Key Areas In The Hedge Fund Industry in 2010
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Transcript of Key Areas In The Hedge Fund Industry in 2010
KEY AREAS IN THE HEDGE FUND INDUSTRY IN 2010
Daniel Capocci, PhD – CAIA [email protected] Luxembourg Educational Event APRIL 2010
Today’s objectiveDiscuss the hedge fund industry in 2010 and illustrate our views using updated information
1. Why a second edition?
2. Hedge Fund in 2010: some updated figures
3. Hedge Fund in 2010: strategies evolution
4. Hedge Fund in 2010: the consolidation of the industry
5. The future of the hedge fund industry
6. Conclusion
« Introduction aux hedge funds »
Why a second edition?
1. Why a second edition?The world of hedge fund changed dramatically between2003 & 2010
The industry grew rapidly between 2004 & 2007The industry has been strongly hurt by the financial crisisStar hedge fund managers emergedHedge fund strategies emerged/diedHedge funds became more standardNew regulations have been implemented (Europe)Performance stabilized in 2009
The industry is back but it is different…
1. Why a second edition?Categories Strategies Sub‐strategies
Non‐directional strategies
Market neutral
Equity market neutralStatistical arbitrage
Fixed income arbitrageMortgage‐backed securities
Convertible arbitrage
Event driven
Event drivenRisk arbitrage
Distressed securitiesSpecial situationsPIPE/regulation D
Activism
Arbitrage
Relative value arbitrageOption arbitrage
Closed‐end fund arbitrageVolatility arbitrage
Multi‐strategy arbitrage Multi‐strategy arbitrage
Other Asset based lendingOther
Directional strategies
Long/short equityDeveloped marketsEmerging markets
Global
Sector Sector
Credit High yield
Short selling Short selling
Long only (leveraged) Long Only (leveraged)
Macro Macro
Managed futures CTAShort term trader
Fund of funds Diversified Diversified
Niche Niche
Source; Introduction aux hedge funds, 2nd edition, Economica 2010
1. Structure of the second edition
Chapter 1: What is a Hedge Fund? (55 pages)
Chapter 2: Hedge Fund Characteristics (76 pages)
Chapter 3: Hedge Fund Strategies (226 pages)
Chapter 4: Hedge Fund Performance over Time (42 pages)
Chapter 5: Hedge Fund Regulation (27 pages)
Chapter 6: Hedge Fund, LTCM & recent Crisis (33 pages)
Chapter 7: Hedge Funds versus Mutual Funds (12 pages)
+ websites + index + glossary
1. What’s new?1st EDITION 2nd EDITION
CHAPTERS 6 chapters 7 chapters
PAGES 350 pages 550 pages
STRATEGIES PRESENTED IN DETAILS
17 22
EXAMPLES PER STRATEGY 1‐2 (25 in total) 2‐3 (> 40)
100% updated
100% from HF managers
HEDGE FUND REGULATION
11 countries broadly covered 14 countries in details
100% update analysis
HEDGE FUND & CRISIS / Including the subprime crisis
GRAPHS & SCHEMAS Around 75 graphs & schemas More than 150 graphs & schemas
Hedge Funds in 2010: updatedfigures
Where are we today?
0
500
1 000
1 500
2 000
2 500
0
2
4
6
8
10
12
88 90 92 94 96 98 00 02
Nombre Actifs
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2 500
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88 90 92 94 96 98 00 02 04 06 08
Nombre Actifs
In 2003 In 2010
2. Hedge Fund in 2010: some updatedfigures
Source; Introduction aux hedge funds, 2nd edition, Economica 2010
2. Hedge Fund in 2010: some updatedfigures
Number of fundson 01/01/08
Funds exiting Funds enteringEstimated
attrition rate
All HFR funds 3221 894 170 28 %
Long short equity 1566 404 74 26 %
Relative value 702 259 46 37 %
Credit 215 71 11 33 %
Directional trading 599 119 30 20 %
Systematic funds 114 29 8 25 %
Others 25 12 1 48 %
Attrition rate: percentage of funds that stopped reporting
Source; Introduction aux hedge funds, 2nd edition, Economica 2010
Roughly 30% of the funds stop to report
2. Hedge Fund in 2010: some updatedfigures
Hedge Fund domicile based on number of funds
Hedge Fund managers domicile
Offshore42 %
United-States33 %
Europe12 %
Asia10 %
Latin America 2%
Others1 %
New York36 %
USA ex-NY28 %
London18 %
Europe ex-
London8 %
Asia10 %
Source; Introduction aux hedge funds, 2nd edition, Economica 2010
2. Hedge Fund in 2010: some updatedfigures
Hedge Fund investorsrepartition
US Hedge Fund investorsrepartition
United States50 %
Switzerland 20 %
Japan 5 %
Others25 %
Instit. investors
31%
Private investors
36%
Funds of funds18%
Others15%
Source; Introduction aux hedge funds, 2nd edition, Economica 2010
Institutional investors continue to grow
2. Hedge Fund in 2010: some updatedfigures
Use of hedge funds by Institutional investors
Institutional investorsallocation to Hedge Funds
01020304050607080
2001 2003 2005 2007
0
2
4
6
8
10
12
2001 2003 2005 2007 2009
Source; Introduction aux hedge funds, 2nd edition, Economica 2010
2. Hedge Fund in 2010: some updatedfigures
Based on number of funds Based on AUM
Event driven10 %
Distressed4 %
Risk arbitrage
2 %Macro6 %
CTA6 %
Long/short equity30 %Equity
market neutral
7 %
Equity non hedge
2 %
Emerging market
8 %
Sector7 %
Fixed income
8 %
Convertible arbitrage
2 %Autres
8 %Event driven
16 %
Distressed7 %
Risk arbitrage
3 %
Macro10 %CTA
10 %Long/short equity20 %
Equity market neutral
6 %
Equity non hedge
2 %
Emerging market
6 %
Sector6 %
Fixed income
7 %
Convertible arbitrage
1 %Autres
8 %
Source; Introduction aux hedge funds, 2nd edition, Economica 2010
2. Hedge Fund in 2010: some updatedfigures
Performance of HF, bonds & equities during the worst20 months for equities over the last 20 years
Source; Introduction aux hedge funds, 2nd edition, Economica 2010
-20%
-15%
-10%
-5%
0%
5%
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Moy
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Actions mondiales Obligations mondiales Hedge fund global
The HF index offered a positive performance 11 months (12 for bonds)
The average performance for the stock index is -9% against0.4% for bonds and -2.4% for HF.
$100 000 invested duringthese 20 months in the indices (impossible practically) would have resulted in $13 680 for shares, $108 610 for bonds and $59 900 for HF
2. Hedge Fund in 2010: some updatedfigures
Performance of HF, bonds & equities during the worst20 months for bonds over the last 20 years
Source; Introduction aux hedge funds, 2nd edition, Economica 2010
The HF index offered a positive performance 11 months (7 for equities)
The average performance for the bond index is -1.6% against -2.1% for equities and -0.2% for HF
$100 000 invested duringthese 20 months in the indices (impossible practically) would have resulted in $71 200 for bonds, 61 290 for equities and 95 100 for HF
-20%
-15%
-10%
-5%
0%
5%
10%
07-2
003
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03-1
994
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09-2
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Moy
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Obligations mondiales Actions mondiales Hedge fund global
2. Hedge Fund in 2010: some updatedfigures
Performance of HF, bonds & equities during the worst20 months for hedge funds over the last 20 years
Source; Introduction aux hedge funds, 2nd edition, Economica 2010
The equity index was negative20 times but the bond index was up 13 times
The average performance for the HF index is -3.2% against -7% for equities and -0.5% for bonds
$100 000 invested duringthese 20 months in the indices (impossible practically) would have resulted in $50 560 for HF, 21320 for equities and 95 000 for bonds
-20%
-15%
-10%
-5%
0%
5%
10%
07-2
003
04-2
004
03-1
994
10-2
008
02-1
999
02-1
994
02-1
996
03-2
002
09-1
994
11-2
001
01-1
992
09-2
008
08-1
990
10-1
992
01-1
990
03-1
997
09-2
005
03-2
006
10-2
003
12-1
996
Moy
enne
Obligations mondiales Actions mondiales Hedge fund global
Hedge Fund in 2010: hedge fundstrategies
What changed or what is changing?
3. Hedge Fund in 2010: strategyrepartition
The hedge fund industry evolves quickly and the strategy repartition has always evolved dramatically
1970ies: long/short funds
1980ies: macro funds
1990ies: mix (long/short, macro & new strategies)
1999- early 2000ies: end of very large macro, real long/short,
CTA, CB arb, etc.
Starting 2005: long biased funds, emerging markets, less liquid
strategies (private investments, asset based lending, distressed,
event driven)
3. Hedge Fund in 2010: strategyrepartition
Since 2005, many new strategies became available: the more exotic, the more attractive
In terms of products, of markets and of tools used
Hedge fund investors focused more on returns & the background of hedge fund selector was too often light on technicals to understand the real risks.
Less liquid strategies became commonThe frontier between hedge funds and private equity funds disappeared
After the crisis, most hedge fund managers went back to basics and they are more focused
In 2010, hedge fund selectors should go deeper in the understanding of the strategies
3. Hedge Fund in 2010: new strategies
Source; Introduction aux hedge funds, 2nd edition, Economica 2010
Equity non hedge
Wine investing (and other commodities)
Asset based lending
Closed-end fundarbitrage
Master Limited Partnership
Activism
Electricity trading
Trade finance
PIPE
Long/short
Event driven
Convertible Arbitrage
Equity market neutral
Fixed income arbitrageMulti-strategy
Funds of funds
Climate-related fundsSector
Short selling
Emerging Markets
High Yield
Macro
CTA
3. Hedge Fund in 2010: strategies more complex than many thinks
CreditInterest rates
FIXED INCOME ARBITRAGE
Spread trade
Curve trade
Correlation
Volatility
Spread betweencountries Relative value Long/short
Capital structure
Bonds/ CDS
Curvetrades Inter-currency
arbitrage
New issuances
Basis trading
CDS
Various maturities
Source; Introduction aux hedge funds, 2nd edition, Economica 2010
3. Hedge Fund in 2010: strategies more complex than many thinks
Convertible arbitrage
Inputs Outputs
Interest rate curve
Credit spreads
Share price
Stock volatility
Currency
Dividend policy
Structure of the bond
Delta
Gamma
Theta
Vega
Sensitivity tocredit
Sensitivity to interestrates
Source; Introduction aux hedge funds, 2nd edition, Economica 2010
3. Hedge Fund in 2010: strategies more complex than many thinks
Merger & acquisitions
Distressedcompanies
PIPE Activists
Event driven
Other specialsituations
Source; Introduction aux hedge funds, 2nd edition, Economica 2010
3. Hedge Fund in 2010: strategies more complex than many thinks
Merger & acquisitions
Distressedcompanies
PIPE Activists
Event driven
Other specialsituations
Source; Introduction aux hedge funds, 2nd edition, Economica 2010
3. Hedge Fund in 2010: strategies more complex than many thinks
Other specialsituations
Balance sheetrestructuring
Shares buyback
Recapitalisation refinancing
LBOs
Exchange listing
Deconsolidation
Partial sale New regulation
Reorganisation
Rating changeGovernmentprivatisation
Source; Introduction aux hedge funds, 2nd edition, Economica 2010
3. Hedge Fund in 2010: strategies more complex than many thinks
Asset BasedLending
Transactions sourcesSpecialized agentInternal origin
Intangible Tangible non fixed Tangible fixed
<------------------------ Follow up of the collateral ------------------------Very frequent Spaced out Very spaced out
Intellectualrights
Life-insurance
Land
Real estate
Forest
Droitintellectuel
Plane
TrainRawcommodities Boat
Merchandises
Machinery
Orders Shopping center
Cash to receive
Securities
Documents describing the transaction
Long termcontracts
3. Hedge Fund in 2010: strategies more complex than many thinks
Trade finance Real estate financing
Life insurance
Auto loansConsumer finance
Entité d’investissement
Producteur
Courtier Spécialisé
Revendeur
Fonds ABL
Produits
CashAvance
Produits pré-vendus
Autres intervenants
Entité d’investissement
Actif immobilier
Emprunteur
Fonds ABL
Financement Intérêtet
capital
Collatéral
Entité d’investissement
Détenteur de police
d’assurance
Fonds ABL
CashIntermédiaire
Cash
Polices d’assurance
Polices d’assurance
Entité d’investissementAssureur Prêteur original
Fonds ABL
Prime
Assurance
Intérêts et capital
Prêt
Entité d’investissement
Collatéral :véhicules
Fonds ABL
VéhiculesIntérêts et capital
Vente des prêts
Emprunteurs peu solvables
Financement
Société de financement
Vendeur de voitures
3. Hedge Fund in 2010: hedge fund & private equityMany hedge funds invested during the private phase & several private equity players shortened the life of the funds
FOUNDER PRIVATE INVESTMENT
PRIVATE INVESTMENT PUBLIC INVESTMENT
LIFE OF A COMPANYPrice
Time
PrivateEquity Fund
LISTED SECURITIES
IPO
Hedge fund
Source; Introduction aux hedge funds, 2nd edition, Economica 2010
Consolidation of the hedge fundindustry
How is the industry consolidating?
4. Consolidation of the hedge fundindustry
Before the crisis, not only original but also small funds (in terms of assets) became attractive because of the competition between hedge fund investors.
After the crisis, investors look for:Funds that went through the crisisFunds that are giving enough transparencyFunds that (looks like) have(ing) the capacity to make stables returns and manage liquidity…avoid fraud and liquidity issues
Large established funds closed for years opened to investors and got the main inflows
4. Consolidation of the hedge fundindustry
The new talents cannot raise assets to reach the minimum size to grow furtherMany funds made significant losses in 2008 and are still far from high watermark
Many managers/traders join the large hedge fund groups
A significant part of the new assets comes frominstitutional investors that loose confidence in banks and classic asset management companies but the needinstitutionalized funds
Is it the end of the « entrepreneur of finance »?
The industry is splitting with a few hundreds big ones and the other ones
4. Consolidation of the hedge fundindustry
< USD20m38 %
$20m to $50m20 %
$50m to $100m12 %
$100m to $200m10 %
$200m to $500m10 %
$500m to $1 000m5 %
$1 000m to $2 000m
2 %
>2 000m3 %
Source; Introduction aux hedge funds, 2nd edition, Economica 2010
In number of funds
4. Consolidation of the hedge fundindustry
Assets in billions of dollars
Number of funds
Assets in the bucket billions
in Percentage of the industry
20 10 200 14%10 25 250 17%5 50 250 17%1 100 100 7%
NA 185 800 55%
Assets in millions of dollars
Number of funds
Assets in the bucket in billions
Percentage of the industry
70 9 315 650 45%
Source; Introduction aux hedge funds, 2nd edition, Economica 2010
In assets under management
3. Consolidation of the hedge fundindustry: why?
Because of the institutionalization of the large fundsNo exposure to unwanted risks like operational risks(operational DDQ + quantitative analysis)
Reconciliation
External events
FraudPeople
managementChange of
infrastructure
Computer problem
Electricitybreakdown
Valuation or execution
OPERATIONAL RISK
Source; Introduction aux hedge funds, 2nd edition, Economica 2010
3. Consolidation of the hedge fundindustry: why?Repartition of hedge fund
failuresRepartition of operational
failures
Source; Introduction aux hedge funds, 2nd edition, Economica 2010 – originally from Capco
The future of hedge fundinvesting
The easy part?
5. The future of the hedge fund industry
Source : Alternative Investment Solutions, International Financial Services London based on Watson Wyatt, Merrill Lynch/Capgemini, BCG, World Federation of Exchanges, BIS.
0102030405060708090100
W… P… T…
5. The future of the hedge fund industry
My (published) view in 2007 was…
USA
Europe
Asia
East Europe & Russia
Latin America
Africa
ConsolidationCatch upEmergence Start
Source; Introduction aux hedge funds, 2nd edition, Economica 2010
5. The future of the hedge fund industry
For the future, 3 phases were possible
USA
Europe
Asie
ConsolidationCatch up
Rapid growth
Persistent consolidation
Des-interest
Source; Introduction aux hedge funds, 2nd edition, Economica 2010
Conclusion
Almost done…
6. ConclusionThe industry is back on track but it is different and willcontinue to evolve rapidly.
In 2010, hedge fund selector should know more than the basics of every strategy even if many managers went back to basics.
Larger established funds opened to investors after the crisis and they are getting the main inflows
The short to medium term future of the industry is probably persistent consolidation
Q&A
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