Ron Suber, senior partner and global head of sales and marketing for Merlin Securities, recently shared his thoughts with IvyPlus about how managers can more effectively market their products and strategies to investors. Ron’s presentation addresses some of the key points made in Merlin’s two most recent white papers: “The Spectrum of Hedge Fund Investors” and “The Business of Running a Hedge Fund.”

So what are Ron’s recommendations for managers looking to get to the next level of AUM? Simple: have your business in order, know your investors and tell your story to them effectively.

The presentation is available at http://slidesha.re/gL9Gqn, and Ron’s white papers are posted at http://merlinsecurities.com/whitepapers.

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PWC in a recent study says that "European managers will now need USD250m of assets to be viable, up from USD100m to USD150m a few years ago."  Is $250 million the new barrier for institutional quality as Europe wallows in a banking crisis larger than the US?   PWC refers to the need for new operating excellence for funds due to new transparency requirements from investors.  More here, http://bit.ly/duJP3p

 ********  IvyPlus December 8th How to Run Your Hedge Fund as a Business Event –http://bit.ly/auce1t  ******* 

Institutional Investor Magazine blogs Hedge Funds are outstripping PE firms in capital raising.  PE firms have only raised $50 billion in the last quarter while only investing $26.6 billion in that same period. Fundraising time lines now stretch from 12 to 18 months for mature funds. 

However, the two industries use different terminology to identify how much capital they have allocated.  Understanding that difference shows HF actively managed assets are far greater than PE actively managed assets.  You can find more info here, http://bit.ly/brcigz

The proper terms Hedge Funds use for the money they trade under their own account is Assets Under Management (AUM).  At times, hedge funds may be inactive in trading or be in a cash position but their assets are still held under their own account.  Again there is a secondary consideration which is how much of any hedge fund’s assets are "Managed Accounts" .  Managed Accounts encompass a broad array of assets held by an asset manager which may be traded by a hedge fund manager on a contractual basis.  In additions, there is proprietary trading which is done by major banks and other asset managers who separately trade their own book with potentially differentiated positions than those of their clients.  We assume the $2 trillion in AUM widely quoted for hedge funds comprises only assets actively managed in a fund by hedge funds and not Managed Accounts.

With respect to Private Equity the $1 trillion of capital commitments is different than AUM in that many cases the actual capital on call is not in a fund structure but can be called upon at a certain point when the PE firm needs the capital.  Under different legal terminology, capital on call can be called at different intervals of time.  Some contracts may stipulate such terms as being over a 3 – 5  year period, never to exceed 40% of the total capital committed over a 1 year period.   In other cases, the call period could be longer and investors may anticipated returns from their year 1 investment to feed a year 4 plus investment or follow on fund issuance.  Other times, capital on call could be capital with rights of first refusal such as in the case of search funds.  Moreover in most hedge funds AUM is constantly reinvested but with PE firms, other legal clauses can require that all assets invested are returned when a deal is exited.  There are few industry-wide figures on capital on call vs actual assets under management but we think PE firm capital call commitments have largely been upset by the massive post-2007 asset valuation decline and there are cases where PE firms are not making capital calls on Limited Partners if they have not returned capital to those same LPs in the same time frame.

When looked at side by side, HF actively managed AUM on a daily basis far outstrips PE actively invested AUM on a significant basis. 

 ********  IvyPlus June 15th Fund Business Development Event –  http://bit.ly/aToA1J  *******

With the economy on the rebound and interest rates possibly increasing, questions surround the long term viability of Mortgage Backed Securities (MBS) purchased by the government.  A recent article in the WSJ mentions that the New York Fed has inherited a substantial portfolio of MBS from Bear Stearns, a large percent in hotel properties which are in disarray. 

The article in The Economist, “Earthbound,” discusses the reforms Congress is trying to make to alleviate the negative symptoms of the recession. The Fed has purchased “almost 1.25 trillion-worth of such MBSs since last year,” resulting in low interest rates. When rates rise, and a slew of commercial and residential debt maturing as well as sinking asset values, a double dip seems likely.   More here, http://bit.ly/cNO9IL
 

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Reuters’ Simon Meads in London reports that private equity firms are using investors’ disappointments with low returns from buyouts to their advantage. They plan on getting more funding to make arrangements with entrepreneurs, and lessen their activity with debt-laden controlling stakes. 

The 3i Group has decided to initiate a growth fund devoted to investors want for less risky investment even with lower returns. Funds such as these receive low returns during peak times, but during economic downturns these funds outperform due to their lower rate of volatility.

It’s questionable as to whether this strategy will be successful as the private equity market remains in flux and many investors have suffered from illiquidity in the marketplace from both buyout and growth strategies.

If you would like more information of this topic click on this link: http://bit.ly/a4xiZR.
 

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Barbara Kollmeyer, the editor of MarketWatch in Spain, recently wrote the article, “Fund managers move towards U.S., away from Europe,” and according to this article, a recent BofA Merril Lynch survey, fund managers around the world are less likely to take risk in the Europe and would rather work with the risk in the corporate United States and Japan.

The survey encompassed 207 fund managers, who are responsible for $589 billion in funds. These managers revealed that they were in favor of corporate risk over sovereign risk, which may explain the lack of faith in European funds.  Likewise, an environment of increasing regulation in Europe may disincentify managers from participating in those markets.

For more information, click on the following link:  http://bit.ly/cpxiNA.
 

********  IvyPlus April 13th Commercial Real Estate Deal Summit, http://bit.ly/cwHZx9 *******

Venture Capital Funds (VC) continue to see their fortunes slide. They are at a severe disadvantage vs. other alternative investment funds due to the extent of their lockups, lack of liquidity, high risk, and present regulatory environment which diminishes the value of exits.  8.2% VC return on 10 year lockups are incredibly damaging from the eyes of the investor class who have a wide array of risk free options and better risk adjusted options with far higher returns such as hedge funds with 20%  targets and monthly liquidity.  On a risk adjusted basis, VC should outstrip hedge fund returns dramatically but they don’t.   Regulation will continue to increase as regulators see VC as another form of private equity with similar risks of over-leverage, speculation, etc .  Moreover, for funds that depend on capital calls, there is more LP resistance to fulfill obligations. 

The NVCA has published a widely quoted study stating Venture-backed companies employ 11% of all Americans in the private sector. Yet this empty metric doesn’t differentiate between the jobs created by VC backed firms vs. those acquired by the same firm. Nor does it differentiate between the age of the VC backed firms or whether they are public companies.  According to this study, HP and other firms that have grown dramatically through acquisitions of major competitors lump together acquired jobs and "created" VC jobs for a nonsensical metric.  Reviewing the study in more detail shows that VC backed firms peaked in creation and backing at the time the internet bubble burst and are now operating at 33% of where they were. VC backed firms and job creation since their nadir in  2003 barely track the U.S. population increase.  It is questionable that the formal VC industry needs to remain at its current size as the golden era of VC may be looked back upon as the time when VC was 5% the size of it’s peak yet churned out winners like Apple Computer and Hewlett Packard.  It is really a question of what have you done for me lately.

An argument for reducing the size of VC is (1) the cost of software startups have broadly diminished due to the availability of global sourcing for cheap software and project management talent and micro marketing capability for customers created by the internet.  One well known VC has said that the cost of marketing niche products in the ’80s could be as much as $15 million to 50,000 potential customers, today that cost is 10% of what it was BEFORE INFLATION ADJUSTMENT.  (2)  Likewise, the need for clean tech is diminished due to the global warming crackup.  With many state coffers empty, it will not be surprising if states roll back their tax incentives for clean tech as happened in the late ’70s and early ’80s with alternative energy.  The empty statement that VCs provide 11% of all jobs is similar to pre-global meltdown statements of real estate and the stock market values always go up.  Clearly changes will come and hopefully government will focus on ways to make credit cheap for job creators and emerging companies reducing their overall cost of capital and the need to sell equity at a dear price.

You can find the link to the NVCA study here, http://bit.ly/9ZGaNM

The Wall Street Journal reports that VC syndicate failure is increasing.  Again, LP cash is diminishing with resistance to capital calls as more LPs see the risk in litigation and penalties as more rewarding than the chance of losing all their capital in funds where the dynamic for success is diminished i.e. lack of leverage in the marketplace and side to side stock market performance. " of the 9,267 closely held companies in the U.S. backed by venture-capital firms, 59% have an investment syndicate. Such alliances, which aren’t new, allow venture-capital firms to spread the risk of investing in a start-up, though some firms demand at least a 20% stake."

More info here, http://bit.ly/9C9cq1

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As 2010 begins the Hedge Fund industry looks at a new wave of investment from institutional investors.   Some Global Pension Funds are vastly under-funded from past traditional strategies in markets that have moved cumulatively side to side for several years and are jumping into the hedge fund space head first rather than dipping their toes. 

Max Gottschalk, head of Gottex, says "There has been a clear change of attitude toward hedge funds between 2009 and now. Many institutions say they will up allocations, and private investors who stayed on the sidelines for much of 2009 are now coming back," 

Further, Gottschalk says, "individual investors and private banks are likely to focus on the more liquid hedge fund strategies while institutions were likely to diversify across all strategies." and "Some of the less liquid strategies like relative value and convertible arbitrage did extremely well in 2009 and the environment seems good for 2010. These strategies will likely attract institutional investors,"

More information here, http://bit.ly/8hkq0Y

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New PPIP funds continue to be raised as Marathon Asset Management has announced an initial $400 million raise of it’s fund with minority owned Blaylock Robert Van.  Pensions and Investments reports,

"The Treasury Department said in a news release it expects an initial closing on the remaining PPIP funds soon, rounding out a total Treasury equity and debt investment of $30 billion plus another $10 billion of private investor capital. Meg Reilly, Treasury spokeswoman couldn’t learn by press time how much is in the Marathon fund."

 For more on the story, http://bit.ly/4SZ953

 ********  IvyPlus Jan 26th Event – Alternative Funds Business Development and Capital Raising Cram Session http://bit.ly/7cuNdu *******

ICAP Plc (IAP.L), the world’s premier interdealer broker, has expanded its alternative investments business with the hires of Laura Prager and Linda Prager, who will act as Co-Heads and Managing Directors of the Alternative Investments Group. The Alternative Investments Group will provide personal and strategic assistance to investors interested in buying and selling secondary interests in hedge funds, private equity funds, real estate funds and other illiquid assets. The Group’s goal is to provide sellers of illiquid positions the ability to gain liquidity, rebalance portfolios and/or reduce exposure to distressed assets. For purchasers, the Group will provide access to mark-to-market priced limited partnership interests and other illiquid products, positions with shorter investment horizons, and a channel for rebalancing portfolios.

Laura Prager will be presenting at our November 10th Hedge Fund and PE Acquisitions and Secondaries half day seminar.

More info here, http://bit.ly/14z7jr

********  IvyPlus Nov 10th Event – Hedge Fund and Private Equity Funds:  Acquisitions and Secondaries.  http://bit.ly/3Ci1B2  *******