Alternative UCITS Barometer Quarter 1, 2014
Introduction ML Capital Asset Management, the investment manager and promoter of the MontLake UCITS Platform, is delighted to present the 13th 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 survey a diverse range of 60 investors who collectively manage almost $95 billion and today invest upwards of $20 billion into Alternative UCITS reflecting the widening of the investor base for regulated alternative products in Europe. Respondents range from insurance and pension funds to private banking organisations, with a significant constituent of financial advisers that deal with the primary source of Alternative UCITS inflows, the mid-net-worth investor. Commenting on the highlights of the latest Barometer, John Lowry, Co - Founder & CIO of ML Capital; "This quarter, the strategies that our survey indicated would gain most assets were those focussed on Global, European and US stocks. This indicates that sophisticated investors are favouring risk assets, with the strongest uptick in demand for Global long short funds where almost half of respondents plan to deploy more assets. In addition, the Emerging markets sector as a whole, while still facing some stiff headwinds, appears to be well positioned to stem the outflows of 2013 and indeed garner decent inflows over the coming months. Investors remain negative on the outlook for the convertible bond funds, and have quite divergent views on most of the main sectors. We are now entering into our fourth year of publishing the Barometer and would like to thank all respondents for sharing with us their allocation plans for the coming quarter". We hope that the Barometer will provide a useful insight into current appetite levels across some of the major sectors of the regulated fund universe. Should you have any questions then please do not hesitate to contact the team. Cyril Delamare, CEO 2
Q1 Barometer Highlights Participant Type Bullish Plans for Global and US L/S Equity Strategies 6 14% 2% 14% The top two most sought after strategies are Global long/short and US long/short, with a healthy level of interest in the Emerging markets and European sectors. Bank/institution Family Office Fund of Funds Private bank Wealth manager / IFA Huge Spike to Market Neutral Funds Three times more interest this quarter for Market Neutral funds, which contrasts the overall view of favouring risk assets. Some of the investors surveyed indicated a barbell approach, strategically balancing an overweight long/short equity exposure with a market neutral allocation. Others indicated that they expect some potential headwinds for the markets with increased levels of volatility this year. This should accelerate the move into market neutral and lower risk absolute return products, and to the alternative funds sector in general. Participant Location 4% 14% 26% 2% 54% Continental Europe Scandinavia UK Switzerland Swing away from Regional Emerging Market Funds Rest of World While 36% of respondents plan to allocate to diversified EM funds, demand for dedicated Asian and Latam funds has fallen this quarter to the lowest levels since the barometer commenced over three years ago. 3
Looking to launch a regulated fund? ML Capital can help you. Whether it is a standalone fund structure or a new sub-fund of an existing umbrella, 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 platform with access to top tier service providers Structuring expertise - Re-domiciliation, Mergers UCITS & QIF 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 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 +44 207 925 2748 4
Long/Short Equities MORE SAME LESS Trending MORE LESS Global Long/Short 6 38% 14% 48% 5 2 US Long/Short 44% 46% UK Long/Short 6 5 2 5 22% 18% 6 2 Japan Long/Short 2 18% 62% 5 2 5
Long/Short Equities MORE SAME LESS Trending MORE LESS European Long/Short 2% 6 5 52% 46% 2 Commentary The most dramatic results within the long/short arena, is a strong trend towards Global l/s funds. Markedly, 48% of investors said they plan to allocate more to the Global sector, up from in the survey from the last quarter. Following a year in which the S&P had its strongest year since 1997, many respondents are planning to increase allocations to US l/s managers. Last quarter, some investors indicated a more cautious approach in anticipation of increased volatility due to uncertainty surrounding quantitative easing in the US. Hence the last survey indicated a drop back in appetite to a level of 35% planning to raise exposure to the area. After this pause, demand is once again on the rise, with 44% of respondents planning to shift up their US exposure levels. While Europe still has growth issues due to continued austerity measures coupled with anemic levels of bank lending, on a relative basis, the macroeconomic fundamentals are improving and the environment appears ripe for talented regional stock pickers to buy cheaply into sound businesses that are unloved by the markets. European funds therefore remain one of the most popular of all strategies, with 46% looking to allocate new assets to the sector. Despite some stellar returns of late, the demand for dedicated UK and Japan funds remains relatively subdued, ironically with the exact same result of 18% planning to increase allocations. Investors may well be underestimating the economic strength of both countries, with Nouriel Dr Doom Roubini predicting a good year for Japan off the back of an accommodative government policy and evidence of stronger growth. 6
Emerging Markets MORE SAME LESS Trending Global Emerging Pan-Asia 32% 36% 32% 7 6 5 2 MORE LESS 26% 12% 62% 2 Latin America 8% 42% 5 Commentary 45% 35% 25% 2 15% 5% As a whole, EM equities underperformed the major developed markets in 2013, returning a - 4% vs. a 25% rise for developed world equities. Investors made a big strategic move away from the emerging markets last year and allocated the majority of their risk asset exposures to the developed markets, concerned about uncertainty surrounding QE. While several headwinds still remain, it appears that a healthy number of allocators are taking a bolder approach with a strong 36% of respondents planning to allocate to diversified EM l/s funds over the coming quarter. Evidently, with a clearer picture in terms of US monetary plans, quite a number of investors believe that emerging markets do indeed offer attractive opportunities. Globally diversified EM funds remain by far the most popular way to allocate to the Emerging Markets over regional funds. However in stark contrast, demand for dedicated Asian and Latam funds is very muted and continues to fall - to the lowest levels since the barometer commenced over three years ago. 7
Relative Value MORE SAME LESS Trending MORE LESS Market Neutral 5 58% 6% 36% 2 Convertible Arbitrage 9 2 Fixed Income 14% 54% 32% Commentary 7 6 5 2 By far the most popular strategy in the Relative Value sector is Market Neutral funds this quarter, with 36% of allocators wishing to raise current positions. This big spike of interest may indicate that some investors are expecting increased levels of volatility this year, which is also likely to accelerate a meaningful move into market neutral products and to alternative funds in general. The uptick in interest levels may also be due to the relatively strong returns delivered by the sub strategy in 2013, which was one of the few hedge fund categories to deliver at or close to its targeted levels of return. With the convertible bond market fair to richly priced, interest levels in Converts is at an all-time low of, while the negative view on the general Fixed Income funds sector continues this quarter with 54% of investors planning to decrease exposure, as investors see returns falling as strategy risks increase. 8
Event Driven MORE SAME LESS Trending MORE LESS Multi-Strategy 6 8% 7 22% 5 2 Distressed 2% 12% 86% Merger Arbitrage 8 Commentary 5 2 6 5 2 Despite delivering solid returns, the healthy swing back towards the Event Driven sector, indicated in the survey of the last quarter, has not followed through this time, with interest levels falling back across all three sub sectors. Multi strategy funds show the healthiest levels of interest with 22% of those surveyed planning to raise their levels of exposure. It will be interesting to review both the returns and the levels of interest over the coming quarters for this sector. Merger Arbitrage funds performed quite well in 2013. Managers are predicting a good year in 2014 with corporations incentivised to use cash on their balance sheets due to the likely rise in interest rates. Despite this, investors appear to have reservations and have drastically cut their plans for allocation to its lowest level,, since the first issue of the barometer, over three years ago 9
Macro & CTA MORE SAME LESS Trending Global Macro-Discretionary 26% 28% 46% Global Macro Systematic 6% 22% 72% Managed Futures / CTAs 8 7 6 5 2 7 6 5 2 6 MORE LESS 48% 14% 38% 5 2 Commentary Global Macro- Discretionary funds continue to be the most popular within the overall Macro/CTA sector, with almost of investors planning to look for new macro-managers to invest with. However, investors continue to indicate that the low level of supply of proven managers is holding back their investment plans. Following several years of relatively poor returns from CTAs, interest levels continue to slide, and from a highpoint of almost 6 in the fourth quarter of 2011, this quarter only 14% now plan to raise their allocations, reflecting a broader consensus for the sector. The relatively limited number of CTA managers who have delivered solid returns are generating considerable levels of demand. Cleary the environment has been very difficult for most CTAs, with a lack of definitive trends, risk-on and risk-off market environments, and low rates. However we remain convinced that the rationale for a healthy allocation to the sector will be well rewarded over the coming months. 10
Source Data Emerging Markets Long / Short Equity More Same Less More Same Less Global Emerging 36. 32. 32. Global L/S Equity 48. 38. 14. Latin America 8. 50. 42. UK L/S Equity 18. 60. 22. Pan-Asia 12. 62. 26. US L/S Equity 44. 46. 10. Relative Value More Same Less Fixed Income 14. 32. 54. Convertible Arbitrage 0. 90. 10. Market Neutral 36. 58. 6. European L/S Equity Japan L/S Equity 46. 52. 2. 18. 62. 20. Further Statistics Press Reported Event Driven More Same Less Multi-Strategy 22. 70. 8. Total Press Reported Alt UCITS Assets USD $ 265 bn Total Press Reported Hedge Fund Assets USD $3,000 bn Barometer Participants Distressed 2. 86. 12. Barometer Surveyed Alt UCITS Assets USD $ 20 bn Merger Arbitrage 10. 80. 10. Barometer Surveyed Hedge Fund Assets USD $ 95 bn Highest Surveyed Alt UCITS Allocation USD $ 8 bn Macro & CTA Lowest Surveyed Alt UCITS Allocation USD $ 2 m More Same Less Highest Surveyed Hedge Allocation USD $25 bn Global Macro Discretio' 28. 46. 26. Lowest Surveyed Hedge Allocation USD $ 25 m Global Macro Systemat' 6. 72. 22. Highest Surveyed Avg Alt UCITS Ticket USD $ 165 m Managed Futures/CTA 14. 38. 48. Lowest Surveyed Avg Alt UCITS Ticket USD $ 100 k 11
About ML Capital ML Capital is an independent and privately owned financial services group at the forefront of bringing high quality alternative investments to the mainstream. Utilising our collective industry experience and expansive network of contacts, we are dedicated to locating the very best boutique fund managers and working with them to introduce their skills to the rapidly growing market for quality onshore regulated investment products. ML Capital launched the MontLake UCITS Platform in 2010 and has become one of the fastest growing UCITS platform in the market which delivers a range of specialist boutique alternative managers to institutional and retail investors. ML Capital also creates and sponsors a range of non-ucits regulated European investment funds such as the QIF and PIF, for investment managers and advisors whose strategy does not fit the UCITS framework. Our senior partners have many years of hedge fund experience in key areas incorporating manager due diligence, portfolio management, operations, risk management and distribution. Through our diverse backgrounds, extensive experience and industry knowledge, our professionals have a proven track record in delivering investment products and solutions which perform to the highest standards. ML Capital is headquartered within the European Union in Malta and has offices in London and Geneva. About The MontLake UCITS Platform 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 Citi 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 www.mlcapital.com or our platform website www.montlakeucits.com. 12
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