AIMA Presentation The changing landscape: trends, flows and opportunities Jiří Król Deputy CEO Head of Government & Regulatory Affairs Representing the global hedge fund industry
Global Reach Over 1,400 member firms worldwide Manager members manage over $1.5 trillion Members in over 50 countries Over 7,000 individual member contacts Representing the global hedge fund industry 2
Global Network AIMA National Groups Representing the global hedge fund industry 3
Membership Profile Members by firm type Managers Regional breakdown of manager members (by number) 4% 8% 7% 8% 50% Fund of funds managers Lawyers Fund Administrators 47% 28% 11% Accountants/Auditors 25% 13% Prime brokers Consultants/others Americas Asia Pacific EMEA Members by region Regional breakdown of manager members (by AUM) 47% 27% 44% 26% 51% 5% Americas Asia Pacific EMEA Americas Asia Pacific EMEA Notes: Data as at March 2014. AUM based upon information obtained from Hedge Fund Intelligence, company websites and information received from the manager. Where no AUM can be obtained, estimates are based upon the lowest amount within the manager s billing range, as indicated on their AIMA application form. Where there is no information regarding the regional allocation of a manager s AUM, the entire amount has been allocated to the region where the company is headquartered. Representing the global hedge fund industry 4
Market overview Broader market themes for the second quarter! US equities (S&P 500) endured a difficult and volatile start (CBOE VIX +23% in first 10 days of April) but rebounded (fuelled by corporate earnings growth) to end the second quarter 4.7 % up. Elsewhere the FTSE 100 was up 2.2% and the MSCI World 4.2% as global equities continued their strong performance.! Economic data was mixed for the US as the economy contracted 2.9% (annual rate) in the first quarter in the final GDP revision the main drag was from unimpressive growth in consumer spending due to an unseasonably cold winter, however housing and labour market figures were encouraging.! The Federal Reserve interpreted the GDP growth figure as a temporary aberration. The Fed s monthly rate of treasury purchases fell to $35bn in the quarter and quantitative easing is likely to end in October.! Expansive monetary policy continued to benefit bond markets. The Barclays Global Aggregate Bond Index was up 2.5%.! Modest growth in the Eurozone persisted and a debate on monetary policy tightening in the UK to combat soaring house price inflation began.! Emerging markets had a strong quarter (MSCI Emerging Markets +5.6%) helped by a stabilisation of growth in China and all time equity highs in India. Emerging markets are benefiting from looser monetary policy after earlier tightening to defend falling currencies. Outlook: Key risks are geopolitical in nature including the consequences of unrest in the Ukraine and higher oil prices caused by instability in Iraq. Furthermore while economic growth remains mixed and inflation is tame in most developed economies, monetary policy should remain accommodative which will continue to benefit bull equity markets. Representing the global hedge fund industry 5
Quarterly performance (Q2 2014) Hedge fund and other asset performance 80% 60% 40% 20%! The HFRI Fund Weighted Composite was up 2.1% for the quarter (3.2% YTD), attributable to gains from all main strategy indices: relative value +2.4%, event-driven +2.2%, equity hedge funds +2.2% and macro +1.1%. 0% -20%! Sixteen of the seventeen major investment strategies published by HFR posted positive performance. -40% HFRI Fund Weighted Composite Index HFRI Equity Hedge (Total) Index HFRI EH: Short Bias Index HFRI Event-Driven (Total) Index HFRI ED: Distressed/Restructuring Index HFRI ED: Merger Arbitrage Index Source: HFR (Q2 2014). An exact numeric breakdown of returns is provided in the appendix. HFRI Macro (Total) Index HFRI Relative Value (Total) Index HFRI RV: Multi-Strategy Index HFRI Fund of Funds Composite Index HFRI Emerging Markets (Total) Index FTSE 100 Q2 2014 Q1 2014 Q4 2013 Q3 2013 NASDAQ S&P 500 MSCI World GSCI Barclays Capital Global Aggregate! Relative value funds performed the best in the quarter (+4.8% YTD) the result of a narrowing of credit spreads.! Macro funds experienced positive performance as systematic diversified CTAs (the largest constituent of the macro strategy by assets) benefited from clearer policy communication from the Federal Reserve. Representing the global hedge fund industry 6
Performance versus other assets 120% 100% 80% 60% 40% 20% 0% -20% -40% 10 year asset cumulative returns 75% 72% 64% 32% 2% Hedge fund performance! Hedge funds have outperformed other asset classes over the last ten years with a cumulative return of 75% in the period.! This return was accomplished with a maximum drawdown (largest loss in a sub-period) of only 21%. In comparison, investors in the S&P 500 endured a 57% drawdown in the period (Oct 07 Mar 09). Further, the maximum drawdown of hedge fund investment compares favourably with fixed income (10%) and was lower than commodities (54%) and property (35%). -60% Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Hedge Funds (HFRI FWC) Equities (S&P 500) Commodities (CRB) Bonds (Barclays Global Aggregate) Property (Case-Shiller 10-City) Case-Shiller10-City Home Price Index reported up to Apr 14. Index held constant through Jun 14.! Hedge funds are well positioned to outperform other asset classes over the course of the market spectrum. AIMA s recent report Apples and Apples: How to better understand hedge fund performance explains the key criteria in evaluating HF performance Representing the global hedge fund industry 7
Hedge fund Assets under Management Global AUM Breakdown of AUM by manager location! The global hedge fund industry increased by 3.7% from the first quarter of 2014 to account for $2.8 trillion in assets under management (AUM) at end of the second quarter according to HFR. Overall the industry grew 16.7% in 2013 while annualised growth from 2014 YTD equates to 11.6% for 2014. 32% 4% 1% 63% North America Europe Asia Other! The market remains dominated by North America and Europe with North America accounting for 63% of global AUM by HFI estimates. Source: HedgeFund Intelligence, June 30 th 2014. Mined from database. Breakdown of European AUM by manager location! In comparison, AIMA s manager membership accounts for $1.47tn in AUM (roughly 50% of the known universe) with the Americas, EMEA and Asia regions accounting for 51%, 44% and 5% of AUM respectively. 7% 7% 4% 1% 6% UK Channel Islands Sweden Switzerland European AUM 7% 68% France Netherlands Other! Hedge fund AUM in Europe ($645bn) continues to be dominated by UK-based managers (68% of the market including UCITS or $437bn). Source: HedgeFund Intelligence, June 30 th 2014. Mined from database. Representing the global hedge fund industry 8
Hedge fund asset flows Global flows! Investment into hedge funds continues in 2014 with a net asset inflow for the second quarter of $30.5bn up 110% from Q2 2013. Net inflows YTD amount to $56.8bn. Quarterly inflows are the highest since Q1 2011 as hedge funds continue to benefit from improved conditions in developed economies and markets.! Capital inflows were complemented by a $68.4bn performance based gain resulting in a net effect of a $98.9bn increase to $2.8tn in global AUM. Assets per regional investment focus flows! Net asset inflows in the second quarter were distributed between the Americas ($14.6bn), Europe ($5.5bn) and Asia ($0.2bn) focused funds. The Americas also achieved a $17.8bn performance gain.! HFR s fourth regional investment focus classification (consisting of Africa, the Middle East and Multiple Emerging Markets) achieved a performance based gain of $46bn as well as net asset inflows of $10.5bn in the quarter. The region was responsible for 57% of industry growth in the second quarter while the Americas accounted for 33% of industry growth. Representing the global hedge fund industry 9
Hedge fund asset flows Hedge fund asset flows and performance growth by strategy (Q2 2013 - Q2 2014) Net performance growth ($bn) Net asset flows ($bn) Contribution to AUM growth ($bn) 4.9 14.8 11.7 22.6 17.6-4.3 18.3 16.3 4.1 11.2 13.4 10.7 19.5 1.5 15.3-5.3 17.9 29.6 118.4 110.6 30.1-6.3 22.6 53.2 8.6 13.1 39.5 34.3 19.2 15.8-13.3 2.0 10.6 30.5 6.4 23.9 6.1 0.3 4.3 12.2 9.3-3.2 9.0 19.9 3.6 5.0 3.6-7.5 Equity Hedge Event-Driven Macro Relative Value Equity Hedge Event-Driven Macro Relative Value Equity Hedge Event-Driven Macro Relative Value Equity Hedge Event-Driven Macro Relative Value Equity Hedge Event-Driven Macro Relative Value Equity Hedge Event-Driven Macro Relative Value Source: HFR (Q2 2014) Q2 2014 Q1 2014 2013 Q4 2013 Q3 2013 Q2 2013 Representing the global hedge fund industry 10
Hedge fund asset flows Distribution of net asset flows ($bn) by firm AUM tier Capital allocation trends Net Asset Flows ($bn) 25 20 15 10 5 0-5 - 10 Q3 2009 Q4 2009 <$100m $100m to $250m $250 to $500m $500m to $1bn $1 to $5bn >$5bn Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014! The majority of new asset flows continue to be allocated to the largest funds (funds with greater than $5bn in AUM) $21.2bn was allocated in the second quarter, comfortably a five year high.! Net allocations to the next subset of funds (funds with between $1bn and $5bn in AUM) amounted to $8.6bn for the second quarter.! Meanwhile, allocations to the other subsets of funds were fairly consistent with recent allocation levels. Source: HFR (Q2 2014) Representing the global hedge fund industry 11
Launches and liquidations Number of funds launched and liquidated (1996 Q1 2014) Launch analysis and trends Number of Funds 2,500 2,000 1,500 1,000 500 0 (500) (1,000) (1,500) (2,000) 2,073 1,518 1,435 1,197 1,087 1,094 1,113 1,108 1,060 935 784 673 659 507 450 261 348 328 289 (109) (52) (57) (115) (71) (92) (162) (176) (296) (272) (563) (848) (717) (743) (775) (873) (904) (1,023) (1,471) 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Q1 2014 Launches Liquidations! In the first quarter of the year there was a net (launches minus liquidations) result of 17 hedge fund launches versus 101 launches in the first quarter of 2013.! Although modest growth in terms of fund numbers persists, net launches in each of the last three quarters (through Q1 14 end) have all been lower than any quarter since Q1 10: Ø A positive is that launch figures are still strong and consistent with recent quarters. Ø The pressure is from the liquidation side. Sluggish performance and capital raising issues are likely two contributing factors for funds not yet firmly established. Source: HFR (Q2 2014) Representing the global hedge fund industry 12
Leverage Leverage trends! Hedge funds on the prime brokerage platform of Deutsche Bank are operating at a gross leverage multiple of 2.75x as of the end of June 2014. This is modest in relation to banks which are operating at gross leverage multiples in excess of 100x when off-balance sheet activities and notional derivative exposures are considered.! The FCA recently surveyed 49 hedge fund management firms and collected data on 106 funds representing $345bn in hedge fund AUM. Highlights from the survey include: Ø Ø The average gross leverage multiple per fund is 40x while the median gross leverage multiple is only 4.2x. The implication is that there are a few very large hedge funds that use a significant amount of leverage but the vast majority of hedge funds use negligible levels of leverage. Hedge fund leverage is being accomplished through derivative use (synthetic leverage) as opposed to financial leverage. Furthermore, strategies that use interest rate derivatives (relative value and macro) have much higher leverage multiples than other strategies. Gross Leverage Multiple Gross leverage comparison: hedge funds vs. banks 1,400 1,200 1,000 800 600 400 200 LTCM July 1998 LTCM July 1997 HFs (average of the ten largest funds in the FCA survey Mar'14) Societe Generale Morgan Stanley Goldman Sachs Citigroup Bank of America LTCM data points represent the leverage multiples for Long-Term Capital Management, the most documented hedge fund failure to date. Source: AIMA analyst estimates, company financials, Hedge Fund Survey, (FCA, March 2014) and Hedge Fund Leverage Under Different Calculation Methodologies, (FSA, April 2013). Representing the global hedge fund industry 13 UBS Credit Suisse BNP Paribas Barclays RBS Deutsche Bank JP Morgan 0 0 10 20 30 40 50 60 70 80 Notional Derivative Exposure (US$tn) HSBC
Spotlight on event-driven funds Strategy positioning! The event-driven strategy is one of the industry s best performing strategies and also very popular with hedge fund investors ($11.7bn net asset inflow in Q2 2014). The market share of this strategy has increased by 3% in the last five years to account for 27% of global HF AUM at end of the second quarter. The strategy looks set to make further gains in industry market share due to the prevailing low rate environment coupled with an improving economic outlook spurring M&A activity. A buoyant M&A market! Global M&A deals valued at $1,571.2bn for H1 2014 (+56.3% from H1 2013). It was the market s best start to the year since 2007 as M&A deal activity seems set to return to pre-2008 financial crisis levels.! While 2013 only witnessed one mega-deal, 2014 has already experienced five +$40bn deals.! Furthermore according to FactSet, average premiums for the US market amounted to 50.6% for Q2 2014 reflecting increased company appetite for acquisitive growth. Value of deals (US$bn) 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 M&A deal activity (2007 Q2 2014) Source: Mergermarket H1 2014 trend report Representing the global hedge fund industry 14 733.6 849.2 1277.2 809.6 458 682 677.2 592.2 569.1 326.4 710 493.5 396.1 430.7 419.2 458.8 473.3 596.1 581.8 614.2 752.4 570.2 519.7 640.7 563 555 460.5 450 2007 2008 2009 2010 2011 2012 2013 2014 Q1 M&A Value Q2 M&A Value Q3 M&A Value Q4 M&A Value 945.2 626
Emerging trend: private credit The opportunity for hedge funds explained: In response to higher capital ratio requirements under the impending Basel III framework, banks have decreased the size of their loan books and curtailed loans to SMEs (small and medium enterprises). These companies are too small to raise financing through bond and equity markets which has provided hedge funds with an opportunity to provide direct financing. Furthermore, institutional investors are showing great interest in increasing their allocations to private debt funds. A recent survey of 240+ institutional investors by Preqin found:! While 54% of institutional investors currently invest in private debt funds, a further 13% are considering investing.! 78% of investors prefer direct lending funds when investing in private debt. Mezzanine debt and distressed debt funds are also proving popular.! In terms of direct lending, senior debt is comfortably the preferred capital structure for institutional investors.! Lastly, North America and Europe based private credit funds are preferred by investors with lesser interest in funds based elsewhere. Representing the global hedge fund industry 15
Internal research The Extra Mile A recently published study done in collaboration between AIMA and Barclays Prime Services focused on the evolving dynamic of the concept of partnership between hedge funds and investors. The paper was based on a survey of major hedge fund managers and investors with a combined $2.2tn in assets. High level findings of the study were:! HF investors are looking to have fewer but more meaningful relationships with managers as a means of accessing various benefits including access to manager expertise and skill, customization of solutions, increased understanding and value for money.! Manager reasons for forming partnerships with investors include stickier tickets, new product development, cross-selling opportunities, knowledge sharing and investor references (investors can act as a positive reference to fellow investors).! For investors, manager partners tend to share the following attributes: 1) the managers possess the right set of capabilities (large hedge fund firms with broad strategies were most often described as good partners although smaller managers also have a role to play), 2) the managers are solutions-oriented, 3) fee concessions are important considerations for half of the investors with the remainder saying that fees are a non-issue. Source: The Extra Mile: Partnerships between Hedge Funds and Investors, Barclays Representing the global hedge fund industry 16
Appendix: Performance Hedge fund and other asset class returns (Q1 2013 Q2 2014) HFR Hedge Fund Strategy YTD 2014 Q2 2014 Q1 2014 2013 Q4 2013 Q3 2013 Q2 2013 Q1 2013 HFRI Fund Weighted Composite Index 3.21% 2.07% 1.12% 9.14% 3.49% 2.18% -0.37% 3.60% HFRI Equity Hedge (Total) Index 3.33% 2.20% 1.11% 14.28% 4.69% 4.10% -0.07% 4.94% HFRI EH: Quantitative Directional 2.40% 1.89% 0.50% 11.05% 4.46% 3.08% -1.01% 4.19% HFRI EH: Short Bias Index -3.67% -2.23% -1.47% -18.61% -4.50% -5.62% -4.23% -5.71% HFRI EH: Technology/Healthcare Index 4.42% 0.05% 4.37% 22.18% 4.58% 8.32% 2.73% 4.99% HFRI Event-Driven (Total) Index 4.26% 2.24% 1.97% 12.50% 3.79% 2.70% 1.79% 3.68% HFRI ED: Distressed/Restructuring Index 5.41% 2.51% 2.84% 14.06% 4.34% 2.45% 2.22% 4.39% HFRI ED: Merger Arbitrage Index 2.02% 1.36% 0.65% 4.74% 1.40% 1.76% 0.68% 0.83% HFRI Macro (Total) Index 1.09% 1.46% -0.36% -0.45% 1.83% -1.31% -2.17% 1.25% HFRI Relative Value (Total) Index 4.84% 2.44% 2.35% 7.07% 2.37% 1.56% -0.08% 3.07% HFRI RV: Fixed Income-Asset Backed 5.67% 2.30% 3.30% 9.90% 3.16% 2.05% 0.69% 3.67% HFRI RV: Fixed Income-Convertible Arbitrage Index 3.47% 1.16% 2.27% 8.05% 1.49% 2.02% 1.38% 2.94% HFRI RV: Fixed Income-Corporate Index 4.93% 2.73% 2.13% 5.68% 2.55% 1.54% -1.02% 2.54% HFRI RV: Multi-Strategy Index 3.86% 2.39% 1.44% 7.89% 2.28% 1.18% 0.96% 3.26% HFRI Fund of Funds Composite Index 2.00% 1.44% 0.56% 8.96% 3.67% 1.67% 0.04% 3.33% HFRI FOF: Conservative Index 2.25% 0.95% 1.29% 7.70% 2.68% 1.24% 0.81% 2.77% HFRI Emerging Markets (Total) Index 2.86% 3.66% -0.77% 5.46% 3.55% 2.66% -3.20% 2.49% Equity Indices UK FTSE 100-0.08% 2.21% -2.23% 13.75% 4.44% 3.97% -3.06% 8.06% US NASDAQ 5.54% 4.98% 0.54% 37.92% 10.74% 10.82% 4.15% 7.90% US S&P 500 6.05% 4.69% 1.30% 29.60% 9.92% 4.69% 2.36% 10.03% Japan Nikkei 225-6.93% 2.25% -8.98% 56.72% 12.70% 5.69% 11.02% 18.51% Hong Kong Hang Seng -0.50% 4.69% -4.96% 2.87% 1.95% 9.89% -6.71% -1.58% Global MSCI World 4.96% 4.15% 0.77% 24.09% 7.61% 7.68% -0.07% 7.16% Emerging Markets MSCI Emerging Markets 4.80% 5.64% -0.80% -4.98% 1.54% 5.01% -9.14% -1.92% Other Asset Classes Commodities CRB 10.03% 1.18% 8.75% -4.97% -1.86% 3.61% -6.99% 0.49% Commodities GSCI 5.69% 2.69% 2.93% -1.27% -5.76% 10.79% -5.94% 0.53% Fixed Income Barclays Capital Global Aggregate 4.93% 2.47% 2.40% -2.60% -0.44% 2.80% -2.79% -2.10% Property Case-Shiller 10-City Home Price Index 1.78% 1.02% 0.76% 13.44% 0.06% 3.81% 7.36% 1.73% Source: AIMA Research, HFR, S&P, MSCI, CRB,GSCI, Barclays Case-Shiller 10-City Home Price Index reported up to Apr 14. Index held constant through end Q2 2014. Representing the global hedge fund industry 17
Appendix: Global Billion Dollar Club Manager locations of the Global Billion Dollar Club December 2013 December 2012 Location Number of firms % of total firms AUM ($bn) % of total AUM Number of firms % of total firms AUM ($bn) % of total AUM USA 281 68.7% 1642.9 74.8% 251 66.2% 1400.3 72.7% UK 59 14.4% 294.3 13.4% 57 15.0% 267.3 13.9% Switzerland 3 0.7% 4.0 0.2% 3 0.8% 2.8 0.1% Singapore 7 1.7% 12.9 0.6% 8 2.1% 11.6 0.6% Sweden 4 1.0% 35.7 1.6% 3 0.8% 26.3 1.4% Other 21 5.1% 109.0 5.0% 27 7.1% 148.8 7.7% Brazil 8 2.0% 31.1 1.4% 4 1.1% 7.7 0.4% Canada 3 0.7% 5.7 0.3% 3 0.8% 5.7 0.3% France 4 1.0% 12.8 0.6% 4 1.1% 17.2 0.9% Hong Kong 14 3.4% 28.5 1.3% 12 3.2% 20.1 1.0% Australia 3 0.7% 19.1 0.9% 7 1.8% 18.1 0.9% Total 389 100% 2196.1 100% 367 100% 1925.9 100% Number of firms de-duplicated to account for groups running funds from more than one location Top ten firms by AUM (December 2013) Ranking Firm Headquarters AUM ($bn) 1 Bridgewater Associates USA 87.1 2 J.P Morgan Asset Management USA 59.0 3 Brevan Howard Asset Management UK 39.9 4 Och-Ziff Capital Management Group USA 36.9 5 BlueCrest Capital Management Channel Islands 34.5 6 AQR Capital Management USA 29.9 7 Blackrock USA 27.2 8 Baupost Group USA 26.8 9 Man GLG UK 26.3 10 Winton Capital Management UK 25.1 Global Billion Dollar Club trends! The combined AUM of firms with more than $1bn of AUM climbed 14% during 2013 to $2.2 trillion.! US managers were responsible for much of the increase in assets of the billion dollar club over the past year. The 30 new US firms in the club ensured US AUM grew 17.3% over the period.! On a firm basis, Bridgewater Associates remains comfortably the largest manager with 4.9% growth in AUM. And fourth placed Och-Ziff Capital Management boosted their AUM by 15.7% over the period. Source: HFI Representing the global hedge fund industry 18
Contact Alternative Investment Management Association Tel: +44 (0)20 7822 8380 Fax: +44 (0)20 7822 8381 Email: info@aima.org Web: www.aima.org Representing the global hedge fund industry 19