COOConnect Editorial: Interview with Anita Nemes, global head of cap intro at Deutsche Bank
Earlier this year, Deutsche Bank unveiled its tenth annual Alternative Investment Survey (AIS). Respondents bullishly predicted that investors would allocate $140 billion to hedge funds in 2012, bringing total industry Assets under Management (AuM) to $2.26 trillion. COOConnect Editorial speaks to Anita Nemes, global head of capital introduction at Deutsche Bank, about the survey and how she sees 2012 panning out for alternatives.
COO: Investors appear bullish despite arguably poor hedge fund performance in 2011. Why is this?
Nemes: When assessing hedge fund performance, it is important to compare to other asset classes, and by and large hedge funds have performed better on a relative basis. Furthermore, hedge fund indices include several thousand hedge funds, but only a small minority of these managers control the majority of the assets. It is important not to generalise across the industry. If one looks at the bigger managers, many of them have performed extremely well. Also, while hedge funds faced a challenging third quarter of 2011, they started 2012 with one of the strongest performances on record. Institutional investors are therefore continuing to increase their commitments to hedge funds.
COO: Which investors are the biggest allocators into hedge funds, and which investors do you anticipate will express more interest in alternatives going forward?
Nemes: We anticipate that pension funds will be major allocators into hedge funds. Our 2012 survey said that 38% of trustee boards acknowledge alternatives as a viable asset class – a significant increase from 2011. Consultants, who accounted for 6% of the number of investors polled but represented 24% of AuM, are also major players. Many consultants (26%) are even creating discretionary funds of hedge fund vehicles (FoHFs) for clients to invest in, which is a very interesting development.
COO: FoHFs account for a large segment of those polled. Are fears of their demise overstated and what value add do they offer?
Nemes: FoHFs are still a very viable force, although the percentage of assets they control in the industry has declined over the last four years. A lot of FoHFs are trying to differentiate themselves from their peers, most notably by allocating into emerging or start-up hedge funds. Our survey revealed that 55% of end investors are foregoing FoHFs and simply making direct allocations into single managers; however, this has declined from 62% in 2011, indicating that the FoHF market does seem to be stabilising. Fears of FoHFs’ demise are far from true. FoHF’s still represent a significant percentage of the total investors polled and AuM in the Deutsche Bank survey.
COO: Investors are putting a lot of pressure on fees. Is this unfair given the increasing costs being faced by managers?
Nemes: The survey highlighted that 51% of investors had negotiated their fees in 2011, remaining relatively unchanged from last year’s findings. Day one or early stage investing was the most persuasive argument for fee concessions, with nearly one-fifth of investors citing this as the main reason for their fee negotiations. Furthermore, if a hedge fund has a strong beta element to it, consultants and pension funds will again request fee concessions from the standard 2 and 20. This contrasts with our findings from 10 years ago, when fees did not even register on the agenda.
COO: Another issue is the waves of consolidations among hedge funds and FoHFs, why are we seeing this trend?
Nemes: There are several thousand hedge funds in the market, yet approximately 350 hedge funds control 90% of the AuM,. Further consolidation should therefore be expected. The survey highlighted that 44% of investors currently allocate to managers with more than $1 billion AuM, while a third intend to invest in managers of $1 billion or more over the coming year. Nevertheless, 65% said they would consider managers with AUM under $1 billion. Nowadays, gaining investor capital with less than $100 million can be challenging. While new funds will certainly continue to launch on their own, I anticipate that there will be many who launch on platforms of established hedge funds looking to expand.
COO: Managed accounts appear to be quite popular, according to the survey – has the uptake of managed accounts been exaggerated?
Nemes: The increased usage of managed accounts is a reality because investors are increasingly looking for the benefits that they can provide. 42% of those surveyed use managed accounts, and that number has been growing since 2006. They have been an institutional phenomenon since 2008, as more and more insurance companies and pension funds have sought to achieve greater transparency, better liquidity, stronger risk management, enhanced corporate governance and ownership of assets through the use of managed accounts.