In This Issue:

• Brighton House Associates and the Alternative Arena - Dennis Ford
• Opportunities for Mid-Sized Hedge Funds - Ryan Cunningham
• Family Offices Focus on Experience - Blake Foster
• Interest in Long/Short Equity Funds Remains High - Ryan Rutherford
• Hot New Mandates
  

BHA has analyzed the global alternative investment industry and we estimate that there are 20,000 fund managers:

• 10,000 Hedge Funds and Funds of Funds
• 5,000 Private Equity Funds
• 3,000 Venture Capital Funds
• 2,000 Real Estate Funds

Every one of these fund managers could benefit from BHA’s services. 

On the other side of the industry divide, we estimate that there are approximately 50,000 alternative investor firms. We have broken this universe into 14 categories:

• Banks
• Consultants
• Corporate Pensions
• Endowments
• Family Offices
• Foundations
• Fund of Funds
• Government Pensions
• Healthcare Plans
• Insurance Companies
• Private Banks
• Sovereign Wealth Funds
• Tax Exempt Organizations
• Union Pension Plans

There are probably only a quarter of a million people participating in the entire alternative investment arena.  One common observation is that there is an amazing amount of assets flowing in and out of this relatively small arena.  Another frequent observation is that given the industry’s small size, the old adage “everybody knows everybody” most certainly applies.  The issue today, for almost all of the parties concerned, is that market churn has made it hard to keep up with who’s who and who’s where! 

If you are a reader of the BHA Investor Monitor, I am sure you have heard me proclaim, “Data comes in two forms: out of date and really out of date.” If you have a small investor relations team trying to keep up with 1,000 or more firms, there is a good chance that your information on these firms and their current interests is stale. (How could it not be?)

This is where the BHA research service comes into play. BHA has a team of 20 analysts updating our investor profiles every 90 days while adding 120 new ones each week. It takes a dedicated effort to supply fresh, accurate information about the alternative institutional investor community. Share your short list and call list with your dedicated BHA research analyst, and he or she will focus on finding new leads from investors you haven’t spoken with recently or have never met. The global breakdown of the BHA investor mandate database is 40% U.S., 40% Europe, and 20% the rest of the world. The net-net is: we can provide the BHA value anywhere.

Investor firms tell BHA the types of funds they prefer to invest in, often specifying certain fund characteristics that appeal to them. We regularly report on these fund qualities, which include liquidity terms, strategies, and transparency levels. One of the most important characteristics, however, is fund size or assets under management.

Many investor firms cannot invest in small funds. The reason is because such investments increase their level of risk; the chance of a small fund collapsing is often greater than a medium or large fund. Therefore, large or small, many investor firms tend to look for a minimum amount of assets under management when searching for new funds.

In many cases, investors begin tracking and following funds once they reach a minimum threshold of $100 million to $200 million in assets under management. It is generally accepted that when a fund reaches this size, it can accommodate large allocations, which attracts institutional investors. When a fund can show it has institutional investors, the number of opportunities increases. High net worth individuals, private family offices, and other investors are willing to invest. As a result, reaching this minimum is an important milestone in the capital raising process. This past week, BHA spoke to an investor in Italy that stated if a fund had $100 million from other institutional investors, then it could allocate in a short time period to that fund.

Receiving capital from high net worth, personal contacts is one thing, but getting money from large institutional investors improves your funds’ capabilities to raise money. Mid-sized funds that have $100 million or more under management and a credible investor base ultimately have a greater chance of getting noticed in the investor community.

Family offices are a highly valued investor category in the alternative investment space. Fund managers are constantly looking to meet and develop relationships with family offices because they are typically perceived as long-term investors. As a result, BHA places a strong emphasis on working with family offices to capture their mandates and manager requirements.

In the past several weeks a trend has emerged among family offices: every family office that BHA interviewed in the hedge fund space was searching for fund managers with a track record of at least two-and-a-half years. The recent volatility and uncertainty in the equity markets has forced family offices to demand longer track records before they will consider investing with a manager.

Family offices are also turning towards experienced hedge fund managers that have shown a consistent and long track record of steady performance. The head of hedge fund research for a large multifamily office in the U.K. said that he will not even consider a fund that cannot show consistent and excellent fund performance over the past several years in both good and difficult markets.

Family offices are typically characterized as conservative investors. Poor performance, lack of transparency, and several high-profile fraud cases in the hedge fund industry in 2008 has made them even more cautious. The head of a small Canadian family office told a BHA analyst that the office was only interested in managers that have at least a five-year track record and an excellent background and pedigree. The hedge fund space has been so volatile that this office feels it is too risky to invest with inexperienced fund managers at the current moment.

Family offices are demanding experienced fund managers with extensive track records that show a consistent ability to produce solid returns in all market conditions. Brighton House will continue to monitor this trend and work with family offices to capture exactly what they are looking for in a fund manager.

Analysts at Brighton House continue to find that long/short equity is the most popular strategy mentioned by institutional investors. The reason is because this strategy provides diversification, transparency, and frequent liquidity opportunities.

In the last month, one-third of all investors have indicated an interest in long/short equity funds, while more than 50 percent of hedge fund investors have sought opportunities in this space. Most investors have cited liquidity as the main reason. For example, a large wealth advisory firm in the United States has said it is investing only in long/short equity funds because liquidity is its biggest concern.

While the number of investors seeking long/short equity funds remains consistent, there has been an increase in the number that prefers fundamental funds over quantitative ones. In the recent turbulent market, the former have outperformed the latter. In addition, although fundamental research is considered time consuming and sometimes subjective, fundamental strategies are easier to understand and evaluate than their counterparts. A U.S. foundation said it prefers fundamental strategies to quantitative because it has difficulty explaining quantitative funds to the board of directors.

As analysts continue to speak with investors, we expect to hear that liquidity is their primary concern. Therefore, BHA expects the number of investors seeking opportunities in long/short equity funds to remain constant or even increase.

© 2009 Brighton House Associates, LLC. 4 Mount Royal Ave., Suite 140, Marlboro, MA 01752

The Investor Monitor is a general circulation weekly. No statement in this issue is intended as a recommendation to buy or sell securities or to provide advice. Reproduction is prohibited without the permission of the publisher.