Consolidation in alternatives inevitable in 2012, says Deutsche Bank's head of cap intro
Consolidation among hedge funds and funds of hedge funds (FoHFs) will continue throughout 2012, according to the global head of cap intro at Deutsche Bank.
“It is a very fragmented market and we expect a strong trend towards consolidation. There are over 7,000 hedge funds in the market yet 90% of the Assets under Management (AuM) are controlled by around 350 hedge funds,” said Anita Nemes, of Deutsche Bank.
According to Deutsche Bank’s latest Alternative Investment Survey, investors marked manager consolidation as the second most likely industry trend after regulation in 2012. This should not come as a shock. Markets over 2011 were incredibly volatile prompting a flight of institutional capital into the largest funds.
The survey highlighted 44% of investors allocate to managers with more than $1 billion AuM while a third intend to invest in $1 billion plus managers over the coming year. Nevertheless, 65% said they would consider a sub $1 billion fund. “Nowadays, it is very difficult to gain investor capital with less than $100 million. Alongside new funds launching on their own, I anticipate a lot of funds will launch on platforms within established hedge funds which are looking to expand,” commented Nemes.
FoHFs are also going to have to evolve as they face growing pressure from investment consultants for pension fund capital. “This sector of the industry will have to consolidate too. It is an incredibly disparate industry but there is still room for those offering differentiated products, either by focusing on emerging managers, specific markets or niche products. Comments about the demise of FoHFs are overstated. A lot of new entrants into alternatives are utilising the skill-sets of FoHFs to make their first foray into hedge fund investments or using them for niche areas,” said Nemes.
FoHFs accounted for two thirds of investors polled by Deutsche Bank and 70% of those surveyed by Citi in its own hedge fund survey illustrating they are still a major source of capital for managers.
Nevertheless, last year saw a wave of consolidations in the FoHF space including New York-based Arden Asset Management’s acquisition of Robeco Group’s $1.3 billion FoHF business which brought Arden’s AuM to $8.5 billion. In May 2011, the London and Paris-based firm Nexar Capital purchased the $1 billion FoHF Ermitage. This trend looks likely to continue. Credit Suisse’s 2012 hedge survey revealed 43% of FoHFs said they are looking to be acquired – a massive jump from 23% in 2011.