Jack Inglis

Renewed interest in alternative investment exposures, growth in new launches and ever closer alignment of interests with investors have pushed hedge fund assets to more than $3 trillion global highs with plenty of green shoots, according to AIMA Australia General Manager Michael Gallagher.

“This improved outlook, around the globe and in Australia, has helped the industry to refocus on emerging developments, such as incorporating ESG into investing, operational efficiency and preparedness for regulation such as MiFID,” he said.

In the area of ESG – applying environmental, social and governance factors to investing – Gallagher said AIMA had worked alongside the United Nations Principles for Responsible Investment (PRI) and other organisations in helping to shape the PRI’s first industry-standard due diligence questionnaire (RI DDQ) for hedge funds.

The new DDQ, which is available from the AIMA website, helps investors during their manager selection and assessment process. It comprises a standardised set of questions to help identify those fund managers who have the staff, knowledge and structure in place to incorporate ESG factors into the investment decision-making process.

Mr Gallagher says ESG measures are increasingly being recognised as proxies for management quality, and can be another arrow in the quiver of hedge funds in their search for out-performance and diversification.

How managers integrate ESG into investment practices will be a key topic discussed at this year’s AIMA Australia Forum. Also likely to feature is MiFID II, the new cornerstone of European securities laws that will take effect in January 2018. MiFID II promises to have global impact. For example, Australian fund managers who trade with European brokers will find that the European trading environment is radically transformed – with greater transparency for bond and derivative trading, position limits for commodity contracts and new rules for trading of derivatives on European venues.

The AIMA Australia Annual Forum 2017 will be held at the Sofitel Sydney Wentworth on 12th September. Some of the confirmed speakers include:

• Thomas Weber, Co-Founder and Managing Partner of LGT
• Stuart Roden, Chairman of Lansdowne Partners
• Joel Poster, Head of the ESG Strategies, Future Fund
• Dr Ian Woods, Head of ESG Investment Research, AMP Capital
• Sushil Wadhwani, Founder, Wadhwani Asset Management
• Matthew Turner ,Managing Director of the Intermediate Capital Group
• Justin Ferrier, Managing Director Asian private credit platform, BlackRock
• Philippe Jordan, CEO of CFM
• Jack Inglis, Global CEO of AIMA

The Forum will likely reflect on how hedge fund managers have changed models to better align interests with investors. While signs of this alignment are global, a recent survey by AIMA and boutique prime broker GPP of 135 smaller funds sub-$500m found that:

• Half are charging 1.5 per cent of less (for start-up funds closer to 1.25 per cent);
• Two-thirds are charging less than 20 per cent performance fee;
• Close to 90 per cent of managers say they have a high watermark, and
• Around one-third have hurdle rates.

The survey also showed that most firms are able to turn a profit with less than $100m, with around one third of managers able to break even with less than $50m.

AIMA Chief Executive Jack Inglis said: “Our research disproves the notion that only relatively large, institutionalised businesses can succeed in the modern hedge fund industry. We have found that firms can build strong, sustainable and growing businesses with considerably less than $100m in assets. This is good news not only for the future health and well-being of the sector but for investors too, since smaller managers have often been the source of many of the industry’s greatest innovations.”

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Jack Inglis

Hedge funds finished last year up 2.42%, beating equities and bonds on an absolute and risk-adjusted basis, according to an analysis of performance data by the Alternative Investment Management Association (AIMA), the global representative body for alternative asset managers.

AIMA said the analysis, based on returns reported to HedgeFund Intelligence (HFI) by funds with total assets under management (AUM) of roughly $1.1 trillion, represented one of the most comprehensive assessments of the global hedge fund industry’s performance last year.

The analysis includes the first measurement of the industry’s risk-adjusted performance in 2015. Risk-adjusted returns are closely watched by institutional investors such as pensions and endowments since they measure both the total return and the volatility of those returns. AIMA’s analysis also contains an extensive breakdown of returns by the different hedge fund investment strategies.

According to AIMA:

• hedge funds on average outperformed stocks and bonds on both a headline and risk-adjusted basis
• hedge funds globally finished the year up 2.42% net of all fees
• around two-thirds of funds (65.30%) reported positive returns
• risk-adjusted returns were positive, as measured by a Sharpe ratio of +0.52
• the best performing strategies were equity market neutral / quant (up 10.44%), long/short equity (up 6.79%) and multi-strategy (up 5.65%).

Jack Inglis, CEO of AIMA, said: “While 2015 will not be remembered as a vintage year for the industry, the majority of hedge funds still produced positive returns amid challenging market conditions, beating stocks and bonds on both an absolute and risk-adjusted basis and preserving capital for pension funds and other investors.

Given that this period of market volatility is set to continue during 2016, we remain confident that hedge funds will continue to meet their investors’ expectations for competitive, diversified and low-volatility returns.”

On a strategy-by-strategy basis, the average returns, according to AIMA’s analysis, were as follows:

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Jack Inglis

Investors increasingly are striking partnerships with hedge funds, underlining the closer collaboration taking place between the hedge fund industry and its investor base, according to a new survey by the Alternative Investment Management Association (AIMA), the global hedge fund industry association, and Barclays.

According to the new survey of investors and managers, called ‘The Extra Mile: Partnerships between Hedge Funds and Investors’, partnerships of varying forms between hedge funds and their investors are becoming increasingly common.

More than three-quarters of managers and two-thirds of investors who took part in the survey said they had entered into partnerships.

The survey found five key elements of partnerships: access to expertise and resources; customised products and solutions; co-investment; product seeding; and equity stakes.

The survey revealed a number of benefits to investors, including improved knowledge and understanding, better alignment of interest with managers, and better value for money.

Both larger and smaller managers and hedge funds of all strategies were found to be striking partnerships. Benefits to managers included “stickier” or more loyal investors, support for new product development, cross-selling opportunities and the offer of investor references.

The investors surveyed manage a combined $2 trillion in assets, of which approximately $260 billion is allocated to hedge funds. They include pension funds, endowments, foundations, sovereign wealth funds and family offices globally. The managers surveyed manage approximately $200 billion in assets.

Jack Inglis, AIMA’s CEO, said: “It is encouraging that so many hedge funds and their investors are striking such deep and wide-ranging partnerships. These arrangements represent a win-win for both sides, with significant benefits for both the manager and the investor.

“What the survey shows is that managers are truly going ‘the extra mile’ in terms of sharing knowledge and resources and providing customised products and services to their investor partners. These partnerships are also providing further evidence of very high levels of satisfaction among investors in their hedge fund investments.”

“The publication of this paper comes at an important time in the evolution of the hedge fund industry. Amidst the on-going process of institutionalisation, investors are actively pursuing a more direct engagement with the underlying hedge funds in which they are invested,” said Michelle McGregor-Smith, the Chief Executive of British Airways Pension Investment Management Ltd and the Chair of the AIMA Investor Steering Committee, which helped to direct the survey.

Lou Molinari, Managing Director, Global Head of Capital Solutions, Barclays, said: “The growth of partnerships represents an exciting new direction for the hedge fund industry as it continues to evolve. Successfully building partnerships with investors can allow managers to grow their business whilst increasing the stability of their assets under management, and cater to the specific needs of an increasingly-sophisticated investor base.

“Managers who are interested in pursuing partnerships should put in place a strategy to do so, identifying those investors they want to partner with, and deciding which of the elements of partnership they are best-placed to deliver.”

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