• This growth has been fueled by investors seeking ways to diversify

their portfolios, manage risk, and deliver reliable returns over time.

• Institutional investors, in particular, have had a profound impact on the

industry and institutional capital accounts for 66% of global hedge fund

assets.*

• This presentation gives an overview of the hedge fund industry,

providing insight on investment trends and topics.

• Data included in this presentation comes from Deutsche Bank’s

Twelfth Annual Alternative Investment Survey, the 2014 Credit Suisse

Global Survey of Hedge Fund Investor Appetite and Activity, Hedge

Fund Research Global Hedge Fund Industry Report, and the 2014

Preqin Global Hedge Fund Report, as referenced in the document.

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Contents

Industry Growth 3

Growing Popularity 4

2013 – A Year of Growth 5

Who Invests? 6

Why Invest 9

Institutional Trends 10

2014 and Beyond 15

Investment Strategies 18

*Source: 2014 Preqin Global Hedge Fund Report

Industry Growth

Growth of the Hedge Fund Industry:

• Hedge fund assets have more than tripled since 2002, driven primarily by increased allocations from

institutional investors such as:

– Public and corporate pensions

– University and College Endowments

– Philanthropic Foundations and Charities

• Cash that has been previously redeemed and will be recycled back into the industry is another

important source of assets.*

• Institutional investors currently represent 66% of assets invested in the global hedge fund industry.

• The industry is expected to reach an all time high of $3 trillion by the end of 2014, based on

investor’s performance and net inflow predictions.*

3

*Source: 2014 Deutsche Bank Alternative Investment Survey

Investors Favor Hedge Funds:

• Investors are increasingly favoring hedge fund allocations over other investment types.

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Source: 2014 Deutsche Bank Alternative Investment Survey

Hedge Funds Growing in Popularity

• According to a recent survey,

nearly half of investors grew their

hedge fund assets under

management (AUM) in 2013.*

• 47% of responding investors

increased their allocations to

hedge funds in 2013, including

52% of pension funds.

• Among the institutions with the

largest increases in hedge fund

allocation were:

– Pension Funds (private and

public)

– Endowments and foundations

– Family offices

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2013 – A Year of Growth

Investor Statistics:

• Research firm Preqin released a study recently

mapping out the hedge fund investor universe,

key findings include:

• Endowments make up 12% of hedge fund

investors.

• Public pension funds represent more than 9% of

all investors, with a mean allocation of 7.5% to

hedge funds.

• Corporate pension funds also represent 15% of

hedge fund investors, with a mean allocation of

nearly 10%.

• Foundations represent one of many groups

increasing their hedge fund investments, with

mean allocations increasing from 15.6% in 2011

to 17.5% in 2013.

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Source: 2014 Preqin Global Hedge Fund Report

Breakdown of Hedge Fund Investor

Universe By Investor Type

Who Invests in Hedge Funds?

Endowments and Foundations:

College and university endowments and philanthropic foundations play a vital role in expanding educational

opportunity and enriching the quality of life in our communities. In 2014, 46% of endowments and foundations

expect to increase their allocation to hedge funds to help meet their financial needs. These investments help

provide scholarships, fund critical research, and enable economic development, health and education-related

grants in cities and towns across the U.S.

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Pension funds (Public and Private):

Hedge funds also help provide retirement security for millions of hardworking American families through

investments held by pension plans. In 2014, 60% of public and private pensions plan to strengthen their

partnership with hedge funds by increasing their portfolio allocations. A number of plans also look to

make initial investments with hedge funds to help diversify their portfolio and provide reliable returns over

time.

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Why Invest in Hedge Funds?

• Investors partner with

hedge funds to deliver:*

– Risk-adjusted returns

– Diversification

– Low correlation with other

investment types

– Low volatility

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• According to the Deutsche Bank

survey, two-thirds of institutional

investors responding to the survey only

invest directly with single-manager

hedge funds.

• This trend underscores the increased

sophistication and due-diligence

undertaken by institutions in their

decision making process.

• Two-thirds of investors routinely take

between three to six months to

complete due diligence on an

investment manager – only a third did

so in 2002.

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Industry Trends –

Direct Investment


Institutional Trends –

Dedicated Hedge Fund Teams

Institutional Trends: Dedicated Hedge Fund Teams

Institutional investors are strengthening their ability to perform due diligence and research potential managers

for hedge fund allocations. In recent years, institutions have grown the size of their dedicated hedge fund

allocation teams.

• Eighty-seven percent of respondents grew or maintained the size of their hedge fund due diligence

teams in 2013.

• Pension plan respondents noted significant growth in this area, with 66% of those surveyed growing their

teams in 2013.

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Meeting Expectations

Investors partner with hedge funds to help diversify portfolios, manage risk, and produce reliable returns.

• During the investment cycle of 2013, 7 out of 13 hedge fund investment strategies either met or

exceeded investors expectations from a year earlier.

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Investors expect hedge funds to continue to perform well in 2014, with Credit Suisse’s survey showing that

investors believe in hedge funds’ ability to produce absolute returns.

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Source: 2014 Credit Suisse Global Survey of Hedge Fund Investor Appetite and Activity


Meeting Expectations

• Hedge fund managers often invest

their own money alongside that of

other investors, forming a partnership

with a shared interest in success.

• Communication is a critical component

of a successful investor/manager

relationship.

• Nearly 70% of investors say they did

not reject a hedge fund based on a

lack of transparency in 2013, an

increase of 21% from 2012.

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Transparency

2014 and Beyond

Confidence in Growth

Investors believe capital inflows in 2014, along with performance gains, will push the industry to an all-time

record of $3 trillion in assets under management.

15


2014 and Beyond

Confidence in Growth

Ninety-two percent of hedge fund investors plan to increase or maintain their current allocations to hedge

funds in 2014.

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Steady Growth in 2014:

• Fifty-seven percent of institutional

investors plan to increase their

allocations to hedge funds in 2014.

• Deutsche Bank expects $11 billion of

new direct institutional flows into the

hedge fund industry in 2014: $8.1

billion from pension funds, $2.1 billion

from insurance companies, and $800

million from endowments/foundations.

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2014 and Beyond

Investor Insight:

• Investors identified the following

hedge fund strategies as the most

promising for 2014:

– Equity Long/Short

– Event Driven

– Equity Market Neutral

– Global Macro

– Emerging Markets

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2014 Investment Strategies

For more information contact:

Steve Hinkson

[email protected]

202-730-2600

www.managedfunds.org

Follow us on Twitter: @MFAUpdates

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