Merlin Securities released their latest research article, this time focused on helping hedge fund managers identify, understand and market to the right investors.

The white paper, titled “The Spectrum of Hedge Fund Investors and a Roadmap to Effective Marketing,” analyzes the 10 most common types of hedge fund investors (from “Partners, Friends and Family” to “Sovereign Wealth”) along a spectrum from the least “institutional” to the most. The article then defines a four-stage marketing program designed to help funds identify and effectively reach the types of investors most appropriate for their respective funds.

The article includes two helpful charts and some interesting context on the current environment for hedge fund managers and their investors. Interesting reading as always from Merlin.

The full article is available here: http://merlinsecurities.com/pr/spectrum.pdf

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Denver Employees Retirement Plan hired hedge fund-of-funds manager Prisma Capital Partners to run $80 million.  The commitment represents 5% of the $1.6 billion plan’s overall portfolio and is the plan’s first hedge fund-of-funds allocation.  The move is part of the plan’s revised asset allocation, which reduced its core fixed-income allocation by 4.5 percentage points to 17%

You can find out more here, http://bit.ly/bohnZy

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Interesting reading from Heidrick & Struggles’ "Hedge Fund Industry Trends" report.  Key findings are:

(1) A pickup in merger activity

(2) Stronger asset flow into funds

(3) More transparency and liquidity

(4) An increase in hedge fund startups

(5) Aggressive hiring of marketing agents in the industry.  

More findings on the marketing side of hedge funds are:

(a) Marketing and Investor Relations professionals are in high demand

(b) European FOF marketers moving to single strategy funds

(c) More than 55 marketers changing firms with 30 firms aggressively seeking marketers

(d) Average 2009 total compensation ranges for marketing professionals included:

• Group Head: US$1,200,000 – US$3,000,000*

• Managing Director: US$1,000,000 – US$2,500,000

• Vice President: US$450,000 – US$850,000

• Associate Vice President/Senior Associate:  US$170,000 – US$500,000

You can find more here, http://bit.ly/bicYob

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Newsweek lost $28.1 million last year with much of the loss coming from operating expenses such as manufacturing, advertising and distribution which AMI has an extensive network to support.  

Washington Post corporation is divesting Newsweek and potentially other properties as more than 60% of its revenue comes from Stanley Kaplan Corporation, a $2.9 billion education services colossus.  

More from the WSJ here, http://bit.ly/bSpEDG

Arizona Public Safety Personnel Retirement System has added new allocations to global tactical asset allocation, international bonds and absolute-return strategies as part of its annual asset allocation, confirmed James Hacking, administrator of the $6.3 billion fund. 

New allocations were recommended by NEPC.

The system also retained Albourne Partners as its hedge fund and private equity consultant, ORG Portfolio Management as its real estate consultant, StepStone Group as its North American-focused private equity consultant and NEPC as its general consultant, Mr. Hacking said.

More info here, http://bit.ly/bBYtab

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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. 

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HFMWeek reports that Hedge Fund Allocations are back to pre-crisis levels.  Pension funds continue to lead the charge into hedge fund investing. 

Mercer consulting reports,

“If you look at the demand this year compared to 2008 and early 2009, there has definitely been an increase,” said Robert Howie, a principal at investment consulting firm Mercer, which advises over 2,700 clients with assets in excess of £1.9trn.

The renewed confidence has been won by a series of industry reforms, aimed at creating better levels of oversight. “Most hedge funds have now tightened up their operations, they have multiple prime brokers and there is much less reliance on leverage,” said Howie.  You can find more here, http://bit.ly/cdRvec .

 Other signs of renewed interest come from the Ohio schools pension fund which plans to increase direct investment from 6% – 9 %.  More here, http://bit.ly/bMk1Mc

 Other news from Pension funds is to balance financial objectives with socially responsible investment moving away from real estate oriented deals that displace low income persons.  Calpers lost $500 million on its investment in Stuyvesant town.  More info here, http://bit.ly/9I62nx

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A paper released by HEC Montreal Department of Finance professors analyzes the pure persistence of fund strategies and reviews the ability of different strategies to continually reach high water marks.  With more than 10,000 hedge funds globally (more hedge funds than Starbucks), investors should question the ability of strategies to continually perform.  With more than 80% of funds under their high water marks in 2008, investors need to consider (a) their fund strategies’ ability to return to their high water mark and (b) the strategies average time to return to that figure.  Using Markov analysis, the professors were able to derive average time for different strategy categories to return to prior highs and likelihood that those highs would be met.  You can download the paper and derivations here, http://bit.ly/ctEqW1

A discussion of the analysis in more layman’s terms occurs here, http://bit.ly/95KSXW

Conclusions are:

• It is more challenging to increase high water marks than to generate positive returns, because typical negative returns are greater in magnitude than typical positive returns.
• The bigger the difference between probability of positive return and probability of increasing high water mark (see the first chart below), the greater the time to recover from losses. Across strategy classes, the average time to recover a capital loss ranges from 2.49 months to 7.15 months.
• Strategy classes with greater persistence in reaching new high water marks (see the second chart below) tend to recover from losses more quickly.

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Investcorp and Interlachen have recently received awards for Best Multi-Strategy Fund for their excellent returns in a time of instability as reported by Jonathan Havice in the article, “Trading opportunity for multi-strategy fund.” In 2009, the fund was able to push for liquidity and low levels of leverage because of the funds smaller size.

Investcorp and Interlachen found a tremendous investment opportunity in keeping a clean portfolio laying the foundations for the high risk-adjusted returns in 2009.  To find out more information on this, click on the following link: http://bit.ly/chi4Wg.
 

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SkyBridge Capital is in the process of closing out a deal with Citi to acquire three hedge fund businesses from Citi.  This is a diversification or forward integration from  SkyBridge’s core seeding strategy into the Fund of Funds business.  Scott Prince, the managing partner of SkyBridge Capital says that this acquisition will make SkyBridge the biggest hedge fund seeder and is estimated to quadruple their profit once the agreement is fully settled in June.  More info here,  http://bit.ly/9GdPA5 . 

As 2010 advances, the business for M&A in FOFs grows as uncertainty in the market continues.  Multiple reasons for FOF uncertainty include (1) the business may no longer be strategic to their financial supermarket owners such as CAI or Ivy Asset Management, (2) are under fee pressure even as returns have improved, or (3) are seeing more of their own institutional investors create investment groups that bypass FOFs. Other targets include, Rock Creek Group, Mesirow Advanced Strategies Inc., Pine Grove Associates Inc. and Archstone Partners. Ted Gooden of Berkshire Capital, a past speaker at Ivy Plus seminars, says "The growing list of acquirers is a sign that “the unrequited buyer-seller love” that characterized most of the past decade is over"  .  More info here, http://bit.ly/a2Re0m

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