Sat, Jul 2, 2016
A A A
Welcome Guest
Free Trial RSS
Get FREE trial access to our award winning publications
Industry Updates

Agecroft Partners largely upbeat on hedge fund industry trends for 2012

Tuesday, January 03, 2012
Opalesque Industry Update – American consultancy Agecroft Partners has published its predictions for the coming year, leading with the expectation that 2012 will be the best year for net flows into the hedge fund industry since 2007 despite the poor industry performance over 2011.

The firm’s findings come from their identification of several dominant and emerging trends through their conversations with more than 300 hedge fund organizations and 2,000 institutional investors during 2011. Some of the trends they have observed include:

1. Improvement of net capital flows across most major hedge fund investor segments

2. Large rotation of assets between managers based on relative performance and changes in demand for strategies

3. Increased net flows to small and mid-sized hedge fund managers

4. Continued concentration of hedge fund flows into a small percentage of managers

5. More retail oriented hedge funds in the marketplace

6. Increase in both hedge fund closures and launches

7. Greater hedge fund investor concentration risk due to more consultant-based asset placement

Pension Funds: Agecroft believes that pension funds will be the largest contributor to growth in the hedge fund industry in 2012 as they continue to strive for enhanced risk-adjusted returns in order to decrease their massive unfunded liability. “We are in the middle of a 10 year trend during which we will see an increase in the number of pension funds allocating to hedge funds along with an increase in the average percentage allocation. In addition, the hedge fund investment path taken by pension plans will continue to evolve. Historically, many pension plans started with an investment in fund of funds, followed by investments directly into the largest well-known hedge funds. They then focused on alpha generators and finally evolved into the endowment fund best-in-breed strategy of investing. More recently, some of the larger pension funds have begun to skip the first step of investing in fund of funds by investing directly in hedge funds. This will have long-term implications for the hedge fund of fund industry”.

Endowments and Foundations: Agecroft believes that the endowment and foundation market is characterized by perpetual growth, as these organizations are structured to pay out only about 75% of their long-term expected earnings. “Adding to this growth is the fact that many receive ongoing contributions and, more importantly, many new organizations are created each year.” Since many of the largest funds are fully allocated to the hedge fund space, growth will be highly correlated to the annual increase in assets for these organizations, which Agecroft projects will be 10% to 20% annually. Stronger growth will come from mid-sized organizations that are under-allocated to hedge funds and are evolving their portfolios to look more like their larger peers.

Family Offices: The survey found that this segment of the market place has experienced significant growth as more and more super high net worth families hire full-time staff to manage their assets. “This growth has recently been fueled by fortunes made in the technology, private equity and hedge fund industries. Family offices will continue to be very active allocators to hedge funds as their investment staff become more sophisticated and knowledgeable in the hedge fund space”.

Hedge Fund of Funds: The fund of fund market place has experienced net redemptions four years in a row, although during the past two years redemptions have been more modest. “We expect net redemptions to continue in the hedge fund of fund industry in 2012. This will be driven primarily by significant withdraws from the largest pensions funds that are choosing more frequently to make direct investments in hedge funds in order to save on fees. These redemptions will be somewhat offset by smaller and mid-sized pension funds and insurance companies that are increasing their allocations to fund of funds along with high net worth individuals that are advised by financial planners. There will always be a place for fund of funds within certain sectors of the hedge fund investor community and those fund of funds that can change with the evolving landscape will be the most successful going forward”.

Consultants: Agecroft found that the hedge fund consultant marketplace has seen explosive growth as more institutional investors and large family offices begin to invest directly in hedge funds. “These consulting firms have seen their hedge fund assets under advisement balloon in size, which at some point will create difficulties for these firms in adding value to their clients’ portfolios. 2012 will see continued growth in this industry with increased competition from new entrants into the marketplace, including traditional institutional consultant firms and hedge fund of fund organizations that create customized separately managed portfolios for large institutional investors”.

Agecroft believes that 2011 was a very difficult year from a performance standpoint for a majority of hedge fund managers for two primary reasons. Firstly, macro events created significant volatility in the capital markets which increased the correlation of returns between individual securities. “These significant moves in the market dominated the fundamental analysis that characterizes most hedge fund managers, leading many managers to get whipsawed by the markets”.

Secondly, Agecroft found that most global capital markets generated negative returns for the year. “Since most hedge funds tend to be long biased, these declining markets were a large headwind for most managers. However, not all managers performed poorly; some were able to effectively navigate through the volatility to generate strong returns, which created significant deviation in performance between managers with similar styles. Those managers that underperformed will experience above average withdrawals, with a vast majority of these assets being re-circulated within the industry. Because of the length of hedge fund notice periods and liquidity provisions, there will be a lag in these flows which should materialize in the 1st half of 2012”. Their report found that over the past four years there has been a dramatic change in how hedge fund investors allocate across strategies. “For example, based on HFR data, in 2011 equity hedge fund strategies totalled $539 billion which was down from $684 billion in 2007. However, macro hedge fund strategies (including CTAs) in 2011 totalled $434 billion which was up dramatically from $288 billion in 2007. These changes are seen across all major hedge fund strategies. We will continue to see significant realignment of assets across all hedge fund strategies as investors try to position their portfolios based on current and projected economic environments”.

2011 was the year of increased inflows for small and medium-sized hedge funds who had received only a small fraction of net flows in 2009 and 2010. “This coincided with the re-emergence of more experienced and sophisticated hedge fund investors within the endowment, foundation, large family office and fund of fund sectors of the market. Many of these experienced investors believe that the largest hedge fund managers have accumulated too many assets, which dilutes their alpha over a larger asset base and, more importantly, increases the investment risk to investors because of the larger bets they are required to make in individual securities. In addition, a study conducted from 1996 through 2010 by Per Trac showed that small hedge funds consistently outperformed their larger peers”.

Agecroft expects that this greater focus on smaller, more nimble managers will continue to gain momentum as some of the largest hedge funds have recently experienced significant publicity for the poor performance they have generated over the past year. “This is good news for small and mid-sized hedge fund managers that represent a majority of the firms in the industry”.

Looking forwards to 2012, Agecroft believes that those hedge funds with the strongest brands will gain a vast majority of the net flows and can be divided into three main categories:

1. Hedge funds with over $5 billion in assets who have generated short and long-term performance above their peers

2. A few high profile start-ups that have spun out of prop trading desks from investment banking firms or well known hedge funds and finally,

3. Those small and mid-sized hedge funds that are able to rise above their peers by providing a high quality offering, clearly and concisely articulating their differential advantage across all the evaluation factors investors use to select hedge funds and having a best-in-breed marketing strategy. In more upbeat findings, Agecroft predicts that 2012 will reverse a three year trend of declining hedge fund closures and will be driven by managers that significantly underperformed their peers in 2011 and suffered heavy redemptions. “It will also be aided by the loss of hope amongst many managers that have had difficulty raising assets four years in a row due to the high concentration of assets flows. This increase in fund closures will be offset by the fourth year in a row of an increased number of fund launches.

In conclusion, Agecroft reports that as raising assets for hedge funds becomes increasingly more difficult many hedge funds are beginning to target the retail markets that are less competitive and easier to raise assets from. “In Europe we have seen the assets in UCITS funds expand significantly in 2011 with more growth expected in 2012. In the US we are seeing a large growth in 40 Act hedge funds and hedge fund of funds, with many more expected in 2012. We are also seeing hedge fund replication strategies utilizing ETFs. All of these have their strengths and weaknesses and could create more regulatory scrutiny. Significantly, the first movers into these markets have typically had a much easier time raising assets from these more retail oriented structures than from traditional hedge fund investors”.

Beverly Chandler

What do you think?

   Use "anonymous" as my name    |   Alert me via email on new comments   |   
Today's Exclusives Today's Other Voices More Exclusives
Previous Opalesque Exclusives                                  
More Other Voices
Previous Other Voices                                               
Access Alternative Market Briefing


  • Top Forwarded
  • Top Tracked
  • Top Searched
  1. Investing - Soros, Druckenmiller among hedgies profiting in market plunge, Hedge funds were most bullish on bonds since 2004 before Brexit, Surprise Brexit vote unleashes scramble for dollars, High-yield hit on Brexit but no panic selling, Scientist turned hedge fund founder lured to pound, euro, Hedge fund avoids commodities, posts big gains[more]

    Soros, Druckenmiller among hedgies profiting in market plunge From HITC.com: Bullish positions in gold and volatility and well-timed short bets on China and emerging markets, among other areas, were some of the trades that benefited hedge funds on Friday as markets digested Britons' s

  2. Manager Profile - A 26-year old hedge fund manager called Brexit — here's what he thinks about the historic vote[more]

    From Businessinsider.com: Taylor Mann is not your typical fund manager. The twenty-six year old Texas A&M graduate manages Pine Capital in Larue, Texas (population 160), where he resides with his three-year old daughter. Also atypical compared with many of the largest funds out there, Mann makes

  3. Chesapeake Partners to liquidate hedge fund amidst 'hostile environment'[more]

    Komfie Manalo, Opalesque Asia: Chesapeake Partners Management, the hedge fund run by woman fund manager Traci Lerner said it would return investors’ money after 25 years because the market environment has become "hostile" to manage other people’s money, reported

  4. Europe - George Soros says Brexit has ‘unleashed’ a financial markets crisis, Brexit—what we know, Will the UK’s departure be a ‘soft-Brexit’ or a ‘hard-Brexit’?, Brexit: Six-point action plan for asset managers[more]

    George Soros says Brexit has ‘unleashed’ a financial markets crisis From Bloomberg.com: Britain’s decision to leave the European Union has “unleashed” a crisis in financial markets similar to the global financial crisis of 2007 and 2008, George Soros told the European Parliament in Bruss

  5. Hedge Fund Due Diligence Exchange offers complete due diligence reports at $1500[more]

    Matthias Knab, Opalesque: HFDDX is offering complete alternative investment due diligence reports at $1500 US. Industry professionals can simply go to www.hfddx.com and indicate their interest in sponsoring one or more DD Reports for $1500 each.