Gauging Institutional Interests and the Role of Regulated Investment Funds in a Post Crisis World
Dominique Grandchamp Senior Investment Consultant, Mercer
Dominique Grandchamp: Gauging Institutional Interests and the Role of Regulated Investment Funds in a Post Crisis World
1. 04 October 2011
Gauging Institutional Interest and the Role of
Regulated Investment Funds in a Post Crisis World
Dominique Grandchamp, CFA
Senior Investment Consultant
Mercer (Switzerland) SA
dominique.grandchamp@mercer.com
+41 22 918 10 15 www.mercer.com
2. Agenda
1) The Past - Hedge Funds in a Less Regulated World
2) The Present - Where is the Performance?
3) The Future - How to invest in Hedge Funds?
4) Ucits Hedge Funds Growth
5) Conclusions
Mercer 1
3. The Past - Hedge Funds in a Less Regulated World
What Hedge Funds Have to Do Better….
Black boxes (lack of transparency)
Operational and investment risks
– Counterparty
– Concentration
– Leverage
Valuation independence
Liquidity mismatch
Remoteness and lack of regulation of offshore domiciles
Limited asset control and weak corporate governance
Stronger correlation with markets than advertised and expected
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4. Agenda
1) The Past - Hedge Funds in a Less Regulated World
2) The Present - Where is the Performance?
3) The Future - How to invest in Hedge Funds?
4) Ucits Hedge Funds Growth
5) Conclusions
Mercer 3
5. The Present – Where is the Performance?
Example: Switzerland’s Pension Fund System
Commodities, HFs, PE Cash
8% 7%
Real Estate 20%
Bonds
35%
30%
Equities
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6. The Present – Where is the Performance?
Example: Performance last 10 years
Cash 1%
Bonds 4%
Liabilities
Equities 0%
Real Estate 5% 3.5%
Alternatives 3%
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7. The Present – Where is the Performance?
Example: Low Yield on Bonds
SBI AAA-BBB Global Agg Global Agg Corp Global EM
14
13
12
11
10
9
8
YTM (%)
7
6
5.67
5
4
3.79
3
2.43
2
1
1.50
0
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
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8. The Present – Where is the Performance?
Challenges ahead…
Yield on bonds < Liability growth
Uncertain performance of equities coupled with high volatility
Look at more defensive, absolute return strategies
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9. Agenda
1) The Past - Hedge Funds in a Less Regulated World
2) The Present – Where is the Performance?
3) The Future – How to Invest in Hedge Funds?
4) Ucits Hedge Funds Growth
5) Conclusions
Mercer 8
10. The Future – How to invest in Hedge Funds?
Take into account Investor Expectations Post-2008
Liquidity
Transparency
Regulatory Oversight + Onshore Domiciles
Asset Control + Security
Tax Efficiency
Performance and preference for low volatility (defensiveness)
Mercer 9
11. The Future – How to invest in Hedge Funds?
Hedge Funds increase Defensiveness
Embed defensiveness in the equity bucket…
Performance
Drivers
Indexed
Broad
Defensive
Low
market
Equities
strategies Small
Small Emerging
Emerging
Strategies
Volatility
Cap
Cap Markets
Markets
… so as to reduce the overall risk
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13. The Future – How to invest in Hedge Funds?
Hedge Funds increase Defensiveness
Indexed Active
Strategies Managers
Heuristic
(Fundamental Indexing) Quality Strategies
Defensive
Strategies
Optimized Absolute Return
(Minimum Volatility) Variable Bias
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14. The Future – How to invest in Hedge Funds?
Hedge Funds increase Defensiveness
CTAs
Global Macro
Relative Value
Long/Short Equity
Equities
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15. The Future – How to invest in Hedge Funds?
Old and New Access Points
Long-only Offshore Hedge
Funds Funds + FoFs
1 2
Onshore Hedge
Indices+ 6 3 Funds
Replication
(SIFs)
5 4 Mandates+
Ucits
Managed Account
Hedge
Platforms
Funds
Mercer 14
16. The Future – How to invest in Hedge Funds?
The Great Convergence
Trend towards absolute return
Trend towards “onshorisation”
Increasingly benchmark-agnostic
Preference for liquidity and transparency
Mandates
Managed Onshore HFs
Long-only Ucits III Onshore HFs Offshore HFs
Accounts
+ Macs (XIFs)
Liquidity High High High Medium Low
Transparency Medium Medium High Medium Medium
Asset Control Medium Medium High Low Low
Tax Efficiency High High Low Medium Low
Low Beta Low Medium High High High
Regulatory oversight High High Low High Low
Benchmark awareness High Medium Low Low Low
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17. The Future – How to invest in Hedge Funds?
Which Access Point for Whom?
Family
Office
Banks
Insurance
Pension
Plans
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18. The Future – How to invest in Hedge Funds?
Which Access Point for Whom?
Onshore, Ucits III Offshore HFs
Family Office
☺
Banks
☺
Insurance
☺
Pension Plans F,D,I,S,P
☺
Pension Plans CH, UK,
Holland, Nordics ☺
Mercer 17
19. The Future – How to invest in Hedge Funds?
UCITS Drivers…
Factors which will drive the further development of Ucits Hedge Funds:
Wealth Management / Retail Distribution
– Regulatory pressure
– Search for tax efficiency
– Distribution efficiency (Ucits IV)
– Investor preference for liquidity
Institutional Investors
– Regulation in some EU jurisdictions
– Growing acceptance from early adopters
– Search for yield, absolute return, defensiveness in liquid+regulated format
– Size of investable universe (length of track record and AuM)
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20. The Future – How to invest in Hedge Funds?
EU goes UCITS….
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21. The Future – How to invest in Hedge Funds?
Who does not love UCITS???
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22. The Future – How to invest in Hedge Funds?
Who loves UCITS???
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23. Agenda
1) The Past - Hedge Funds in a Less Regulated World
2) The Present – Where is the Performance?
3) The Future – How to invest in Hedge Funds?
4) Ucits Hedge Funds Growth
5) Conclusions
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24. Ucits Hedge Funds Growth
750+ Ucits Hedge Funds Up and Running
# Funds # New Launches
Source: Absolute Return
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26. Ucits Hedge Funds Growth
Length of Track Record
Length of track record (years)
Long (>5y) 15%
Medium (2-5y) 30%
Short (< 2y) 55%
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27. Ucits Hedge Funds Growth
Fund AuM (EUR)
> 200 MM
20%
< 50 MM
50%
50-200 MM
30%
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28. Ucits Hedge Funds Growth
Risks
Performance expectations of investors (less leverage + illiquidity)
Higher beta rather than alpha generation
High barriers to entry for entrepreneurial ventures
Counterparty risks and hidden fees (total return swaps)
Corporate governance issues remain (related parties + directors)
Regulatory oversight (NOT regulatory protection)
Lower due diligence standards applied by investors
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29. Agenda
1) The Past - Hedge Funds in a Less Regulated World
2) The Present – Where is the Performance?
3) The Future – How to invest in Hedge Funds?
4) Ucits Hedge Funds Growth
5) Conclusions
Mercer 28
30. Conclusions
Ucits and onshore Hedge Funds will continue to grow
Traditional Hedge Funds remain to capture illiquidity premium
Lower performance than in the past, defensiveness is welcome
Fund of Hedge Funds model challenged and struggling
Convergence with long-only products
Institutional interest is taking off in selected jurisdictions
Stick to a robust due diligence process
Mercer 29