march 2012 hf recap

7/31/2019 March 2012 HF Recap

1/7

The information contained herein is not intended to be, and does not constitute, advice from Morgan Stanley. Morgan Stanley is not your advisor (municipal,financial or any other kind of advisor) and is not acting in a fiduciary capacity.

APRIL 2012

P RIME BROKE RAGE

March 12 Hedge Fund RecapAPRIL 2012

Strategic Content Group ([email protected])

This memorandum is not a product of Morgan Stanleys Research Department and you should not regard it as a research report. For Institutional Use Only.

1.0 HIGHLIGHTS

Based on our initial sample of returns, Hedge Fundshad positive returns for the third consecutivemonth as the median return was +0.68% and theaverage return was +0.32% in March (Section 2.0)

o The median YTD return was +5.06%, while theaverage YTD return was +5.76%

o Based on aggregate equity holdings with Morgan

Stanley, global HF longs increased faster thanboth shorts and the broader equity marketforthe third consecutive month. Info Tech andFinancials performed best YTD and performedwell in March

Leverage changes were inconsistent across regions asmarkets were less directional in March(Section 3.0)

o Europe net increased in March, but still remainsbelow its end of 2011 level. US net was flatmonth/month and Asia net decreased

Net buying continued in March, albeit at theslowest monthly pace YTD as we saw some net

selling during the last two weeks of March (1)(Section 4.0)

o While we continued to see net buying in NorthAmerican and European equities, Asian equitiesturned net sold across regions with Japan themost net sold in March

In the U.S., Materials was the most net bought sectorin March after being one of the most net sold sectorsin Jan and Feb(Section 5.0)

o Info Tech was net bought for the secondconsecutive month as it continued to outperform.By the end of March, the Tech long/short ratio

increased to 2.60, the highest level since Jan

2010

Sentiment seems to be cautiously optimistic asHedge Funds continue to capture upside in a risk-on environment. All regions have seen an increase indemand for Equity L/S and continued demand forCredit (Section 6.0)

1.1 KEY FIGURES

Japanese Equities Net Sold in March as Equity Market Continuesto Rally (Figure 9)

Info Tech Long/Short Ratio Highest Since Jan 2010 (Figure 11)

Sector Dec-09 Dec-10 Dec-11 Jan-12 Feb-12 Mar-12

Cons Disc 1.67 1.78 1.83 1.80 2.00 2.02

Cons Stap 2.73 1.88 1.50 1.81 1.67 1.55

Energy 1.60 2.03 2.27 2.09 1.97 2.03

Financials 1.73 1.82 1.70 1.65 1.71 1.76

Health Care 2.20 2.09 1.94 1.81 1.90 1.98

Industrials 1.35 1.58 1.70 1.83 1.88 1.90

Info Tech 2.67 2.17 2.32 2.29 2.36 2.60

Materials 2.15 2.19 2.15 1.90 1.78 1.89

Telecom 1.13 1.37 1.05 0.96 0.85 0.76

Utilities 1.14 1.16 1.33 1.43 1.38 1.45

ETF 0.28 0.35 0.40 0.55 0.41 0.45

Total 1.62 1.66 1.69 1.72 1.73 1.76

Equity Net Trading as a % of Total Global Net Exp. Nikkei YTD Rtn

-5

0

5

10

15

20

25

(0.4)

0.0

0.4

0.8

1.2

1.6

2.0

Japan Net Ac ti vity ( LS) Nikkei 225 Return (RS)

Source: Morgan Stanley Prime Brokerage, Bloomberg, Data as of Mar 30, 2012

Source: Morgan Stanley Prime Brokerage, Data as of Mar 30, 2012Note: U.S. Long / Short Ratios are measured as [LMV / (absolute value (SMV))]across all U.S. clients and all U.S. listed cash equities held with Morgan Stanley PrimeBrokerage.


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The information contained herein is not intended to be, and does not constitute, advice from Morgan Stanley. Morgan Stanley is not your advisor(municipal, financial or any other kind of advisor) and is not acting in a fiduciary capacity.

APRIL 2012

2

P RIME BROKE RAGE

2.0 PERFORMANCE(2) Third Positive Month

Based on our initial sample of returns, Hedge Fundshad positive returns for the third consecutivemonth as the median return was +0.68% and theaverage return was +0.32% in March (Figure 1)

o The median YTD return was +5.06%, while theaverage YTD return was +5.76%

With the S&P 500 rising 3.3% in March, but manynon-US equity markets seeing declines such that theMSCI AC World index only rose 0.7%, the medianL/S fund was up 0.95% in March and the average

was up 0.62%

o Over 90% of Equity L/S funds are up YTD with amedian return of +6.45% YTD and an averagereturn of +6.58%

o YTD the S&P 500 rose 12.6% and the MSCI AC

World rose 12.0% Based on aggregate equity holdings with Morgan

Stanley, for the third consecutive month global HFlongs increased faster than both shorts and thebroader equity market (Figure 3)

o On a YTD basis, longs have appreciated 16.2%while shorts have appreciated 11.9% and theMSCI AC World has increased 12.0%

o Adding to earlier gains in Jan and Feb, InfoTech and Financials continued to perform wellin March. For IT,Internet Software & Serviceswas a key contributor in March on the long and

short sides while Computers & Peripherals is thekey contributor YTD. For Financials, DiversifiedFinancials is the key contributor on the long sideYTD

o In addition to IT and Financials, Consumersectors performed well in March

o While Health Care performed better in Marchthan in Jan and Feb, its the only sector in

which shorts have appreciated more than longs

YTD

Figure 1: Performance Details (%) (2)

All Funds Equity L/S

Mar YTD Mar YTD

Median 0.68 5.06 0.95 6.45

Mean 0.32 5.76 0.62 6.58

% Up 62 85 66 91Percentiles

95th 3.70 16.79 3.93 15.94

75th 1.70 8.44 1.94 9.90

50th 0.68 5.06 0.95 6.45

25th (0.89) 1.82 (0.61) 2.49

5th (4.61) (2.26) (3.36) (1.51)

# Funds 230 228 122 122

Figure 2: March is Third Consecutive Month of Positive Returns (2)

-10

-5

0

5

10

15

Jul-11 Aug-11Sep-11 Oct-11 Nov-11Dec-11Jan-12 Feb-12 Mar-12

Al l -Med ian Equi ty L/S -Med ian S&P 500 MSCI AC Wor ld

Figure 3: Sector Appreciation of Global Equity Positions in Mar (3)

Sector

LongAppre-ciation

ShortAppre-ciation

DifferenceBtwn Longand Short

MSCI ACWorld TR

Cons Disc 4.3 1.9 2.5 2.8

Cons Stap 3.4 1.1 2.3 3.0

Energy -3.5 -4.7 1.2 -4.8

Financials 4.4 2.5 1.9 1.2

Health Care 4.0 3.3 0.7 3.1Industrials 0.4 -1.3 1.7 -0.1

Info Tech 5.7 1.7 4.0 4.2

Materials -2.7 -3.6 0.9 -4.2

Telecom 2.7 0.9 1.8 0.2

Utilities -0.5 -1.0 0.5 0.2

ETF & Other -1.0 1.1 -2.1

Total 2.9 0.8 2.1 0.7

Source: Morgan Stanley Prime Brokerage, Bloomberg, Returns as of Mar 30, 2012

Source: FactSet, Morgan Stanley Prime Brokerage, Data as of March 30, 2012

Source: Morgan Stanley Prime Brokerage, Returns as of March 30, 2012

Return %


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APRIL 2012

3

P RIME BROKE RAGE

3.0 LEVERAGE(4)

Leverage Changes Mixed in March

Leverage changes were inconsistent across regions asmarkets were less directional in March (Figures 4 &5)

In the U.S., gross ticked up further while net wasflat M/M

o While gross is at the same levels as one year ago,net is 12 percentage points lower and low relativeto the VIX (Figure 6)

o Gross leverage increased 4% in March with mostof the increase coming during the first half of themonth

o Net leverage reached its YTD high of 55% onMarch 19 for the second time this year (first timewas February 9) before declining slightly intomonth-end

Europe net leverage increased to as much as 32%in mid-March, near the high end of its six month

range of 21% to 34%. It ended the month at 30%

o In line with the general trend of the MSCI Europeindex, Europe gross leverage increased mid-month before pulling back to end March 6%below its end of February level

After increasing from 33% at the end of 2011 to ashigh as 55% in mid-March, Asia net leveragedeclined 7% to end March at 48%. The decline inthe second half of March came as the ShanghaiComposite pulled back but the Nikkei maintained its

ascent

o Asia gross leverage continued to tick higher andincreased another 2% in March to 138%

Figure 6: US Net Leverage vs. VIX

Figure 4: Recent Leverage Figures

End of Mar 2012 Month / Month YTD

Gross Net Gross Net Gross Net

U.S. 157% 53% 4% 0% 15% 7%

Europe 203% 30% (6%) 5% 16% (3%)

Asia 138% 48% 2% (3%) 23% 15%

Figure 5: Regional Equity L/S Gross and Net Leverage(4)

30%

40%

50%

60%

70%

80%

90%

100%

100%

110%

120%

130%

140%

150%

160%

170%

Jan-10 Jul-10 Jan-11 Jul-11 Jan-12

US Gross (LS) US Net (RS)

0%

10%

20%

30%

40%

50%

60%

70%

80%

140%

150%

160%

170%

180%

190%

200%

210%

220%


Euro pe Gross (LS) Euro pe Net (RS)

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

60%

70%

80%

90%

100%

110%

120%

130%

140%

150%


Asia Gross (LS) Asia Net (RS)

Source: Morgan Stanley Prime Brokerage, global data as of Mar 30, 2012Note: Figures across all regions are 5-day averages


US Median Gross Lev (%) US Median Net Lev (%)

EU Average Gross Lev (%) EU Average Net Lev (%)

Asia Median Gross Lev (%) Asia Median Net Lev (%)

Net Leverage VIX (Inverted)

Source: Morgan Stanley Prime Brokerage, Data as of Mar 30, 2012Note: Figures across all regions are 5-day averages

5

15

25

35

45

55

6510%

20%

30%

40%

50%

60%

70%

Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12

Net Leverage (LS) VIX (RS)


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APRIL 2012

4

P RIME BROKE RAGE

4.0 TRADING ACTIVITY(1)

Hedge Funds Continue to BuyDM in March, Sell EM as EM Underperforms DM

GLOBAL ACTIVITY

Net buying continued in March, albeit at theslowest monthly pace YTD as we saw some net

selling during the last two weeks of March

Equity L/S and Stat Arb / Quant funds were net buyersin March while Multi-Strat / Macro funds were netsellers

Excluding the U.S. holiday on Feb 20, average dailyvolumes declined 3% in March as compared toFebruary

o Equity L/S funds saw volumes decline 7%month/month, while Multi-Strat/Macro volumesrose 7% month/month

o Volumes in European equities continued to

increase in March, rising another 6%month/month after a 15% rise in Feb

o After seeing a rise in volumes of almost 40% inFeb, Japanese equity volumes on our booksdeclined about 15%

REGIONAL ACTIVITY

The MSCI World index climbed another 1.3% inMarch and the MSCI EM index declined 3.3%. Inline with these returns, we saw DM net bought andEM net sold in March (Figure 7)

While we continued to see net buying in NorthAmerican and European equities, Asian equities

turned net sold across regions with Japan the mostnet sold in March (Figure 8)

o The net buying of Japan slowed in late Februarybefore turning decisively better for sale in thesecond half of March (Figure 9). The net sellingwas led by Equity L/S funds, although moststrategies were net sellers in the second half of themonth

Figure 7: DM Net Bought and EM Net Sold in March

(20)

(15)

(10)

(5)

0

5

10

15

Jan-11

Feb-11

Mar-11

Apr-11

May-11

Jun-11

Jul-11

Aug-11

Sep-11

Oct-11

Nov-11

Dec-11

Jan-12

Feb-12

Mar-12

EEM/MSCI World Cum. Rtn DM EM

Figure 8: Asia Turns Net Sold in March

Figure 9: Japanese Equities Net Sold in March as Equity MarketContinues to Rally

(2.0)

(1.0)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

North

America

Euro pe O th er EM EMEA LatAm Pac ific Ex

Japan

EM As ia J apan

Jan -12 Feb-12 Mar-12


Source: Morgan Stanley Prime Brokerage, Data as of Mar 30, 2012

Equity Net Trading as a % of Total Global Net Exposure

Cumulative Equity Net Trading as a % of Total Global Net Exposure

Equity Net Trading as a % of Total Global Net Exp. Nikkei YTD Rtn

-5

0

5

10

15

20

25

(0.4)

0.0

0.4

0.8

1.2

1.6

2.0

Japan Net Ac ti vity ( LS) Nikkei 225 Return (RS)



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APRIL 2012

5

P RIME BROKE RAGE

5.0 US SECTOR ACTIVITY(1,5)

Materials Flips to Net Boughtin March, Info Tech Buying Continues

In the U.S., 7 of 10 sectors were net bought inMarch as we saw net buying of single-names andETFs (Figure 10)

Materials was the most net bought sector in Marchafter being one of the most net sold sectors in Jan

and Feb

o The reversal was primarily due to Stat Arb/Quantfunds switching to net buyers after being thelargest net sellers of Materials in Jan and Feb

o Fundamental Equity L/S funds, however,continued to be net sellers of Materials for the 5thconsecutive month

Info Tech was net bought for the secondconsecutive month as the sector has been one of the

top performers, up 21% YTD

o The long/short ratio at 2.60 is the highest levelsince Jan 2010, primarily due to longs addedacross strategies over the past two months

o Net buying has been widespread across industriesYTD, with 7 of 8 industries net bought. Semiswas the most net bought, while Computers &Peripherals was the most net sold due to sellingin Feb and March

Consumer Staples was one of the most net soldsectors for the second month in a row as the sector

saw shorts added across strategies in March

o The long/short ratio decreased from 1.67 inFebruary to 1.55 in March, and is at the lowestlevel since the beginning of 2012

Telecom continued to see net selling in March andis the most net sold sector YTD which has causedits long/short ratio to drop further. Aside fromETFs, it is the only sector with a L/S ratio below 1

Cons Disc was net bought for the third consecutivemonth and is the most net bought sector YTD

o Stat Arb/Quant funds are the largest net buyers ofConsumer Discretionary YTD despite being the

largest net seller in Marcho Textiles, Apparel & Luxury Goods was the most

net bought industry in March

Financials was slightly net sold in March after havingbeen net bought in Feb

o Diversified Financials saw most of the net sellingin March and this was mostly offset by net buyinginInsurance andReal Estate

Figure 10: U.S. Sector Net Activity and Returns

(3.34)

3.43

1.21

7.52

1.36

1.24

4.44

4.60

5.07

0.37

(5) 0 5 10(1.0) (0.5) 0.0 0.5 1.0

Cons. Stap.

Telecom

Financials

Utilities

Industrials

Healthcare

Cons. Disc.

Energy

Info Tech

Materials

Mar 2012 Net Activity Mar 2012 Return (%)

S&P500: 3.3

(1.62)

2.08

22.05

11.19

5.54

3.88

9.06

11.31

21.46

15.96

(10) 0 10 20 30(1.0) (0.5) 0.0 0.5 1.0

Telecom

Financials

Materials

Cons. Stap.

Utilities

Energy

Healthcare

Industrials

Info Tech

Cons. Disc.

2012 Net Activity 2012 Return (%)

S&P 500: 12.6

Figure 11: U.S. Long/Short Ratio by Sector

Sector Dec-09 Dec-10 Dec-11 Jan-12 Feb-12 Mar-12

Cons Disc 1.67 1.78 1.83 1.80 2.00 2.02

Cons Stap 2.73 1.88 1.50 1.81 1.67 1.55

Energy 1.60 2.03 2.27 2.09 1.97 2.03

Financials 1.73 1.82 1.70 1.65 1.71 1.76

Health Care 2.20 2.09 1.94 1.81 1.90 1.98

Industrials 1.35 1.58 1.70 1.83 1.88 1.90

Info Tech 2.67 2.17 2.32 2.29 2.36 2.60

Materials 2.15 2.19 2.15 1.90 1.78 1.89

Telecom 1.13 1.37 1.05 0.96 0.85 0.76

Utilities 1.14 1.16 1.33 1.43 1.38 1.45

ETF 0.28 0.35 0.40 0.55 0.41 0.45

Total 1.62 1.66 1.69 1.72 1.73 1.76

Source: Morgan Stanley Prime Brokerage, Data as of Mar 30, 2012Note: U.S. Long / Short Ratios are measured as [LMV / (absolute value (SMV))]across all U.S. clients and all U.S. listed cash equities held with Morgan Stanley PrimeBrokerage.

Source: Bloomberg, Morgan Stanley Prime Brokerage, Data as of Mar 30, 2012Note: Net Activity charts are meant to give directional indications of activity. Thesector with the largest absolute change in activity is indexed to +1 or -1 with theother sectors indexed to it. Sector returns are based on the S&P 500 GICS sectorreturns.


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APRIL 2012

6

P RIME BROKE RAGE

6.0 CAPITAL INTRODUCTIONS UPDATES(6)

FLOWS AND OVERALL INDUSTRY SENTIMENT

Sentiment seems to be cautiously optimistic asHedge Funds continue to capture upside in a risk-

on environment

US: Manager flows seem to be picking up marginallywith visibility to stronger commitments in early Q2

Europe UK: Cautious optimism on the outlook forEurope in 2012 continues to improve. We saw anincrease in US investors travelling to Europe in Q1,indicating a consistent view that we may have seen thebottom in Europe and now is a good entry point

Asia: As investors continue to search for new ideas tointroduce into their portfolios, we see a number ofportfolio reallocations occurring, but no meaningfulnew inflows into the industry

o We are starting to see a small increase in riskappetite as investors want to play catch-up in therecent rally. However, as investors are aware thatthere are a number of new launches in thepipeline for Q2 and Q3, they may wait to see howthese news launches fare before allocating

Asia: Fee discounts are a much talked about topic.We are starting to see some managers offeringdiscounted share classes to encourage investors toallocate earlier, but they are largely concepts whichmanagers are willing to discuss

STRATEGIES OF INTEREST

US: In March, we saw an overall increase in managersearches as investors continue to source new ideas andstrategies

US: There has been a recent uptick inglobal emerging markets interest as some investors

have noted underweight exposure

o Equity Long/Short interest continues to increasefrom early Q1 lows with bifurcated requests forexposures (relatively even split between longer

biased mandates versus low net/market neutralmandates)

o Non-Equity searches, including Macro andCredit, remained relatively constant compared toJanuary and February

Europe UK: In March we have seen an uptick inappetite for European L/S strategies. We alsocontinue to see requests for Credit and Distressedfunds and the recent growth of funds like OVS is a

testament to the strong demand for fundamental EventDriven strategies

Europe Geneva: Appetite for equity strategies hasreturned, but is mainly focused on US equities wherethey are more bullish on the macro situation

Asia: We continue to see a healthy level of interestfor Asian Credit strategies and Fundamental

Equity L/S remains a key area of interest

o New launches continue to get attention frominvestors across different strategies

INVESTOR VERTICAL UPDATES

US: Endowments & Foundations have reportedreducing cash levels; however, current levels are stillhigher than normal. Additionally, appetite for non-USexposure is driving many groups to look abroad (with

a noted uptick in international travel) for talent (hedgefunds, long-only, private equity and real estate)

US: Most Family Offices are increasing their duediligence timeframe in an effort to perform morerigorous due diligence, particularly with a renewedfocus on operational due diligence

Europe UK: We continue to see an increasingamount of larger FOF's launching early stage and seedmanager vehicles. Our current view is that there isapproximately $10Bn in seed capital globally waitingto be deployed, so the opportunity for capturing talentremains high

Europe Geneva: FoFs have restructuredtheir businesses to cater for the institutional marketand have subsequently seen flows

o Private Banks focusing on building in-housemanaged account solutions continues to be a trend

o Consolidation is expected to continue withinPrivate Banks and Family Offices.Outperforming Multi-Family Offices have startedto win business

Asia: On the back of the AIJ announcement, Japaneseinvestors remain prudent with respect to their hedge

fund allocations. While we have not seen any materialredemptions, new subscriptions remain on hold untilfurther clarity emerges


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The information contained herein is not intended to be, and does not constitute, advice from Morgan Stanley. Morgan Stanley is not your advisor (municipal,financial or any other kind of advisor) and is not acting in a fiduciary capacity.

APRIL 2012

7

P RIME BROKE RAGE

Disclaimer

The above information has been prepared by one or more Morgan Stanley entities (each individually or collectively, as appropriate, Morgan Stanley), andmay have been prepared by or in conjunction with Morgan Stanleys trading desks. Morgan Stanley is involved in many businesses that may relate tocompanies mentioned in this report, including market making and specialized trading, acting as liquidity provider, trade execution, research, fund management,investment services and investment banking. Morgan Stanley makes every effort to use reliable, comprehensive information, but we make no representationthat it is accurate or complete. For example, various filters are used by Morgan Stanley in compiling the data which may cause significant data to be excludedfrom the reports due to client confidentiality obligations or for other reasons. The application of these filters may lead to a reporting of no reportable activity.Morgan Stanley has no obligation to tell you when information in this report changes or to update the information.

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Copyright by Morgan Stanley 2012, all rights reserved.

Notes:(1) Hedge Fund trading activity bullets are based on trading across all cash single-name, cash ETF, and swap global equities within Morgan Stanley Prime Brokerage

accounts. The U.S. sector related bullets and charts on trading activity in Section 5.0 are based on trading across all single-name (non-ETF) US equities within all

US Morgan Stanley Prime Brokerage accounts.(2) All performance values are net of fees and are based on investor letters collected by Morgan Stanley Prime Brokerage through March 4, 2012. Morgan Stanley

does not and cannot verify the accuracy of the information contained in these letters. S&P 500 Index and MSCI AC World Index returns sourced from Bloomberg.(3) Based on broad sample of largest holdings with Morgan Stanley Prime Brokerage. Securities include all global single-name equities and ETFs.(4) Gross Leverage = (Long Exp + Absolute Value (Short Exp)) / Equity; Net Leverage = (Long Exp - Absolute Value (Short Exp)) / Equity. US and Asia "Leverage

levels" are 5-day averages of daily medians, while Europe levels are 5-day averages of daily simple (non-weighted) averages. All exposures are delta-adjusted.All samples include accounts with a minimum account equity and have been rebalanced at least every 6-12 months to keep sample representative of historicalaccounts. US sample reflects a broad sample of US based Equity Long/Short funds. The Europe sample is based on a selection of the largest Europe focusedEquity Long/Short funds. The Asia sample includes all Asia-based accounts and non Asia-based accounts with greater than 50% of gross assets exposed toAPAC. The vast majority of funds in the Asia sample are Equity L/S funds. The most recent U.S. leverage levels and data back to January 2010 can be madeavailable regularly upon request.

(5) Market returns sourced from Bloomberg.(6) Source: Based on observations expressed by managers and investors during discussions with the Morgan Stanley Capital Introductions team.

march 2012 hf recap

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