Highlights.

1. 38% of SWFSs are known to be investing in hedge funds and a further 2% are considering making allocations to the asset class.
2. Many SWFs are newcomers to the asset class; however they have become relatively comfortable with other types of alternative investments such as private equity (where the proportion of SWFs investing is closer to 60%) over recent years.  Consequently we expect to see this pattern replicated for hedge funds in the future.
3. More transparent strategies such as global macro and long/short equity are amongst the most sought after from this group.
4. 50% of SWFs allocate capital to both fund of hedge funds and single-manager funds.
5. Many SWFs have fixed requirements with respect to the size and experience of prospective hedge fund managers, and as a result allocations to US-based hedge funds (where the industry is well established) are particularly popular.

Details at…

“Hedge Fund Spotlight April 2012″

Over the past three months, total assets of the Future Fund rose by $4 billion to $77 billion. The Fund has generated a return of 4.9% per annum since contributions began on 5 May 2006.

The Future Fund’s return for the quarter to 31 March 2012 was 5.4% and for the financial year to date it was 2.2%.  Asset classes which received significantly more funds during the quarter were global equities (both developed and emerging markets), private equity and debt securities.

Portfolio details for the March 2012 quarter…

* Figures may not sum due to rounding

Executives quoted included;

• Thomas Murphy, managing partner of Family Office Research and Management who favours long/short funds. (30 and 40 wealthy families as clients).
• James Burkitt, CEO of a networking group, The Table Club, (which includes the top 70 family offices in Australia/New Zealand), who noted that ‘a number of families …are looking to allocate to hedge funds later this year that have never allocated to them before.’
• Matthew Browning, head of investment strategy at the Myer family office, (60 and 70 families as clients)
• Kris Vogelsong, Head of Corporate Development, Private Portfolio Managers, Sydney.

Details at…

“Some Of Australia’a Richest Families Flock Back To Hedge Funds”

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Wilson HTM Investment Group has received insufficiently attractive bids for its 79.3 percent equity stake in boutique fund incubator Pinnacle Investment Management.

Wilson will now explore its options in selling the individual elements of Pinnacle’s business which consists of minority equity stakes in seven fund managers: Plato, Hyperion, Palisade, Resolution, Solaris, Pinnacle Private Equity, and Sigma; as well as a distribution agreement with US based Capital International.

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NYSE- listed Affiliated Managers Group (AMG) is open to discussing potential equity stakes in Australian boutiques, according to Andrew Dyson, AMG’s head of global distribution speaking to Investment Magazine.  AMG operates a sales office in Australia and has amassed $18.7 billion from Australian and NZ institutional investors into its suite of affiliated managers.

Details at http://investmentmagazine.com.au/2012/03/appetite-for-acquisition-of-boutique-managers/

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AQR Capital Management’s Global Risk Premium Trust has won an allocation from ipac Asset Management, according to Financial Standard.  The Australian domiciled trust will now have $500 million AUM.  The trust feeds into a global strategy run by the Connecticut-based, quant-focussed firm.  AQR has US$45 billion AUM of which around US$8.5 billion is reportedly sourced from Australian and New Zealand clients.

Preqin also notes that Select Asset Management is actively seeking one to three additional managers in liquid strategies to run a total of $20 million.  It notes that Select’s hedge fund portfolio has up to 50 percent devoted to investments in Asia.  .

Separately, Preqin discusses further details its Preqin/Global ARC survey (see Australian Hedge Feb 2012) of Asia Pacific institutional investor appetite for hedge funds.  Highlights;

• 37 percent of respondents intend to increase allocation to hedge funds in 2012.  57 percent intend to keep allocations approximately the same as last year
• 23 percent will focus on adding new managers (compared to just 10 percent of global institutional investors)
• 83 percent will consider investments in the Asia Pacific, 61 percent will look to invest in North America, and 41 percent in Europe.

Details at

http://www.preqin.com/docs/newsletters/HF/Hedge_Fund_Spotlight_Mar_2012.pdf

Many years ago, I was fortunate enough to cross paths with Peter Fletcher who is the CEO of Parly a Geneva based Family Office. With another European Family Office, he founded le club b which is a collective of Family Offices. They run a major annual conference and a couple of sub conferences around the world. Peter is interviewed by another old buddy of mine, Matthais Knab who runs one of the best Alternative Asset electronic publications, Opalesque. Matthias ran a recent video interview of Peter Fletcher. The link is below.

http://www.opalesque.tv/hedge-fund-videos/Peter_Fletcher/1

There were a couple of points that I was particularly interested in. Firstly Peter and other Family Offices have a preference for Managed Account exposures. I.e. the investor owns the assets via a custodian. The hedge fund or the private equity manager is appointed with power of attorney over the account. The second point is the fee structure. Peter rarely pays the standard 2 and 20. The fees are more likely sub 100 bpts and incentive is normally around 10% but interestingly Peter requests incentive on “realized” profits not marked to market. Peter also talks about investment opportunities in the direct lending space. This is an area that has tremendous appeal going forward because of the lack of capital available via the banks. Family Offices can invest with direct lending managers who have significantly lower overheads and staff numbers versus the banks.

Over the years Peter has worked to engage Australian Family Offices within le club b. A number of Families that I have introduced to Peter, have ended up entering into co-investments with offshore Families.

There are number of local entities that have set up businesses around Family Office platforms. James Burkitt, a Financial Services Industry veteran, started the Family Office Connect. James has developed an excellent database of Australian and New Zealand Families. He also arranges regular lunches with guest speakers.

My colleagues at Triple A Partners in Hong Kong have morphed their business into Family Office consulting. Paul Smith Simon Cox have parlayed their Family Office experience and connections into an interesting advisory business. They have a number of offshore Families who engage them to be their eyes and ears on the ground in Asia. This covers everything from manager introduction to account setup, custody and administration for groups that reside outside the region.

I can only see the Family Office segment as an area that will continue to grow as a “smart investor”.

• Look-alike strategies are a problem. Six in ten investors agree that hedge fund strategies are too similar
• Operational strength has become a major competitive advantage for hedge fund managers
• While transparency has improved, investors still see it as a top worry

Initial findings from the survey were released last month. (see Australian Hedge Jan 2012).

The survey was conducted by SEI in collaboration with Greenwich Associates.  105 investment institutions participated in Sep/Oct 2011.

Details at http://www.seic.com/enUS/im/promo/6891.htm?cmpid=im-hf2-fin-12

Highlights;

• Investors have adjusted their target returns expectations for their hedge fund portfolios to account for the current low interest rate environment and difficult market conditions.  The average expectation for returns in 2012 was 8.6 percent, down from 11 percent in 2011.
• Global Macro is the most sought-after strategy for 2012.   CTAs ranked second, while Fixed Income Arbitrage moved up from 15^th place last year to 3^rd place this year.
• In terms of geographic preferences, Asia and Emerging Markets have remained at the top of investors’ buy list for a second year running.
• Investors continue to show appetite for new hedge funds that can “check the box” on a number of key requirements.  These include pedigree, continuity, differentiation and institutional quality.
• Crowded trades/herd behaviour, sovereign default risk and counterparty/credit risk are seen as the greatest sources of risks facing the hedge fund industry

Details at;

https://www.credit-suisse.com/upload/news-live/000000022548.pdf

The ‘dbalternatives Discovery’ platform will be based on Deutsche Bank’s dbalternatives managed account platform which was established in 2002 and currently has $12 billion under management.

FRM’s hedge funds seeding division, FRM Capital Advisors, (FCA) will select and negotiate strategic investments in emerging managers.  Deutsche Bank will also raise capital for a seeding fund which will invest in early stage hedge funds selected by FCA.  FCA evaluates over 500 seeding opportunities annually through the FRM’s global investment team.

• Nearly 38 percent of investors plan to increase their allocations to hedge funds over the next 12 months – down from 54 percent a year earlier.
• Hedge funds represented 16.7 percent of institutional portfolios in 2011, versus 12 percent during the 2008 financial crisis.
• 26 percent of institutional investors said their top challenge in hedge fund investing was meeting performance expectations.
• 40 percent invested solely via single-manager funds, up from 24 percent a year earlier.
• Nearly a third invested in hedge funds for absolute return, while more than half cited risk management reasons such as diversification and lower volatility as the key criteria.
• Respondents earned an average annualized return of 6.2 percent in 2011 versus 9.2 percent in 2010.

Details at http://www.seic.com/enUS/im/promo/6891.htm?cmpid=im-hf1-fin-12