Investors remain confident on emerging managers, says J.P. Morgan survey
Nearly three quarters of investors are willing to put capital into sub-$100 million hedge funds, according to a survey by J.P. Morgan’s Capital Introductions Group (CIG).
Funds of hedge funds (FoHFs), family offices and registered investment advisors were the most enthusiastic advocators of nourishing emerging talent and start-ups. Nevertheless, 68% of respondents said they would not seed managers – a figure roughly on par with 2011.
Pension funds (67%) and insurance companies (57%) acknowledged they only look at managers with a minimum of $250 million Assets under Management (AuM) although this conservatism is largely in part down to binding concentration and risk limits which these institutions are required to abide by.
Some 70% of those polled said they would consider an investment in a start-up manager, a figure that has remained relatively consistent since 2010. However, there was a noticeable increase in respondents considering start-up managers on a regular basis. Again, FoHFs, family offices and private banks had the biggest appetite for such managers.
There are countless empirical research papers arguing emerging managers outperform their more established peers in terms of performance. According to the Neuberger Berman 2011 strategy outlook report, emerging managers’ annualised returns stand at approximately 9.49% compared with 7.61% for their experienced counterparts.
Nevertheless, capital raising has proved incredibly tough for these budding entrepreneurs as institutional investors increasingly allocate to sizeable, brand-name hedge funds. A recent survey by Citi Prime Finance highlights just $5.6 billion flowed into 352 start-up hedge funds in 2011, a number described as “telling” by Chris Greer, Citi’s global head of capital introductions.
“Manager pedigree” was identified as the most important evaluation criteria for investing into a hedge fund start-up by J.P. Morgan’s respondents. Interestingly, two thirds will consider a manager with a track record of less than one year. However, endowments, pension funds, foundations and insurance companies expect at least three years track record before contemplating an investment.
Institutional investors are also exerting pressure on the traditional 2% management and 20% performance fees. The survey revealed 42% of investors negotiated the management fee, while 26% reduced the performance fee last year. The majority of respondents, said J.P. Morgan, paid an average management fee of between 1.50% and 1.99%.
Almost all (93%) of investors intend to maintain or increase the capital they allocate to hedge funds more broadly. In 2011, 75% of investors increased their exposures to at least one hedge fund strategy. Macro (45%) saw the most new investment despite being flat at best for most of 2011. A further 23% of investors said they will put more capital into macro throughout 2012. CTAs and managed futures (32%) were also popular given their historical track record of delivering uncorrelated returns.
However, two thirds of investors reduced their exposures to at least one strategy with fundamental long/short equity (39%) being the biggest loser, followed by distressed credit (21%) and event driven (19%). This should not come as a shock given equity long/short hedge funds posted declines of 8% in 2011, according to Hedge Fund Research - although they have performed well so far in 2012 with Year-to-Date (YTD) gains of more than 7%. Fundamental long/short equity also remains the most popular hedge fund strategy with 83% of respondents invested in it, followed by event driven (78%).
2012 was a poor year for hedge funds with the HFRI Fund Weighted Composite Index dropping almost 5%, making it the third calendar year decline for the industry since 1990 albeit the second in four years. Fixed income relative value was the only strategy area which enjoyed positive performance throughout 2011 gaining 0.55%. Given these substandard performances, just 60% of investors told J.P. Morgan their hedge funds had reached their high-water marks in 2011 compared with 80% in 2010.
While there were also demands for increased transparency and liquidity, this did not translate into a surge of interest in either managed accounts or Ucits. Just one third invest into managed accounts, revealed J.P. Morgan. According to Deutsche Bank’s recent Alternative Investment Survey, 42% of investors used managed accounts – a figure that has been growing since 2006 and a trend which Deutsche Bank’s cap intro head Anita Nemes believes will continue.
Ucits vehicles experienced very marginal inflows with 23% of respondents invested in the onshore product – a slight increase from 19% in 2010. The J.P. Morgan survey anticipates 26% will put capital into Ucits by 2012. Predictably, the majority of these investors are in Europe (56%), followed by Asia (20%) and North America (10%). However, there appears to be an increased appetite for Ucits in Asia with 31% expecting to invest in a Ucits product by 2012. Whether or not AIFMD leads to greater interest in such vehicles is yet to be seen.
Investors also predict increased regulation (78%), enhanced transparency (62%) and consolidation (61%) will be the key trends for 2012.