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Managers surveyed for Raising the Game reported that their AUM is down an average of 32% from peak levels, however managers reported a positive outlook for fund raising. Overall, the hedge fund industry has seen approximately $150 billion of inflows in the first nine months of the year. Managers of mid-sized and large funds – more than $5 billion of AUM – witnessed lower outflows than smaller funds – less than $5 billion of AUM. Managers of mid-sized funds – those with $5 billion to $10 billion of AUM – reported that year to date inflows have outpaced outflows, resulting in net positive flows of approximately 5% in AUM.

Andrea Gentilini, Head of Strategic Consulting in the firm’s Prime Services division and author of the report, said, “Raising the Game found that hedge fund managers are significantly more positive on the industry outlook, and having seen $150 billion of inflows in the first nine months of the year, they have good reason. However, Raising the Game has shown that the dramatic changes in the hedge fund landscape caused by the market dislocations have forced managers to be more strategic in their asset raising practices and brand management. Managers can no longer let returns sell themselves - today’s investors want more communication, more due diligence and more transparency. Funds that focus on this have clearly been recognized by investors.”

Hedge fund managers are now being more strategic in their asset raising strategies, according to Raising the Game, with surveyed managers showing a clear trend in building their marketing and investor relations teams and increasing their investor communications. While larger funds currently have the largest marketing and IR teams, the biggest planned increase is by funds with less than $5 billion of AUM, who are looking to increase headcount in their asset raising teams by an average of 35% to 40% as they seek to recapture funds redeemed in the market dislocation.

The surveyed hedge fund managers cited the closing of new investor leads as the most significant change in the asset raising process. While genuine hedge fund investors are still easily identifiable, managers reported a heightened need for dedicated relationship building with investors and more due diligence before any commitment of new funds. Sales cycles have approximately doubled in length, with potential for this to increase further.

Reflecting this trend, the most sought-after skill for managers is deep capital markets experience which enables new marketing or investor relations employees to clearly articulate and differentiate the fund’s strategy in the same way as a portfolio manager. Conversely, a traditional rolodex of contacts has become less important today than historically; managers now instead seek individuals with strong project management skills who can manage multiple leads and follow through to secure assets.

Raising the Game found that institutional investors still favor larger hedge funds, with more than 40% of allocation to funds with more than $10 billion of AUM coming from institutional investors; funds of hedge funds dominate the investor base for funds with less than $1 billion of AUM. North American investors continue to dominate the investor base, followed by European investors; geographical diversification outside of North America improves significantly above $10 billion of AUM, a reflection of the fact that these funds generally maintain multiple distribution offices.

Key findings detailed in Raising the Game include:

• Despite positive returns, a large gap to peak AUM still exists with hedge fund AUMs 32% below peak AUM on average
• The balance of inflows and outflows is stabilizing, with large outflows (-30% for funds with $1 billion - $5 billion) offset by large inflows (+18%), resulting in -12% net flows for the first nine months of the year
• Hedge funds with <$1 billion have experienced net flows of -16%, and the least amount of inflows across all size segments
• Hedge funds with $1 billion - $5 billion experienced the largest gross flow fluctuation, having had large redemptions (30%) and large inflows (18%)
• Hedge funds with between $5 billion and $10 billion were the only net asset gatherers year to date, having experienced a 5% positive net flow
• Hedge funds with >$10 billion have been fairly stable, with low inflows and outflows, and therefore a relatively stable net asset basis
• The hiring of investor relations and marketing staff is taking place across the industry
• A longer and more intensive due diligence is now performed by all buyers; hedge fund managers estimate the new due diligence requirements have doubled the sales cycle length
• There has been a bifurcation of investors with 50% of ticket sizes <$10 million (mostly from traditional buyers) and 14% of ticket sizes >$40 million, indicating few new investors
• Proprietary capital (i.e., the capital invested by the hedge fund founder and employees) plays a significant role when AUM crosses the $5 billion mark; institutional investors start playing a significant role when a fund’s AUM crosses the $1 billion mark (from 8% to 34%)
• True geographical diversification across regions meaningfully occurs when a fund’s AUM crosses the $10 billion mark

Corporate website: www.barclayscapital.com

- FG