Alternative UCITS Barometer

Transcription

1 Alternative UCITS Barometer Quarter 2, 2017

2 Introduction ML Capital Asset Management, the investment manager and promoter of the MontLake UCITS Platform, is delighted to present the 26th edition of the quarterly ML Capital Alternative UCITS Barometer (Barometer). The Barometer is designed to help identify and anticipate key trends in the demand for the major strategies within the Alternative UCITS sector. The capital introductory team at ML Capital surveyed a diverse range of 50 investors who collectively manage over $90 billion and today invest upwards of $20 billion into Alternative UCITS. Respondents range from insurance and pension funds to private banking organisations, with a significant constituent of wealth managers that deal with the primary source of Alternative UCITS inflows, the mid-net-worth investor. Commenting on the highlights of the latest Barometer, Kenneth Sim, Head of Sales of ML Capital: "It was a surprising start to the year. We have seen Global growth and US Equity markets reach new highs, rather than falling markets in the face of political concerns towards Trump's agenda and the European Elections. These rallying markets have suppressed volatility for yet another quarter, with the question hanging as to when it is likely to increase. As Equity Markets Indices have reached these new highs, there has been ever increasing discussions as to how long this will continue and when it is likely we will witness some performance retracement. Through and likely the summer, investors are keenly observing markets for signs that might indicate the end of the recent US Equity bull market, especially as interest rates begin to rise periodically. We could begin to witness a reversal back to a normalised market, which will allow Alternative UCITS strategies to prosper. I was very glad to see greater inflows into the Alternative UCITS market through Q1'17 and I hope that this is set to continue. In ML Capital's Barometer, a good portion of investors noted that they began hedging their Long Only exposures with Alternatives UCITS Funds within the last 12 months. The outlook for the sector is positive with assets set to rise especially as markets should provide a better opportunity set for Alternative UCITS strategies generally." I hope that you enjoy this quarter's Barometer, where ML Capital asked more detailed questions to investors and received varying and interesting responses. Cyril Delamare, CEO 2

3 3 Barometer Highlights Whilst 2016 was a lack lustre year for Alternative strategies, inflows into the Alternative UCITS universe rebounded markedly at the beginning of 2017 with the market receiving net EUR 5.8 billion of assets in February 2017 (Luxhedge). Additionally, the UCITS Alternative Index was up across the board at the start of Q1, which no doubt attributed to this rise in assets. In the broader economy, the S&P500 reached record highs following President Trump's promise of 'phenomenal' tax reform and Global Market Equities have continued to procure gains with the inclusion of Emerging Markets. However, yields have risen to the highest in almost 3 years and the Federal Reserve have committed to continue in this direction. This compounded with increasing political volatility across Europe, specifically the French elections, the recent UK election announcement and the growing tensions between the West and the East made the start of an interesting period to assess investors position in the Alternative UCITS space. Assets Rise In Quant Equity Market Neutral Our research found that amongst the investors polled, Equity Market Neutral is experiencing large inflows with half increasing their holdings into. A mere 8% intend to redeem out of this strategy in and our data has shown the strategy to be favourable across both Q1 and. This has presented a contrast to Morningstar data that witnessed outflows in Equity Market Neutral through Q1, but this differential may be explained by our polled investor base allocating to the growing Quant Equity Market Neutral market, rather than Fundamental Equity Market Neutral. Divergence In Developed Markets Equity Long/Short Following a difficult 2016 for Developed Markets Equity Long/Short, investors entering into are overall increasing or maintaining their exposure, but not all expectations of this strategy are in accordance. Investors are making their investment decisions, shaped by their expectations of interest rate rises and potential correlation breakdowns along with their prediction of regional political outcomes and the risks they are willing to take amongst hopes for greater market volatility. It's Still Trending! Medium to Long-Term Managed Futures UCITS Funds continue to see large inflows following their gains in Q1. Many investors believe that CTAs will perform well during this benign rate rising environment. More niche short-term CTA strategies have gathered traction as investors look for further diversification. Amalgamations of Macro and Managed Futures in Multi-Asset Absolute Return products also continue to be popular. 7% Participant Location 4% Participant Type 12% 8% 4% Wealth manager Fund of Funds Private bank Banks/Institution Family Office 8% 15% 4% 42% 69% Independent Financial Advisor Insurance / Pensions Switzerland Continental Europe Global UK Middle East Other Latin America 19% 8%

4 Growing Exposure to Alternatives? Following political/economic fear through the US election, investors experienced some short-term volatility but this proceeded by a large stock market expansionary rally during the beginning months of Trump's term. This has been evidenced in the S&P500 and DAX, that has exhibited a bullish rise in the face of fiscal policy announcements. The promise of jobs, significant tax reform, deregulation and government spending has fuelled stock indices to reach highs, with the S&P500 hitting its new peak on the 1st March. The Governor of the Federal Reserve, Lael Brainard, whom has had disinclinations to raising interest rates in the past, announced that the US and Global economies were in better stead as 'the contrast with the situation a year ago is sharp'. Consequently, the Fed hiked rates in March'17 and are expected to continue to do so gradually. The end of Q1 and into saw a slight negative equity trend off the high and growing expectations of more equity performance retracement so ML Capital enquired with investors if they intended to reduce long equity risk in their portfolios or if they would remain heavily exposed to Developed Markets Equity. 5 of investors responded that they will remain heavily exposed to long only equity funds, given that shorting a new high has been historically a poor investment decision. However, they have implemented hedging against scenarios whereby Equity indices may fall. Investors' confidence in markets has been cautious for some time so many began initiating hedging positions over the last 12 months. Some have re-directed assets from their Long book in order to acquire decent allocations to Alternative funds and ultimately dial down risk. These include layering in Market Neutral positions or maintaining position sizes to liquid Alternatives, such as Equity Long/short funds, whilst taking profits and building cash. Others have implemented Put Options or some are looking for greater diversification in lower Private Equity sectors and regions. of investors are maintaining full levels of Equity market exposure but a half of these investors are diversifying away from the US and tilting towards Asia and Europe. Whilst they believe absolute levels of valuation and sentiment are the principal sources of concern, an economy characterised by low interest rates, improved earnings momentum and healthier global growth, sustains. Other thoughts are that they hope for increasing volatility, which can provide long-term investment opportunities for skilled Equity managers in these areas. Lastly, a couple of investors will maintain their exposure but diversify their manager approach and manage closely their position sizes. The remaining 2 of polled investors are split on their approach with some defensively positioned and others whom have never been heavily exposed to Long Only Equity, since they favour Absolute Return products. The defensive crowd have low beta in their portfolios and find alpha opportunities getting larger, so Equity highs do not present an issue to their allocations. ML Capital have taken away that whilst the majority of investors remain either fully or heavily exposed to Developed Market Equities, there are regional shifts or larger exposures being acquired to Alternative strategies in. For those increasing allocations towards Alternatives, they look forward to a greater normalised economy that should allow such strategies to prosper. 4

5 Looking to launch a regulated fund? ML Capital can help you. Whether it is a standalone fund structure, a new sub-fund of an existing umbrella, or a management company, ML Capital s structuring team will be able to advise you on the best way forward. Investment Manager and Promoter to Regulated Funds Dedicated UCITS and QIAIF platforms with access to top tier service providers Structuring expertise - Re-domiciliation, Mergers UCITS & QIAIF infrastructure support, enabling you to focus on your investment strategy Cross border distribution expertise and fund registration Experienced sales team for retail and institutional distribution MLC Management (part of the ML group) is an authorised UCITS and AIFM "super Manco" management company fully licensed in Ireland ML Capital: your one stop shop for investment managers looking to launch a European regulated fund. For more information please contact info@mlcapital.com or

6 Long/Short Equity MORE SAME LESS Trending MORE LESS Global Long/Short 12% 48% US Long/Short 19% 19% 62% UK Long/Short 15% 12% 73% Japan Long/Short 12% 2 68%

7 Long/Short Equity MORE SAME LESS Trending MORE LESS European Long/Short 15% 31% 54% Commentary Through Q1, Global, US, UK, Japanese and European Equities produced strong returns seen by the S&P500 Index reaching its fifth straight gain, the MSCI World Index nearing new highs and European shares also rising. Entering into, a large proportion of investors expect to see an equity performance retracement that could open the gateway for fundamental stock pickers to benefit from a breakdown in equity market correlations and higher stock dispersion. This is evidenced this quarter by the inflows into this asset class, as investors' confidence improves from the disappointing performance seen in of our polled investors are increasing their allocations to Global Equity Long/Short, which is an 13% increase from Q1. They note the potential risks of growing tensions between the West and East and mild uncertainty of Europe but overall, Global Equity Long/Short is favourable amongst investors. Likewise, European Equity Long/Short is in favour for the quarter with 85% of respondents increasing or maintaining their exposure here. Q1 data improved investor sentiment of a resilient European economic recovery and the Dutch Centre-Right win reduced political concern towards the EU's stability. For UK Equity Long/Short, only 12% of respondents will increase their holdings to this region as in contrast to the US, the Bank of England has maintained low rates that may not provide the opportunity set expected from other Global markets. Following the confirmation of a Hard Brexit and a pending election, the UK's economic position on the Global stage is unclear so we see for now a 73% majority of respondents maintaining their exposure to this strategy. Through Q1, the S&P500 and DAX experienced large gains but US Equity sector performance began to differ by varying degrees. Therefore within, 19% of polled investors are increasing and 62% are maintaining their exposure to US Equity Long/Short strategies with the expectation for further sector breakdown in this asset class. Only a mere 8% want to decrease their exposure. Likewise for Japanese Equities, the majority of investors will either increase or maintain their holdings to Japan Equity Long/Short. The Japanese economy has been relatively stable with both domestic and international demand, which has improved consumer confidence. However, 12% of respondents do not have the confidence of most in the market. In conclusion, Developed Markets Equities Long/Short are much more favourable amongst investors compared to the end of Entering into, they hope for greater returns to be generated from a breakdown in equity market correlations, and hopefully the macro environment can allow for certain Equity Long/Short managers to differentiate themselves, so this strategy can perform better this year than last. 7

8 Emerging Markets MORE SAME LESS Trending MORE LESS Global Emerging 8% 28% 64% Pan-Asia 15% 12% 73% Latin America 27% 73% Commentary The first quarter has been positive for Emerging Markets Equity as a more robust macroeconomic landscape, continued Global economic activity, negative US policy implications and higher commodity prices have spurred EM equity gains (Lazard). This has been reflected in the MSCI Emerging Markets Index that was up 11.44% over Q1. During the month of February, Emerging Asia and Latin America competed to be the highest performing region yet despite strong performance, this has not acted as a catalyst for our polled investors to significantly increase their exposure to either regions in. However, 28% of investors have more confidence in Global Emerging Market Equities, that may mark the beginning of a trend for the region as a whole. In all, our research indicates that the majority of investors are satisfied with their current holdings to both regions. Pan-Asia Market Equities recorded considerable gains in Q1, which was reflected in the MSCI AC Asia Index, up 9.21% for the quarter. Asian currencies were also steady through the quarter and investor confidence has appeared to increase following a rise in companies earnings within the region. As of recent, many investors have been cautious towards Asia but a few respondents are now looking at the region as a more attractive opportunity set, given the rate rises in the US. Despite growing confidence in the region, 73% of our polled investors will maintain their exposure to Pan-Asia Market Equities, whilst others note that they would like to see greater inflows into the region prior to putting it back in focus. Nevertheless, given the regions' decent gains, the outlook seems much more positive. 8

9 Relative Value MORE SAME LESS Trending MORE LESS Market Neutral 8% 42% Convertible Arbitrage 15% 8% 77% 2 1 Fixed Income 7 15% 54% 31% Commentary Market Neutral strategies continue to see inflows with 5 of respondents increasing their exposure this quarter. Market volatility has been persistently low but with hopes of this to increase, coupled with growing Global political risk, many polled investors are looking to hedge through a Market Neutral approach. This has been noted specifically to their Equity Long/Short UCITS holdings, as well as exposure to Quant UCITS Funds. For the Convertible Arbitrage UCITS market, the overall consensus indicates that the majority of investors will maintain their holdings to this asset class with the only difference being that 8% more investors are looking to increase their exposure from last quarter. During Q1, Government Bond markets undertook re-evaluations in light of possible difficulties for Trump to push his economic growth policies through Congress and heightened European political risk with the rise of Far-Right Marine Le Pen, however these concerns appeared temporary on markets, as they rallied back to exhibit tight spreads. On the 15th March, the Federal Reserve raised rates to 1% for the second time in three months, signalling a benign rate rising period over the year. Of the investors polled, 31% are looking to increase their holdings to Fixed Income in, which is up from the previous quarter. However, most notably in Q1, 62% of investors reduced their exposure to this strategy as rates rose. Given that Fixed Income markets are still high, it appears that investors are more content this quarter with their adjusted levels of exposure, the majority of 54% are maintaining their holdings. 9

10 Event Driven MORE SAME LESS Trending MORE LESS Multi-Strategy 2 16% 64% Distressed 23% 5 77% 2 1 Merger Arbitrage 18% 14% 68% Commentary Last Barometer, we reported that 36% of polled investors were increasing their exposure to Multi-Strategy UCITS Funds in Q1. This was later reflected in LuxHedge data that recorded EUR8 billion of inflows into this asset class in January'17. For, the majority of investors (64%) intend to maintain their current holdings yet 16% will increase their exposure, possibly as a result of the strategy's performance, up 1.05% Year-To-Date (Global UCITS Alternative Index). However, despite this 64% of investors, there are more investors reducing rather than increasing their exposure for this quarter. The Distressed UCITS market, amongst our polled investors, continues to also receive redemptions with an additional 23% of investors reducing their exposure from last quarter. This highlights the liquidity requirements of UCITS, which are not suitable for Distressed strategies. Within the Mergers & Acquisitions market in Q1, the total number of announced deals fell by 17.9% however, the value of such activity was up 8.9% compared to Q1'16 (CNBC). Investment Europe described solid inflows into this asset class in Q1, that was mirrored in our last Barometer edition where 22% of polled investors were increasing their exposure. Although the shift towards larger deals presents a new opportunity set, this difference in M&A activity has seen a reduced amount of 14% of investors increasing their holdings into this next quarter. There is a slight increase in the number of investors redeeming their holdings compared to Q1, with 4% more investors reducing their exposure but overall, the conclusion remains that there is a larger percentage of 68% content with their exposure to Merger Arbitrage UCITS Funds. 10

11 Macro & CTA MORE SAME LESS Trending MORE LESS Global Macro-Discretionary 7% 63% Global Macro-Systematic 12% 19% 69% Managed Futures / CTAs 18% 21% 61% Commentary Global Macro Discretionary, Global Macro Systematic and Managed Futures strategies have remained popular amongst investors entering into '17. The trend into Global Macro Discretionary and Global Macro Systematic UCITS Funds show the majority of polled investors increasing or maintaining their allocations to these strategies. Although compared to ML Capital's Q1 research that saw of respondents reducing their exposure here, 's outflows are offset by greater inflows amongst our polled investor base. Lastly, Global Macro Systematic UCITS Funds gained large traction in Q1 with some funds reaching asset milestones however, for there appears to be a minimised trend into this space. In Q1, the Managed Futures market saw inflows of $7.1bln despite poor performance, which has seen CTAs lose money in six of the last eight months. The above chart represents all Short-Term, Medium to Long-Term and Multi-Asset Absolute Return UCITS strategies, all of which have continued to receive large inflows as investors have confidence in their ability to outperform this quarter. As popularity has increased in this market, ML Capital has decided to further break down the Managed Futures sector into separate sub-strategies, where the more specific results can be found on the following page. 11

12 Macro & CTA MORE SAME LESS Managed Futures Short Term Managed Futures Medium to Long- Term 23% 15% 19% 31% 62% 5 Multi-Asset Absolute Return Note 12% 16% 72% Due to inflows that the Macro/CTA market has experienced, ML Capital has decided to further break down the sector for future reports to include: Commentary The Trend Following Market AUM has continued to swell through Q1, recording notable March inflows of $7.1bln (evestment). Despite on average performance of Managed Futures through 2016, the strategy continues to be popular with investors as they look to diversify their portfolios for when markets decline. 31% of our polled investors are looking to increase their holdings of medium to long-term CTAs in, which provides evidence of the greater inflows into this market. More recently, some investors have been focusing on implementing shorter term trading opportunities. This can be witnessed through the 15% of our respondents, whom are increasing their exposure to Short-Term CTAs this quarter. The argument for these allocations could be that investors are looking to diversify their medium to long-term CTA exposure or rising expectations that volatility in markets could rise. However, there are also 23% of polled investors redeeming out of this strategy, which may be due to negative returns across many funds towards the end of 2016 and Q1'17, as a result of extremely low volatility. Other investors are not looking to be exposed to any one specific Macro/CTA strategy hence they have preference towards Multi- Asset Absolute Return UCITS Funds, that are an amalgamation of other Alternative strategies that can include Managed Futures in 12

13 Announcement Of A Benign Rate Rising Period Last quarter, ML Capital posed the question to investors "Which strategies will be successful this year?" 13% of respondents believed that CTAs would be the best performers where a few others had theirs bets either Merger Arbitrage, Equity Long/Short and Global Macro Discretionary. However, an overwhelming majority of responses said 2017 was just too difficult to predict due to an unclear Trump agenda, an undecided hard/soft Brexit, an unclear Federal Reserve agenda and looming European elections. Once Q1 was underway, positive price momentum of US equity markets restored a more optimistic view across global markets and the Federal Reserve announced their interest rate agenda for the year. In a political sense, previous concerns surrounding event outcomes and the magnitude of their implications lessened as markets rallied through the announcement of a Hard Brexit and the Centre-Right Dutch win, which improved confidence towards the stability of the European Union. With eased political woes and continued economic growth, combined with Yellen's announcement that there will be two more rate hikes this year, ML Capital thought it wise to go back to investors once again to ask them if they had a clearer view of which strategies would outperform this year, particularly in the face of an expected benign rate rising period. The sub-set of investors, who had confidence in Merger Arbitrage, Equity Long/Short and Discretionary Global Macro strategies in Q1, saw the third Fed rate rise since the Financial Crisis as further reason to believe that these will outperform. A couple of these investors placing their investment decisions on Equity Long/Short, have shifted away from US Equity Long/Short to reduce exposure to US rates and have moved towards Asia and Emerging Markets. One investor detailed that his confidence in these regions derives from rising interest rates in the US that indicates the US economy remains upbeat. The expectation is that this will feed through to Asia and Emerging Markets through risk on trades and they are looking for better relative allocations. 35% of investors now forecast CTA strategies to perform best during this environment, which displays a 22% increase in confidence, following the announcement of steady US rate rises. This favourable view could be attributed to this strategies' strong performance through Q1, but investors still remain cautious as they would expect Managed Futures to do well in the longer term as experience has taught them not to rely on them in the short-term. 25% of respondents have the belief that Relative Value strategies will have the greatest returns if volatility increases, whilst a smaller proportion of investors are multiplying their allocations to Fixed income, that has included Short Bond strategies. 15% of investors are continuing to be hesitant towards indicating individual strategies that they believe will perform well throughout the year. One third of this sub-set feel that a well-diversified portfolio should be robust to interest rate regimes whilst the other third feel a good diversified multi-asset spread is the best course of action this year. The remaining third still strongly believe that it is tough to generalise about specific strategies and that the previous quarter has not made their view clearer, with some not convinced that the Federal Reserve will raise rates at expected intervals. Instead, they are committed to a bottom-up approach, including a diversified selection of good specific managers in their portfolios, rather than a heavy focus on asset class/strategy performance predications. The remaining percentage of responses are diversified across multiple strategies. In certain circumstances, Gold is being included in portfolios and in others, some FX. Other investors are resting their investment decisions on strategies and sectors such as Financials, Linkers, Small/Mid Caps, TMT, Biotech, Health Care, or Equity Activism. Notably, a market that is gaining larger traction is Risk Premia with a few investors looking to allocate to Risk Premia products in an attempt to exploit structural market imbalances and their inefficiencies this year. Deutsche Bank's 2016 report 'Alternative Risk Premia' stated that the 'AUM in Risk Premia related strategies is projected to rise from around USD250 billion in 2014 to more than USD 1 trillion by the end of 2019' thus it will be interesting to watch the asset levels in this space over the year. To conclude, it is clear that investors have greater conviction from Q1 towards which strategies they favour, especially now a benign rate rising period can be cautiously expected. However, there is still great divergence as to what strategies they believe will outperform in It will be engaging to watch if the Federal Reserve stays true to their announcement of two more rate hikes this year and more broadly, to watch how different strategies perform amongst the economic and political landscape in

14 Source Data Emerging Markets Long / Short Equity More Same Less More Same Less Global Emerging 28% 64% 8% Global L/S Equity 48% 12% Latin America 73% 27% UK L/S Equity 12% 73% 15% Pan-Asia 12% 73% 15% US L/S Equity 19% 62% 19% Relative Value More Same Less Fixed Income 31% 54% 15% Convertible Arbitrage 8% 77% 15% Market Neutral 5 42% 8% European L/S Equity Japan L/S Equity 31% 54% 15% 2 68% 12% Further Statistics Barometer Participants Highest Surveyed Alt UCITS Allocation USD $ 500 bn Event Driven Lowest Surveyed Alt UCITS Allocation USD $ 1 m More Same Less Highest Surveyed Hedge Allocation USD $ 10 bn Multi-Strategy 16% 64% 2 Lowest Surveyed Hedge Allocation USD $ 5 m Distressed 77% 23% Highest Surveyed Avg Alt UCITS Ticket USD $ 500 m Merger Arbitrage 14% 68% 18% Lowest Surveyed Avg Alt UCITS Ticket USD $ 500 k Macro & CTA Macro & CTA More Same Less More Same Less Global Macro Discretionary 63% 7% Medium to Long-Term CTAs 31% 5 19% Global Macro Systematic 19% 69% 12% Short-Term CTAs 15% 62% 23% Managed Futures/CTA 21% 61% 18% Multi-Asset Absolute Return 16% 72% 12% 14

15 About ML Capital ML Capital is a forward looking and leading independent fund structuring and investment management firm specialising in European regulated fund structures. As an award winning platform provider, we partner with the very best of investment managers to bring to market the latest most appropriate fund structures to comply with the raft of incoming regulatory requirements, whilst meeting the ever increasing expectations of investors. ML Capital handles all aspects of the fund structuring and launch on investment managers' behalf. Through our dedicated network we also offer fund sales and distribution if required and have had comprehensive coverage of investors in all key European markets for the past 20 years. Our goal is to provide the most appropriate fund structures to maximise distribution opportunities across all key markets. Our solutions bring together market leading service providers with some of the very best minds in the regulated fund space; providing well managed European investment products with the highest levels of service and governance. We ensure that all incoming investors and partners come in with the full knowledge that they are investing into structures that are designed to protect and preserve investor interest. MLC Management Ltd acts as third party management company for UCITS and AIFMD funds. Offering better compliance, oversight and management facilities than self-managed structures, the management company is the future of fund structuring; as the industry responds to the desire of investors and regulators for greater substance, we believe management companies will become the structure of choice for new funds, as others move away from self-managed fund structures. MLC was incorporated in February 2015 and currently oversees $3.1 billion of assets. About The MontLake UCITS Platform ICAV The MontLake UCITS Platform, domiciled in Ireland and regulated by the Central Bank of Ireland provides investment managers with a turnkey solution for launching a UCITS fund under its umbrella structure. Typical time to market is 10 weeks, or less, with the platform offering immediate access to a wide range of investors through ML Capital s distribution network. Funds placed on the platform by ML Capital will benefit from top-tier service providers including Northern Trust for custody, administration and trustee services, KPMG for audit, and Bridge Consulting for oversight and directorships. ML Capital has also ensured that managers utilising the MontLake UCITS Platform will have unfettered access to a network of the leading prime brokerage firms. For more information on ML Capital please visit our website or our platform website 15

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17 DISCLAIMER INVESTMENT PROFESSIONALS ONLY This financial promotion is issued by ML Capital Limited. This document is not intended as an offer to acquire or dispose of any security. Information given in it has been obtained from, or based upon, sources believed by us to be reliable and accurate although ML does not accept liability for the accuracy of the contents. This information is not intended to constitute a basis for any specific investment decision. For Addressee only. The distribution of this report does not constitute an offer or solicitation. Past performance is not a guide to future performance. The value of investments can fall as well as rise. You should ensure you understand the risk profile of the products or services you plan to purchase. The services provided by ML Capital Limited are available only to investors who come within the category of the Eligible Counterparty or Professional Client as defined in the Financial Services Authority s Handbook they are not available to individual investors, who should not rely on this communication. Information given in this document has been obtained from, or based upon, sources believed by us to be reliable and accurate although ML Capital does not accept liability for the accuracy of the contents. ML Capital does not offer investment advice or make recommendations regarding investments. 17