Alternative UCITS Barometer Quarter 4, 2015
Introduction ML Capital Asset Management, the investment manager and promoter of the MontLake UCITS Platform, is delighted to present the 20th 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 almost $320 billion and today invest upwards of $26 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, CIO of ML Capital; After the worst quarter for markets in five years, investors are naturally hesitant to make any major decisions as they face into the end of the year. Bearish sentiment is at its most extreme level since 2008, usually a strong signal of a market bottom. However with fundamentals not that strong and valuations not cheap, this argument does not hold up well, and therefore most investors are choosing to remain well diversified and cautious until key macro issues become clearer. The global hedge fund industry has grown by approximately a year since the financial crisis, and despite testing conditions and generally weak returns, the challenging environment should be conducive to the best hedge fund managers, hence our belief that the alternative UCITS sector will continue its strong growth trajectory over the next few years. Key findings from PwC s latest global pension fund report show that Global pensions have shown a surge in allocations to alternative asset classes, jumping from $4.4 trillion in 2008to $9.7 trillion in 2014, a 117% increase. A growing percentage of these allocations are flowing into UCITS and other liquid alternative investment funds, as they provide a substantial degree of liquidity, diversification, and a very high level of investor protection, desirable to large funds such as sovereign wealth and pension funds. These investors are driving the increase in the average ticket size for alternative UCITS that we are seeing more frequently of late. 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 a member of our Cap Intro or Fund Hosting teams. Cyril Delamare, CEO 2
Q4 Barometer Highlights Participant Type After a quarter marred by uncertainty and volatility, caution is the watchword of the day and the overwhelming trend in our latest investment Barometer shows investors opting to maintain current positions until there is more certainty in the markets. Of course, there are always exceptions, and there is strong demand for both Asian and Global Macro funds in particular this quarter. Pan-Asia Strategies at Peak Demand Over 6 of respondents plan to start buying into Pan-Asia focused strategies, with demand for the region at the highest ever levels, surpassing the previous high watermark in Q2 of this year. 24% 56% 16% Bank/institution Family Office Fund of Funds Private bank Wealth manager / IFA 2% 2% Global Macro Still a Hot Ticket Benefiting from the potential ability to weather periods of market uncertainty better than most, demand for Global Macro funds continues to ride high, with twothirds of those surveyed planning to increase their allocations to the sector. Participant Location 9% 13% 24% 15% Strong Rebound in Demand for US L/S Equity Perhaps the most interesting result of all this quarter has been the very significant increase in interest in US long/short funds. Demand had fallen off a cliff in the earlier part of the year, dropping from 6 to under 2 by Q2. Investors have now regained their confidence levels with a rebound in demand to half of all respondents looking to increase their exposures. Continental Europe Global UK Switzerland Rest of World 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 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 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 +44 203 709 4510 4
Long/Short Equity MORE SAME LESS Trending MORE LESS Global Long/Short 18% 72% US Long/Short 8% 42% 5 UK Long/Short 14% 6% 8 7 6 5 4 3 2 7 6 5 4 3 2 5 4 3 2 Japan Long/Short 5 4 28% 28% 3 44% 2 5
Long/Short Equity Trending MORE SAME LESS MORE LESS European Long/Short 2% 38% 6 Commentary 9 8 7 6 5 4 3 2 Demand for global long/short funds has remained relatively flat, with an overwhelming majority (72%) opting not to change their portfolio exposures at present. Sector specific strategies tell a different story however. While the Fed can t figure out which way to go in terms of its monetary policy, key UCITS allocators have become bullish in terms of the opportunities for good US stock pickers and the demand trend for US long/short funds has spiked significantly upwards, with 5 now planning an increase and 42% of respondents planning to maintain their allocations to the sector. With 4 of UK exports flowing to the Eurozone, British exporters are losing out on the back of a strong pound; UK headline inflation has fallen dramatically; there is 1.5% of GDP in fiscal tightening expected in 2016; and the Greater London area housing bubble is at risk of bursting. These concerns have contributed to a sharp decline in those looking to increase exposures to the region, with only 6% saying they will look to add to their holdings, a drop of 32% from Q3. The majority are taking a wait-and-see approach, maintaining their holdings at current levels for now. After racing ahead in the first half of 2015, Japan s equity market has seen a reversal in these gains, sparked by concerns over an economic slowdown in China, the country s key trading partner. Our survey respondents echo this movement, as the number of those planning to decrease their exposure or exit the sector jumps by 23%, from 5% in Q3 to 28% this quarter. Europe is a real winner in the long/short equity sphere, as 6 said they would increases their allocations to the sector, with a further 38% keeping their current exposures. This is propped up by several factors: good quality European stocks, such as robust pharmaceutical compounders offering value and protection in the recent market tumble; the ECB continues to implement supportive policies; lower oil prices; and a weaker euro benefitting exports. 6
Emerging Markets MORE SAME LESS Trending MORE LESS Global Emerging Pan-Asia 12% 38% 5 2% 36% 62% Latin America 2% 46% 52% Commentary 7 6 5 4 3 2 7 6 5 4 3 2 7 6 5 4 3 2 While the outlook for Emerging Markets as a block remains unclear in the short term, investors seem to be committed to weather the potential short term squalls and almost 4 plan to increase their levels of investment to the Global EM sector. Pan-Asia strategies are reaping the benefits from China s stimulus efforts, which, underpinned by the economy s healthy long-term growth rate, should begin to bear fruit in 2016. Investors are choosing to allocate now in advance of these expectations, with over 6 of respondents to our survey planning to buy into Pan-Asia focused funds this quarter, broadening the geographic scope of their investments. Reflecting the current complex macro situation, which sees Latin America's economy likely going into recession this year for the first time since the end of the global financial crisis, dragged down by deep recessions in two of its largest economies, Brazil and Venezuela, and lower demand for the region's commodities as a result of China's slowdown; almost half of our respondents (46%) plan to reduce their exposure to the sector. 7
Relative Value MORE SAME LESS Trending MORE LESS Market Neutral 42% 58% Convertible Arbitrage 8% 82% Fixed Income 14% 14% 72% Commentary 8 7 6 5 4 3 2 4 3 2 7 6 5 4 3 2 Historically investors have always had a changeable sentiment towards relative value funds, and we see this once again in the present challenging market conditions. Our respondents are taking a cautious approach, with the majority choosing to maintain their current exposures to these strategies. Investors often seek refuge in market neutral funds as they work well in a volatile environment, and it remains the most popular relative value strategy; however demand has dipped somewhat, with the number of those planning to increase their allocations falling by 31% from its peak in Q3, to 42%. Investors tend to rely more on fixed income strategies during times of economic downturn, however this is balanced against poorer potential for upside return through capital appreciation and less opportunity to outpace inflation than equity investments offer. The demand trends for those looking to increase and to decrease their holdings in this asset class have converged this quarter, with 14% opting to increase allocations and 14% looking to decrease or exit the strategy. The majority (72%) are preserving their current holdings. 8
Event Driven MORE SAME LESS Trending MORE LESS Multi-Strategy Distressed 48% 52% 2% 88% Merger Arbitrage 2% 36% 62% Commentary 7 6 5 4 3 2 5 4 3 2 7 6 5 4 3 2 For all three of the event driven strategies we highlighted, the majority of investors are choosing to maintain current allocations. Multi-strategy funds are at 10 interest, with all those surveyed either maintaining or increasing their current allocations; although again, we see a dip in the number of those increasing their holdings, down 14% from its peak in Q2, to 48%. Investors are often dubious about distressed funds as they are difficult to replicate in UCITS, sparking concerns that the strategy is too watered down to be effective. For now, the levels of those increasing or decreasing their allocations remains flat on the last quarter, with 88% saying they will maintain their current allocations. While interest in merger arbitrage strategies has seen a decline since it peaked at 62% earlier in the year, there is still a substantial majority (98%) looking to retain or increase their current levels of exposure. With global mergers and acquisitions on pace to hit $4.58 trillion this year, the highest level on record, according to data provider Dealogic, it is clear there are opportunities to be found in this sector. The possibility of higher interest rates, which tend to widen deal spreads, also contributes to a positive outlook facing the end of the year and 2016. 9
Macro & CTA MORE SAME LESS Trending MORE LESS Global Macro-Discretionary 2% 32% 66% Global Macro Systematic 12% 16% 72% Managed Futures / CTAs 6% 48% 46% Commentary 9 8 7 6 5 4 3 2 7 6 5 4 3 2 8 7 6 5 4 3 2 Investors continue to favour global macro funds, with 66% of those surveyed looking to increase their exposure to global macro discretionary strategies, and a further 32% maintaining current levels; 88% said they would maintain or increase exposure to systemic global macro strategies. With low correlation to traditional markets, managed futures investments tend to be return diversifiers and can offer a volatility reduction during market periods that are difficult for traditional strategies; in the current market climate, 94% of those surveyed plan to maintain or increase their current allocations to managed futures/cta strategies to capitalise on this. Of these, 46% plan to increase their exposures, an upward revision of 13% on Q3 demand. Looking to the future, there are those who believe managed futures will always go down when stocks are going up. However, non-correlation does not equal negative correlation: there will be periods when stocks and managed futures move in tandem, and periods where they move opposite to one another. A longer-term perspective shows that managed futures funds have performed in a wide range of market environments, including positive performance during interest rate hikes and stock rallies the key is to select the right manager, with the experience and ability to navigate varied markets. 10
Source Data Emerging Markets Long / Short Equity More Same Less More Same Less Global Emerging 38% 5 12% Global L/S Equity 18% 72% Latin America 2% 52% 46% UK L/S Equity 6% 8 14% Pan-Asia 62% 36% 2% US L/S Equity 5 42% 8% Relative Value More Same Less Fixed Income 14% 72% 14% Convertible Arbitrage 82% 8% Market Neutral 42% 58% European L/S Equity Japan L/S Equity 6 38% 2% 28% 44% 28% Further Statistics Press Reported Event Driven More Multi-Strategy 48% Same Less 52% Total Press Reported Alt UCITS Assets USD $ 381 bn Total Press Reported Hedge Fund Assets USD $ 2,870 bn Barometer Participants Distressed 2% 88% Highest Surveyed Alt UCITS Allocation USD $ 3 bn Merger Arbitrage 36% 62% 2% Lowest Surveyed Alt UCITS Allocation USD $ 15 m Highest Surveyed Hedge Allocation USD $ 250 bn Macro & CTA Lowest Surveyed Hedge Allocation USD $ 15 m More Same Less Highest Surveyed Avg Alt UCITS Ticket USD $ 62 m Global Macro Discretio' 66% 32% 2% Lowest Surveyed Avg Alt UCITS Ticket USD $ 230 k Global Macro Systemat' 16% 72% 12% Managed Futures/CTA 46% 48% 6% 11
About ML Capital ML Capital is a forward looking and leading independent investment management firm specializing in European regulated fund structures, headquartered in Dublin, Ireland. 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 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 maximize 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. 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 toa 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 www.mlcapital.com or our platform website www.montlakeucits.com. 12
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