Evolution of Hedge Fund Investing: Institutional Investors Go Direct

Date: Monday, April 29, 2013 Time: 2:15 PM – 3:15 PM

Room: Whittier Room

Global hedge funds began 2013 with one of their strongest

quarters ever

80

90

100

110

120

130

140

150

160

170

180

2009 2010 2011 2012 2013

Global equities

Equity hedgefunds

HFRI Equity Hedge vs FTSE All World, total return, Jan 2009=100

Source: Datastream, HFRI.

The total size of the hedge fund industry continued to grow

Source: Datastream, HFRI.

-0.5

0

0.5

1

1.5

2

2.5

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Hedge fund industry assets, US$ trillions

Net asset flow

Estimated assets

Hedge fund liquidations hit a three year high

-1471

-1010

-743 -775-873

-1600

-1400

-1200

-1000

-800

-600

-400

-200

02008 2009 2010 2011 2012

Hedge fund liquidations

Source: HFRI.

Correlation dropped and fundamentals returned to the fore

40

45

50

55

60

65

70

75

80

85

90

Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12

ICJ Index (S&P 500 Implied Correlation Index)

Source: Bloomberg.

Japanese Yen created dislocations and opportunities in 2013

Source: HFRI.

-15

-10

-5

0

5

10

15

20

25

30

2008 2009 2010 2011 2012 2013

Option volatility surface (USD-JPY pair)

G-7 currency volatility

Historical currency volatility

-0.5

0.0

0.5

1.0

1.5

2.0

12/12 1/13 2/13 3/13 4/13

USD-JPY Volatility, post Abe election

Hedge fund allocations shifted towards health care industry

2013

-2.5 -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0

Health Care

Energy

Industrials

Information Technology

Utilities

Telecom Services

Consumer Staples

Materials

Financials

Consumer Discretionary

Change in allocation since Q4 2012, percent

Source: Bloomberg.

Pension funds continue to invest in hedge fund industry

0.0

0.5

1.0

1.5

2.0

2003 2004 2005 2006 2007 2008 2009 2010 2011

Pension funds and other institutional investors

High net worth individualsand family offices

Sources of hedge fund assets under management, US$ billions

Source: Citi.

Note: “Other institutional investors” includes endowments, foundations, insurance funds, and sovereign wealth funds.

Investor contributions to assets under management 2012

Other

institutional

23%

Fund of funds

17%

Pension funds

17%

High net worth

individuals

24%

Family offices

19%

Investors in hedge funds, percent of total AUM

Source: HFRI.

Firms that increased staff size to improve transparency

2012

6881

7152

3219

2948

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Overall ≤ 499 500-999 ≥ 1,000

By AUM, US$ millions

Yes

No

77

57 59

23

43 41

≤ 25 staff 25-99 staff ≥ 100 staff

By size of firm

Yes

No

Source: KPMG, 2012.

Defined benefit assets grew in hedge funds

Source: Bloomberg.

0

20

40

60

80

100

120

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

US$ billions

Direct investment

Funds of funds

Single-manager funds have outperformed funds of funds

85

90

95

100

105

110

115

120

125

130

2008 2009 2010 2011 2012 2013

Fund of Funds Index

Single-Manager Funds

Index

HFRIFOF Index vs HFRIFWI Index, thousands

Source: Bloomberg.

The JOBS Act changing how hedge funds market themselves

Source: WSJ.