{"id":19750,"date":"2011-01-04T09:00:41","date_gmt":"2011-01-04T13:00:41","guid":{"rendered":"http:\/\/www.hedgeco.net\/news\/?p=19750"},"modified":"2011-01-04T09:09:12","modified_gmt":"2011-01-04T13:09:12","slug":"editorial-hedge-fund-capital-raising-for-2011","status":"publish","type":"post","link":"https:\/\/hedgeco.net\/news\/01\/2011\/editorial-hedge-fund-capital-raising-for-2011.html","title":{"rendered":"Editorial: Hedge Fund Capital Raising for 2011"},"content":{"rendered":"

\"\"<\/a>New York (HedgeCo.net) – 2011 will be a very good year for flows into the hedge fund industry despite the\u00a0recent\u00a0negative publicity generated from the insider trading scandal, according to hedge fund consulting specialist Don Steinbrugge, Chairman at Agecroft Partners.<\/p>\n

“This\u00a0conclusion\u00a0is based on several dominant and emerging trends identified through conversations with more than\u00a0300 hedge fund organizations and 1,500 institutional investors during 2010.” Stienbrugge said.<\/p>\n

These trends include: 1.\u00a0decreased\u00a0competition\u00a0from\u00a0large prominent hedge funds: 2.\u00a0improvement of capital flows across\u00a0most major\u00a0hedge fund investor segments\u00a0including endowments, foundations and hedge fund of funds: 3.\u00a0large increase in hedge fund launches: 4. increased allocations to small and medium sized hedge funds: and 5 increased importance of high quality marketing. These trends are explained below.<\/p>\n

Decreased\u00a0competition\u00a0from\u00a0large prominent hedge funds<\/strong><\/p>\n

<\/strong><\/p>\n

In 2009 and 2010 there was a significant increase in competition within the hedge fund industry due to many previously closed hedge funds opening their funds to new assets.\u00a0There were two primary reasons for this competitive increase. First, managers wanted to replace assets which had redeemed after the 4th quarter of 2008. Second, many of these high profile managers were below their high water mark and they needed\u00a0new assets to generate fees in order to pay and keep their people.\u00a0After two years of the majority of assets flowing to the largest hedge funds\u00a0combined\u00a0with strong performance, many of these big funds have either closed or are\u00a0near capacity.\u00a0Of the large hedge funds that aren’t yet closed, many\u00a0either have issues or\u00a0are gathering assets dilutive to their returns.\u00a0The end result\u00a0is\u00a0less competition for assets from the largest well known hedge funds as investors shift their\u00a0focus away from investing in brand names\u00a0toward managers capable of generating future alpha.<\/p>\n

Improvement of capital flows across\u00a0most major\u00a0hedge fund investor segments\u00a0including endowments, foundations and hedge fund of funds<\/strong><\/p>\n

<\/strong><\/p>\n

2010 saw the hedge fund industry approach its all time high for assets. This was primarily driven by a gradual yet substantial increase in allocations made by pension funds looking to enhance their risk adjusted returns and decrease their unfunded liability. This trend will continue throughout 2011 as we see an increase in the number of pension funds allocating to hedge funds as well as an increase in the percentage of their portfolio\u00a0asset allocation to hedge funds. Pension funds will continue their evolution in how they achieve their hedge fund exposure. This process begins with an investment in fund of funds, followed by investing directly in brand name hedge funds, then focusing on alpha\u00a0\u00a0generators and finally changing to the endowment fund model of\u00a0\u00a0\u201cbest in breed\u201d hedge fund investing.<\/p>\n

Agecroft believes 2011 will see the return of many hedge fund investor segments that have been primarily on the sidelines the past two years. Some of these segments are reviewed below:<\/p>\n

1.\u00a0Endowments and Foundations: <\/strong>The endowment and foundation space is a bifurcated market comprised of organizations with more than $1B AUM and those with less than $1B AUM. Many of the larger endowments and foundations experienced significant liquidity issues within their portfolios as the expected duration of their private equity portfolios lengthened after 4th<\/sup> quarter 2008.\u00a0 These liquidity issues greatly reduced hedge fund allocations from this market segment\u00a0over the past two years. Most of these liquidity issues have now been resolved and as a result we will see a significant increase in hedge fund allocations by large endowments and foundations in 2011. This will especially benefit mid-sized hedge funds as these sophisticated investors\u00a0tend to\u00a0have a bias against the largest hedge funds. For endowments and foundations with less than $1B AUM, 2010 provided an opportunity to increase their average portfolio allocations to hedge funds. We expect this trend to continue in 2011 as these mid-sized endowments move closer to the allocations of their larger peers. <\/strong><\/p>\n

2.\u00a0Hedge Fund of Funds:<\/strong> 2009 and 2010 saw significant contraction in the number of hedge fund of funds as many ceased operations due to 1. Madoff exposure, 2. poor performance 3. strategic decisions by a parent company 4. lack of profitability, or 5. acquisition by larger competitors. In addition, a majority of assets flowed to a small\u00a0number\u00a0of the largest hedge\u00a0fund of funds\u00a0managers,\u00a0keeping\u00a0most hedge fund of funds well below their asset peak. This\u00a0dynamic\u00a0significantly\u00a0affected small and mid-sized hedge funds\u00a0managers\u00a0because the largest hedge fund of funds tend to allocate\u00a0to the biggest hedge funds,\u00a0due to\u00a0the large amount\u00a0of money\u00a0they need to allocate. The balance\u00a0of the hedge fund of funds\u00a0marketplace,which typically prefers\u00a0the small and mid-sized\u00a0hedge funds, were not allocating\u00a0because\u00a0as their\u00a0assets declined,\u00a0instead of replacing under-performing managers with new managers, they simply ran more concentrated portfolios.<\/p>\n

Agecroft\u00a0expects\u00a0these trends to reverse. Most of the flows into the hedge fund of funds industry have come from large institutional investors who have been more focused on the\u00a0perceived security provided by the\u00a0size of a firm and its infrastructure\u00a0as opposed to pure\u00a0performance. Many large institutions have invested in a number of hedge fund of funds\u00a0in an attempt to\u00a0diversify their exposure. They may not\u00a0realize that\u00a0many of\u00a0these large hedge fund of funds have significant overlap of underlying managers\u00a0and\u00a0have underperformed their smaller peers.\u00a0As large institutional investors continue to increase their knowledge of alternative investments they will\u00a0begin\u00a0to utilize a hub and spoke approach to hedge fund of funds investing. This approach\u00a0involves a\u00a0hub\u00a0investment in\u00a0one of the largest hedge fund of funds as the core hedge fund allocation,\u00a0and spokes made up of niche hedge fund of funds that either focus on small to mid-sized\u00a0managers or specific strategies like CTA\/Global\u00a0Macro, Credit or Long Short Equity.These strategy specific hedge fund of funds\u00a0will also be utilized in other parts of institutional investor\u2019s portfolios in addition to their hedge fund allocation.<\/p>\n

This growth of niche hedge fund of funds\u00a0will increase the number of hedge fund of funds while insuring\u00a0a\u00a0smaller percentage of assets flow to the largest hedge\u00a0fund of funds. \u00a0Likewise, as these smaller, niche hedge fund of funds see their assets stabilize and begin to grow, they will reduce the concentration of underlying managers and begin to allocate again to new hedge fund managers.\u00a0This\u00a0should\u00a0result\u00a0in small and mid-sized hedge fund managers\u00a0being included in more searches.<\/p>\n

3.\u00a0Family Offices:<\/strong> 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. Many of these\u00a0family\u00a0offices prefer small and mid-sized managers who they view as more nimble and\u00a0able to\u00a0generate higher returns.\u00a0Family offices\u00a0will continue to be active allocators to hedge funds.<\/p>\n

4.\u00a0Consultants:<\/strong> The hedge fund consultant market place has seen explosive growth as more institutional investors and large family offices begin to invest\u00a0directly in hedge funds.\u00a0These\u00a0consulting firms have seen their hedge funds asset under advisement balloon in size, which will eventually create difficulties for these firms in adding value to their client\u2019s portfolios. 2011 will see continued growth in this industry with increased competition from new entrants into the marketplace from both traditional institutional consulting firms and hedge fund of funds organizations creating\u00a0customized,separately managed portfolios for large institutional investors.<\/p>\n

Large increase in hedge fund launches<\/strong><\/p>\n

<\/strong><\/p>\n

The number of hedge fund launches steadily declined over the past two years as asset flows for start up managers slowed to a trickle. This created pent up demand for mangers wanting to launch a new fund, but waiting for improved market conditions before starting their new venture. With improved asset flows across most major hedge fund investor segments, many of these managers will have the confidence to finally launch their new funds. This will make 2011 the best year for hedge fund launches since 2007. This activity will be further fueled by leading financial institutions shedding their proprietary trading desks resulting in multiple, billion dollar hedge fund launches.<\/p>\n

Increased allocations to medium and small hedge funds<\/strong><\/p>\n

<\/strong><\/p>\n

2009 and 2010 were devastating for small and medium sized hedge funds. Even though these managers represent 95% of the number of hedge funds, they were only able to attract a small fraction of new hedge fund allocations.\u00a0This despite the fact\u00a0a study conducted from 1996 through 2009 by Per Trac showed that small hedge funds outperformed their larger peers 13 of the past 14 years.\u00a0Unable to attract new assets,\u00a0these\u00a0small and mid-sizedhedge fund organizations feared the industry was in a new paradigm making it almost impossible to raise assets going forward.\u00a0Agecroft believes thata much larger percentage\u00a0of assets\u00a0will\u00a0flow to small and mid-sized managers\u00a0due to the many strong trends leading into 2011 discussed here.\u00a0These trends include less competition from the large, well known hedge fund managers, as well as increased allocations from endowments, foundations and hedge fund of funds. These investors tend to focus more on alpha generators than brand name hedge funds. In addition, we will see some of the more sophisticated pension funds allocating to small and medium sized hedge funds.<\/p>\n

Continued importance of high quality marketing<\/strong><\/p>\n

<\/strong><\/p>\n

Although a larger percent of assets will be allocated to small and medium sized hedge funds,\u00a0the days of posting performance numbers to hedge fund databases and waiting for the assets to come are over.\u00a0\u00a0The market remains highly competitive with\u00a0approximately ten thousand hedge fund managers. The typical institutional investor utilizes a process of elimination in selecting hedge funds where they are contacted by\u00a0thousands of investment firms a year, meet with a couple hundred and ultimately hire\u00a0half a dozen. Their due diligence process is longer, more focused and deeper than ever before. Institutional investors typically require three to five meetings before making an investment decision. Their process focuses on multiple evaluation factors including: 1. organizational quality, 2. investment team, 3. investment process, 4. risk controls, 5. operational infrastructure, 6. terms and 7. historical performance. A\u00a0perceived\u00a0weakness in any of these factors will eliminate a firm from consideration.\u00a0As a result, hedge fund managers need to not only have a well refined marketing message that effectively articulates their differential advantages over their competition, but also\u00a0a professional, proactive and knowledgeable sales force able to\u00a0deeply penetrate the market place and stay involved with investors throughout their lengthy due diligence process. This is very difficult for a single salesperson to achieve. As a result, we will continue to\u00a0see hedge funds building out their sales teams and leveraging third party marketing firms to expand their distribution efforts.<\/p>\n

In conclusion,\u00a0Agecroft Partners expects\u00a02011 to be a strong year for flows into the hedge fund industry. Although the competition from the largest, well known funds will decline, the market place will remain highly competitive where a majority of assets will be going to a small percentage of managers. The managers that are successful growing their business will be those that rank well across multiple evaluation factors, have a high quality marketing message and strong distribution capabilities. The hedge fund industry is moving toward a period of sustained growth driven by institutional investors that will increasingly adopt a more institutionalized process for evaluating hedge fund managers.<\/p>\n

About the author<\/strong><\/p>\n

Don Steinbrugge is Chairman of Agecroft Partners, a global consulting and third party marketing firm for hedge funds. Agecroft was selected 3 years in a row by a major industry organization as the top 3rd party marketing firm. Highlighting Don’s 26 years of experience in the investment management industry is having been the head of sales for both one of the world’s largest hedge fund organizations and institutional investment management firms. Don was a founding principal of Andor Capital Management, which at its peak was ranked as the 2nd largest hedge fund firm. Previous to Andor Capital, Don was a Head of Institutional Sales for Merrill Lynch Investment Managers and Head of Institutional Sales for NationsBank (now Bank of America Capital Management). Don is a member of the investment committee for multiple institutional investors and is a frequent speaker at industry conferences relative to trends with institutional investors and the hedge fund industry.<\/p>\n

Editing by Alex Akesson<\/p>\n","protected":false},"excerpt":{"rendered":"

New York (HedgeCo.net) – 2011 will be a very good year for flows into the hedge fund industry despite the\u00a0recent\u00a0negative publicity generated from the insider trading scandal, according to hedge fund consulting specialist Don Steinbrugge, Chairman at Agecroft Partners. “This\u00a0conclusion\u00a0is […]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[919,3],"tags":[],"class_list":["post-19750","post","type-post","status-publish","format-standard","hentry","category-hedge-fund-research","category-hedgeco-news"],"_links":{"self":[{"href":"https:\/\/hedgeco.net\/news\/wp-json\/wp\/v2\/posts\/19750","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/hedgeco.net\/news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/hedgeco.net\/news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/hedgeco.net\/news\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/hedgeco.net\/news\/wp-json\/wp\/v2\/comments?post=19750"}],"version-history":[{"count":6,"href":"https:\/\/hedgeco.net\/news\/wp-json\/wp\/v2\/posts\/19750\/revisions"}],"predecessor-version":[{"id":19752,"href":"https:\/\/hedgeco.net\/news\/wp-json\/wp\/v2\/posts\/19750\/revisions\/19752"}],"wp:attachment":[{"href":"https:\/\/hedgeco.net\/news\/wp-json\/wp\/v2\/media?parent=19750"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/hedgeco.net\/news\/wp-json\/wp\/v2\/categories?post=19750"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/hedgeco.net\/news\/wp-json\/wp\/v2\/tags?post=19750"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}