The Rise of Liquid Alternatives

Transcription

1 Citi Investor Services : Business Advisory The Rise of Liquid Alternatives Presentation to CAIA in Chicago May 21 st 2014

2 Hedge Fund Industry: How investors are using hedge funds continues to evolve with market leaders increasingly looking to use hedge funds as shock absorbers in the core of their portfolio Hedge Fund Industry AUM & Relative Performance: Diversification & Risk-Adjusted Returns Shock Absorption Capture Excess Performance 2,500,000 Avg. 3 year trailing (annualized) MSCI World Return 3.6% Volatility 14.0% $2,252 B Millions of Dollars AUM 2,000,000 1,500,000 1,000,000 Avg. 3 year trailing (annualized) Return Volatility MSCI World HFRI Eq Hedge 15.7% 21.8% 12.0% 8.3% HFRI Eq Hedge Pension A/L 9.8% 86.6% 8.4% $1,868 B Avg. 3 year trailing (annualized) Return Volatility MSCI World HFRI Eq Hedge 2.5% 3.3% 18.2% 9.8% Pension A/L 108.5% $491 B Pension A/L 74.0% 500,000 $167 B * Global pension liability & asset information based on Towers Watson Global Survey with data indexed as percent of 1998 coverage. Data shows annual average for listed period. Only defined benefit assets are considered. Sources: Citi Prime Finance analysis based on MSCI, S&P, Bloomberg, HFR & Towers Watson data.

3 Post-GFC Changeover in Investor Audience The audience providing the majority of capital to the hedge fund industry flipped in the aftermath of the GFC, and Institutional Investors have since continued to dominate total allocations of capital Millions of Dollars Hedge Fund Industry Sources of Underlying Capital 2002 to 2013 $500B 80% $125B 20% Institutional Pension Funds, SWFs & E&Fs $990B 53% $848B 47% $1.17T 61% $748B 39% High Net Worth & Family Office $1.72T 65% $907B 35% Coming out of the Technology Bubble, capital for the hedge fund industry was predominantly sourced from high net worth and family office investors A massive wave of institutional investments led primarily by pensions and then later SWFs helped to balance the sources of industry capital even as HNW & FO AUM nearly doubled Post-GFC, the main audience for hedge funds flipped and institutions came to dominate as HNW & FO investors did not replenish allocations liquidated in Institutional investors have continued to dominate in recent years and this has helped to reshape the industry Source: Citi Investor Services analysis based on HFR data & proprietary interviews. 6

4 Allocations Become More Direct The primary way that investors provide this capital to hedge funds also shifted as more institutions now directly allocate their capital -- with or without the help of consultants Investor Allocation Methodology: Fund of hedge fund (FoHF) AUM peaked in as these were the primary vehicles used by institutions looking to access the market at the outset of their investment cycle As institutions became more experienced, they began to allocate their own capital directly to hedge fund managers Backlash against FoHFs post- Madoff accelerated their decline as many HNW & FO investors fled these investments The changeover in investment approach noted just after the GFC became much more exaggerated in recent years this has had a profound affect on the industry Source: Citi Investor Services based on HFR data. 7

5 Expanded Use of Hedge Funds Changing use of hedge funds in risk-aligned portfolios is helping to push their share of total institutional allocations to post-gfc highs despite significant performance gaps Total Institutional Investment into Hedge Funds & Mutual Funds (Passive & Active) & Hedge Funds as Percent $16,000,000 $14,000,000 $12,000,000 $10,000,000 $10.3 T $12.9 T $13.5 T $15.9 T $16.9 T 10.2% 10.5% 10.3% 10.1% 9.9% 9.7% Relative Performance: 2012 Q S&P 500 MSCI World $8,000,000 $6,000,000 $4,000,000 $2,000, % 9.5% 9.3% 9.1% 8.9% 8.7% HFR Equity Hedge $ % Total institutional investments across hedge funds and mutual funds jumped to $16.9 trillion in 2013 a third year of successive record highs hedge fund s share of such holdings surpassed 10% -- its highest result ever Gains in hedge fund allocations and their share of investments occurred despite significant under-performance relative to the major equity indices signaling the rising use of hedge funds as shock absorption in a high beta year Source: Citi Investor Services analysis based on HFR & evestment data. 11

6 Institutional Assets Seen Doubling We see institutional investors allocating an increased portion of their overall AUM to the traditional hedge fund industry over the coming 5 years more than doubling their total capital investment 2013 Institutional Estimates Total Assets Billions US $ Alternati ves as % Alternative Assets Hedge Funds as Hedge Fund Hedge Funds as % Global Pension Funds $ 31,980 18% $ 5, % $ 1, % Sovereign Wealth Funds $ 5,712 35% $ 1, % $ % Endowments & Foundations $ % $ % $ % Total Institutional $ 38,651 21% $ 8, % $ 1, % 2018 Institutional Forecast Total Assets Billions US $ Alternati ves as % Alternative Assets Hedge Funds as Hedge Fund Hedge Funds as % Global Pension Funds $ 38,165 24% $ 9, % $ 2, % Sovereign Wealth Funds $ 7,191 40% $ 2, % $ % Endowments & Foundations $ 1,294 50% $ % $ % Total Institutional $ 46,650 27% $ 12, % $ 3, % We see the continued drive toward riskaligned portfolio construction and the increased use of hedge funds across a broader portion of pension portfolios driving allocations from the institutional audience up from $1.7 trillion to $3.6 trillion in the coming 5 years Sources: Citi Investor Services analysis based on 2014 Survey Interviews, Towers Watson Global Pension Studies, SWF Institute, Cerulli, NACUBO & Commonfund Studies. 24

7 Traditional Hedge Fund Industry Assets to Grow We expect AUM in traditional, privately-offered hedge fund vehicles to grow from $2.6 trillion to $4.8 trillion by 2018 with capital sourced from institutional investors accounting for 74% Millions of Dollars 4,000,000 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 Underlying Sources of Hedge Fund Capital 2002 with Forecast to 2018 Institutional (Pensions, SWFs & E&Fs) $1.72T 65% $3.56 T 74% $1.25T 26% High net worth and family office assets are also likely to edge higher in this period, rising from $909 billion in 2013 to $1.25 trillion by 2018 Growth from this sector will not outpace continued institutional inflows, however, as institutions will grow to account from 65% in 2013 to 74% of total AUM in our 2018 forecast 1,000, ,000 - $500B 80% $125 B 20% $907B 35% (High Net Worth and Family Offices) E 2015E 2016E 2017E 2018E Together, total industry assets in traditional, privately offered fund vehicles should rise to $4.8 trillion 25

8 Emerging U.S. Audience Potential exists, however, for there to be an entirely new audience of U.S. investors looking for alternative strategies that are ineligible to purchase hedge funds Alternatives Audience Expansion in the U.S. SWFs Pension Funds Endowments & Foundations High Net Worth & Family Offices Affluent Mass Affluent Retail Institutional Private Fund Eligible Public Fund Eligible Increasingly, we are starting to see demand for alternative strategies from a more retail based audience that are ineligible to purchase privately offered funds This could add a new tier to the hedge fund industry and create a secondary asset pool for managers to access in publically offered funds What will be important to watch is whether this U.S. phenomenon begins to spread globally 8 Sources: Citi Prime Finance

9 Breakdown of Assets by Audience Retail investors make up 47% of total U.S. professionally managed assets and individuals having less than $5.0 million net worth make up 73% of that audience Billions of Dollars Professionally Managed U.S. Assets Under Management Retail & Institutional (Excludes Non-Professionally Managed Assets Adjust Channels for Double Counting) $9.9 T $8.6 T $14.2 T $12.5 T $14.5 T Institutional $12.8 T Retail Nearly $9 trillion in assets held by investors unable to purchase private funds Sources: Cerulli Associates citing Department of Labor, ICI, Federal Retirement Thrift Investment Board, PlanSponsor, Insuranceassetmanager.com, The Foundation Center, NACUBO, Insured Retirement Institute, VARDS, Morningstar Direct, Strategic Insight/SIMFUND, SIFMA, Investment News, Financial Planning Bank, Insurance Market Research Group, Meridian IQ, S&P Capital IQ MMID, The Institute of Management and Administration, Pensions & Investments, FDIC, OCC, Barron's, Financial Planning Association, Investment Management Consultants Association Unlike the European market that was predominantly institutional, the U.S. investor market is much more evenly balanced between retail and institutional investors Professionally managed retail assets reached record highs in 2011, surpassing their 2007 peak Individuals in wealth bands that fall under the qualified investment person threshold of $5.0 million in net worth account for 73% of the total pool of investable assets Demand for alternative investment products from the advisors that service these was a dominant theme in this year s survey 9

10 Retirement Assets are Shifting New Audience for Alternatives Source: Citi Investor Services Analysis based Cerulli data

11 Liquid Alternative Growth Drivers Confluence of recent regulatory changes in the U.S. & shifting wealth advisor demand have narrowed the gap between the mutual fund and the hedge fund industry Mutual funds becoming a more attractive investment vehicle Asset Fee : converted 12b-1 fees from a distribution charge to AUM fee Redemption Fee : allowed funds to charge fees for redemptions, resulting in a stickier asset base Fund of Fund Structure : allowed managers to invest in unaffiliated funds, enabling a fund of mutual fund structure (i.e., public investment in private fund structure) Electronic Documentation : permitted managers to offer documents electronically, rather than requiring a large marketing team to support launches while hedge funds face lower incremental cost to enter Hedge Fund Registration and Form PF : required greater transparency for private funds and thus increased the cost for compliance and reporting Proposed JOBS Act : will permit managers to discuss their private fund track record and strategy with non-qualified investors and greater support for retail distribution is emerging Changing Pay Structure : as advisors are compensated on a combination of sales commissions and AUM fees Recognized hedge fund brands may command higher commission rates than traditional mutual fund and ETF products Open Product Architecture : as assets shift to RIAs and independent broker dealers more willing to distribute unaffiliated product Discretionary Investment Authority : RIAs typically have discretion over client portfolios, allowing them to execute combined purchases of preferential share classes 11

12 US Alternative Mutual Fund Asset Growth In 2013 we saw >$100B of inflows into open ended mutual funds tagged as Alternative by Morningstar. The average CAGR over the last 5 Years now represents 43% growth YoY. $350,000,000,000 $300,000,000,000 $250,000,000,000 AUM in Alternative Mutual Funds has increased $29.4 Billion since January 1 st 2014 $200,000,000,000 43% CAGR $150,000,000,000 $100,000,000,000 $50,000,000,000 $ Q14 Bear Market Currency Managed Futures Market Neutral Nontraditional Bond Long/Short Equity Multialternative Source: Morningstar Through March 1 st,

13 US Liquid Alternative Growth in Context 40 Act alternative mutual funds are showing rapid growth that mirrors the hedge fund industry in the early 1990s that pool of AUM went on to double & double again in the following 10 years Growth of Hedge Fund Industry Assets vs. 40 Act Alternative Mutual Funds 2006-Q Growth of Hedge Fund Industry Assets Hedge Fund Industry $374 B 40 Act Alternative Mutual Funds 2006-Q Q $368 B 900, , , , , , , , , % $374 B $820 B / 1991 / 1992 / 1993 / 1994 / 1995 / 1996 / 1997 / 1998 / Q Asset growth in 40 Act alternative mutual funds matches almost dollar for dollar growth in the hedge fund industry itself between 1990 and 1998 Source: Citi Investor Services analysis based on HFR & Morningstar To put this in context, we show on this chart how hedge fund AUM more than doubled in the next 5 years to $820 billion in 2003 By summer 2008, AUM reached $1.8 trillion 22

14 Alternative UCITS Assets Growth In 2013 we saw less significant inflows into UCITS funds, with a net inflow of ~$40B compared to the $100B into US alternative mutual funds. $350, $300, $250, $200, $150, $100, Nontraditional Bond Equity Long/Short Equity Market Neutral Multi-Alt Currency Managed Futures Bear Market $50, $ Growth of US Alternative Mutual Funds Source: HFR December 2013

15 Forecast for Liquid Alternatives We expect liquid alternatives (40 Act alternative mutual funds & alternative UCITS) to grow significantly in the next 5 years based on more democratized access & interest in hedged strategies Forecast Growth in 40 Act Alternative Mutual Funds & ETFs Billions $1,400 $1,200 $1,000 $800 $600 $400 $200 $- $368 B $261 $366 27% CAGR $455 $567 $706 $107 $133 $166 $207 $257 $1.2 T $879 $ E 2015E 2016E 2017E 2018E We anticipate 40 Act alternative mutual funds & ETFs increasing from $368 billion in 2013 to $1.2 trillion AUM by 2018 this is a conservative forecast using a reduced CAGR from recent years The 40 Act alternative mutual fund figure alone is forecast to increase from $261 billion to $879 billion Alternative ETFs Alternative Mutual Funds Billions $1,400 $1,200 $1,000 Forecast Growth in Alternative UCITS $800 $624 $600 $543 $472 $400 $310 $357 $410 $200 $ E 2015E 2016E 2017E 2018E Source: Citi Investor Services based on data from HFR, Morningstar and SEI. We also anticipate continued, albeit slower, growth in alternative UCITS as we see the trend toward broader use of alternative strategies in wealth portfolios We see alternative UCITS AUM doubling in the next 5 years from $310 billion to $624 billion 26

16 Forecast for Total Hedge Fund Industry Growth Retail demand, along with interest from traditional hedge fund investors, should help to double total industry AUM over the coming 5 years with the retail component of that rising to 17% of total AUM Comparative Sources of Hedge Fund AUM: 2013 vs Estimate 2013 Total AUM: $2.9 T 2018 Estimated Total AUM: $5.8T Retail $286B 10% Retail $977B 17% HNW / FO $991B 34% Institutional $1.64T 56% HNW / FO $1.25T 22% Institutional $3.56T 61% Assumes 50% of total 40 Act alternative mutual fund AUM & alternative UCITS AUM is currently managed by hedge funds and forecasts that by 2018 that figure will be up to 65% of total 40 Act alternative mutual fund and alternative UCITS AUM being managed by hedge funds. 27

17 Distribution of Mutual Funds is Fragmented In the US the asset pools for Mutual Funds are spread between traditional wire houses and a new emerging landscape of independent Registered Investment Advisers

18 Sales and Distribution Examples Investment Manager/Fund Distributor Sales Channels AQR Funds ALPS Distributors LLC In-house wholesalers Third-party marketers Mainstay Marketfield NYLIFE Distributors LLC NY Life Sales Third-party markets Arden Alternative Strategies Arden Securities LLC Partnership with Fidelity Portfolio Advisory Service ($50k minimum account) Absolute Strategies Multi-Manager Blackstone Alternative Multi-Mamager Direct sales to broker-dealers and RIAs Foreside Fund Services LLC Foreside Wholesalers Blackstone Advisory Partners LP Third-party marketers on Foreside broker-dealer license Partnership with Fidelity Portfolio Advisory Service ($50k minimum account) Direct sales to broker-dealers and RIAs 8

19 Basic Open-End Mutual Fund Structure Independent Board of Directors Investment Manager & Adviser Active Distribution & Marketing Mutual Fund Regulated Investment Company Security listed on public exchanges Key Service Providers Single pool of assets Statutory Distributor Custodian Trading & Financing Counterparties Executing Brokers Prime Brokers Mutual Fund Administrator Investor Services

20 Open-End Multi-Alternative Mutual Fund Structure Independent Board of Directors Investment Manager Active Distribution & Marketing Mutual Fund Regulated Investment Company Security listed on public exchanges Aggregated Pool of Assets (No Look Through to Underlying Accounts) Key Service Providers Statutory Distributor Custodian Separate Accounts Sleeve 1 Sleeve 2 Sleeve 3 Mutual Fund Administrator Hedge Fund Manager Sub-Advising Sleeve 1 Hedge Fund Manager Sub-Advising Sleeve 2 Hedge Fund Manager Sub-Advising Sleeve 3 Investor Services Trading & Financing Counterparties Executing Brokers Prime Brokers

21 Open-End Managed Futures Mutual Fund Independent Board of Directors Investment Manager Active Distribution & Marketing Mutual Fund Regulated Investment Company Security listed on public exchanges Key Service Providers Single pool of assets Statutory Distributor 100% Ownership 25% of Assets 100% of Profits Custodian Controlled Foreign Corporation ( CFC ) P&L Net of Fees Mutual Fund Administrator Investor Services Commodities & Futures Contracts on Commodities Commodities Trading Advisors (CTAs) Trading & Financing Counterparties Executing Brokers FCMs

22 Series Trust Structure Independent Board of Directors Separate Investment Advisors for each Fund Series on the Trust Active Distribution & Marketing Mutual Fund Regulated Investment Company Security listed on public exchanges Key Service Providers Fund Series A Fund Series B Fund Series C Fund Series D Statutory Distributor Custodian Trading & Financing Counterparties Executing Brokers Prime Brokers Mutual Fund Administrator Investor Services

23 Citi Investor Services : Business Advisory Q&A Presentation to CAIA in Chicago May 21 st 2014