dominique grandchamp: gauging institutional interests and the role of regulated investment funds in...

Gauging Institutional Interest and the Role of

04 October 2011

www.mercer.com

Gauging Institutional Interest and the Role of

Regulated Investment Funds in a Post Crisis World

Dominique Grandchamp, CFASenior Investment ConsultantMercer (Switzerland) [email protected]

+41 22 918 10 15

Agenda

2) The Present - Where is the Performance?

3) The Future - How to invest in Hedge Funds?

1) The Past - Hedge Funds in a Less Regulated World

1Mercer

4) Ucits Hedge Funds Growth

5) Conclusions

The Past - Hedge Funds in a Less Regulated WorldWhat Hedge Funds Have to Do Better….

� Black boxes (lack of transparency)

� Operational and investment risks

– Counterparty

– Concentration

– Leverage

Valuation independence

2Mercer

� Valuation independence

� Liquidity mismatch

� Remoteness and lack of regulation of offshore domiciles

� Limited asset control and weak corporate governance

� Stronger correlation with markets than advertised and expected

Agenda

2) The Present - Where is the Performance?

3) The Future - How to invest in Hedge Funds?


3Mercer


5) Conclusions

The Present – Where is the Performance?Example: Switzerland’s Pension Fund System

Cash

Real Estate 20%

Commodities, HFs, PE

8% 7%

4Mercer

Bonds35%

Equities

30%

Real Estate 20%

The Present – Where is the Performance?Example: Performance last 10 years

Cash

Bonds

1%

4%

5Mercer

Equities

Real Estate

Alternatives

Liabilities

0%

3.5%5%

3%

The Present – Where is the Performance?Example: Low Yield on Bonds

8

9

10

11

12

13

14

YT

M (

%)

SBI AAA-BBB Global Agg Global Agg Corp Global EM

6Mercer

1.50

2.43

3.79

5.67

0

1

2

3

4

5

6

7

Dec-0

0

Dec-0

1

Dec-0

2

Dec-0

3

Dec-0

4

Dec-0

5

Dec-0

6

Dec-0

7

Dec-0

8

Dec-0

9

Dec-1

0

YT

M (

%)

The Present – Where is the Performance?Challenges ahead…

Yield on bonds < Liability growth

Uncertain performance of equities coupled with high volatility

7Mercer

Look at more defensive, absolute return strategies

Agenda

2) The Present – Where is the Performance?

3) The Future – How to Invest in Hedge Funds?


8Mercer


5) Conclusions

The Future – How to invest in Hedge Funds?Take into account Investor Expectations Post-2008

� Liquidity

� Transparency

� Regulatory Oversight + Onshore Domiciles

� Asset Control + Security

9Mercer

� Tax Efficiency

� Performance and preference for low volatility (defensiveness)

Embed defensiveness in the equity bucket…

The Future – How to invest in Hedge Funds?Hedge Funds increase Defensiveness

Broad market Defensive

IndexedEquities

Performance Drivers

10Mercer

… so as to reduce the overall risk

Low Volatility

Small Cap

market strategies

Emerging Markets

DefensiveStrategies

SmallCap

EquitiesEmerging Markets


Index-Strategies (MSCI World)

Beta =1

Beta > 1

• Emerging Markets

• Small Caps

Eq

uit

y S

trate

gie

s

• Minimum Variance-Strategies

• Quality +YieldStrategies

• Absolute Return Strategies

11Mercer

0 0.25 0.5 0.75 1 1.25 1.5

Beta

Eq

uit

y S

trate

gie

s

Beta < 1


Heuristic

IndexedStrategies

ActiveManagers

12Mercer

Heuristic(Fundamental Indexing) Quality Strategies

Optimized(Minimum Volatility)

Absolute ReturnVariable Bias

DefensiveStrategies


CTAs

Global Macro

13Mercer

Relative Value

Long/Short Equity

Equities

Long-only Funds

Offshore Hedge Funds + FoFs

Onshore Hedge

1 2

The Future – How to invest in Hedge Funds?Old and New Access Points

14Mercer

Onshore Hedge Funds(SIFs)

3

4 Mandates+Managed Account

Platforms

5Ucits

Hedge Funds

6Indices+

Replication

The Future – How to invest in Hedge Funds? The Great Convergence

Long-only Ucits IIIMandates

+ MacsOnshore HFs

(XIFs)Offshore HFs

Liquidity High High High Medium Low

Trend towards absolute return

Increasingly benchmark-agnosticTrend towards “onshorisation”

Preference for liquidity and transparency

Long-only Ucits IIIManaged Accounts

Onshore HFs Offshore HFs

15Mercer

Transparency Medium Medium High Medium Medium

Asset Control Medium Medium High Low Low

Tax Efficiency High High Low Medium Low

Low Beta Low Medium High High High

Regulatory oversight High High Low High Low

Benchmark awareness High Medium Low Low Low

The Future – How to invest in Hedge Funds?Which Access Point for Whom?

Family

Office

16Mercer

Banks

Pension

Plans

Insurance

The Future – How to invest in Hedge Funds?Which Access Point for Whom?

Onshore, Ucits III Offshore HFs

Family Office☺ �

Banks☺ �

17Mercer

Banks☺ �

Insurance☺ �

Pension Plans F,D,I,S,P☺ �

Pension Plans CH, UK,

Holland, Nordics � ☺

The Future – How to invest in Hedge Funds?UCITS Drivers…

Factors which will drive the further development of Ucits Hedge Funds:

� Wealth Management / Retail Distribution

– Regulatory pressure

– Search for tax efficiency

– Distribution efficiency (Ucits IV)

– Investor preference for liquidity

18Mercer

– Investor preference for liquidity

� Institutional Investors

– Regulation in some EU jurisdictions

– Growing acceptance from early adopters

– Search for yield, absolute return, defensiveness in liquid+regulated format

– Size of investable universe (length of track record and AuM)

The Future – How to invest in Hedge Funds?EU goes UCITS….

19Mercer

The Future – How to invest in Hedge Funds?Who does not love UCITS???

20Mercer

The Future – How to invest in Hedge Funds?Who loves UCITS???

21Mercer

Agenda


3) The Future – How to invest in Hedge Funds?


22Mercer


5) Conclusions

Ucits Hedge Funds Growth 750+ Ucits Hedge Funds Up and Running

# Funds # New Launches

23Mercer

Source: Absolute Return

Ucits Hedge Funds Growth120 Billion EUR AuM reached

24Mercer

Source: Absolute Return

Ucits Hedge Funds GrowthLength of Track Record

15%Long (>5y)

Length of track record (years)

25Mercer

55%

30%

Short (< 2y)

Medium (2-5y)

Ucits Hedge Funds GrowthFund AuM (EUR)

< 50 MM

> 200 MM

20%

26Mercer

50%

50-200 MM

30%

Ucits Hedge Funds GrowthRisks

� Performance expectations of investors (less leverage + illiquidity)

� Higher beta rather than alpha generation

� High barriers to entry for entrepreneurial ventures

� Counterparty risks and hidden fees (total return swaps)

� Corporate governance issues remain (related parties + directors)

27Mercer

� Corporate governance issues remain (related parties + directors)

� Regulatory oversight (NOT regulatory protection)

� Lower due diligence standards applied by investors

Agenda


3) The Future – How to invest in Hedge Funds?


28Mercer


5) Conclusions

Conclusions

Ucits and onshore Hedge Funds will continue to grow

Lower performance than in the past, defensiveness is welcome

Traditional Hedge Funds remain to capture illiquidity premium

29Mercer

Convergence with long-only products

Institutional interest is taking off in selected jurisdictions

Fund of Hedge Funds model challenged and struggling

Stick to a robust due diligence process

www.mercer.com

Dominique Grandchamp

Mercer (Switzerland) SA

Avenue Reverdil 8-10

1260 Nyon

Switzerland

+41 22 918 10 15

[email protected]

www.mercer.com

dominique grandchamp: gauging institutional interests and the role of regulated investment funds in...

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