BREAKING INVESTOR TREND – Increase in Interest in Real Estate Funds

During the week of July 13 – July 17th, BHA analysts received over a 100 percent increase in the number of real estate fund mandates from the global investor community. A diverse group of investors expressed interest in real estate funds including a consulting firm, two corporate pension plans, a university endowment, two family offices, and one union pension plan amongst others. Experienced and Spinoff management teams are greatly preferred over those running first time funds, and most investors expressed interest opportunistically in terms of the exact types of funds they are interested in.

Quantitative Funds Have the Right Equation

By Blake Foster

In the past four weeks, investors have increasingly mentioned an interest in high-velocity, short-term trading and quantitative managers. Wealth advisors, funds of hedge funds, and consultants are all interested in interviewing algorithm-based managers to see if they can give investors a competitive edge as the global markets begin to ease their downward spiral.

Black box funds, which fell out of favor during 2008 for breaking down in the face of a catastrophic market collapse, are well positioned to evaluate the subtle economic indicators of a potential recovery before it is widely discovered. These high-velocity trading strategies are also highly liquid, and this continues to help drive interest.

An analyst at a midsize family office in London mentioned that his firm is currently turning to quantitative funds with the hope that the financial indicators that signal an economic recovery will trigger these funds to make correct directional bets and earn substantial profits. Timing is everything in a market recovery, and investors are betting that complex algorithms can predict an upturn ahead of fundamental analysis, which takes far more time.

Whether black box funds will be the first to position themselves for a recovery remains to be seen. However, BHA will continue to monitor this trend throughout the remainder of 2009.

Investors Hit the Road in Convertibles

By Renee Astphan

Shifting from one of the worst performing strategies of 2008 to one of the best in 2009, convertible arbitrage is making waves in the hedge fund industry. The difficulties experienced by managers in 2008 left investors wary to even consider this strategy moving into the first quarter. However, it has bounced back significantly since. BHA has heard several investors mention that convertible arbitrage is an area they could invest in by the end of 2009.

Convertible arbitrage funds are appealing to investors for many of the same reasons as volatility arbitrage funds. Convertible arbitrage funds can provide a fair amount of liquidity in comparison with other credit-oriented strategies. Also, a significant number of investors have expressed more confidence in strategies taking a systematic rather than fundamental approach. A wealth advisor in Europe, for example, is currently focusing on evaluating opportunities in liquid and systematic strategies, and it’s including convertible arbitrage. The firm targets annual returns of at least 8 percent for convertible arbitrage funds, and many convertible managers surpassed that in the first two months of this year.

The current environment provides a great opportunity for convertible arbitrage managers to prove that they have the ability to bounce back from difficult markets. When convertible arbitrage managers find investors interested in their strategy, they will need to explain how they were able to minimize losses in 2008 and how they have been able to recover this year. Evaluating managers’ risk management procedures will be a critical part of investors’ due diligence over the next few months.

Convertible arbitrage managers can appeal not only to investors seeking that strategy specifically, but also to investors looking for event-driven or credit-related strategies in general. In addition, multi-strategy managers with exposure to the convertibles market can appeal to investors that want exposure to these assets, although not through a dedicated convertible arbitrage fund. BHA sees opportunities for managers to get in front of qualified investors before allocations take place at year’s end.

Making Fees Competitive

By Ryan Cunningham

At the beginning of this year, many investors stated that they were going to wait until the markets settled before reviewing new hedge fund vehicles. As the months have gone by, however, the fear has somewhat receded, and many investors are evaluating and even allocating to new funds. A number of these investors believe that there is opportunity in this market and want to invest with managers capturing above average returns. A sticking point, however, are management fees.

Some investors have stated they do not want to return to hedge funds because of the high fees. Many more are making it clear to BHA that managers must demonstrate that they can generate the types of returns that merit high fees. Managers often cite positive past returns as a reason for high fees, but with a forecast of uncertain growth, investors are wary. High fees must produce consistently high returns, which many investors don’t think is possible.

Performance is not the only benchmark investors are considering, however. Competition is another. Managers need to be aware of the fees charged by their peers. If other funds are charging less, investors may consider them a more attractive investment.

Today, managers need to analyze and adjust their fee structure not only in terms of performance, but also in terms of their competition and investors’ expectations. Only by doing this will managers be able to better position themselves when marketing their investment vehicles and gain the upper hand.

Hot New Mandates

Brighton House Associates (BHA) is a research organization focused on the alternative investment community. BHA has a team of research analysts who compile information on the active investment searches of the global investor community through direct phone conversations with investors. On average, analysts profile 125 investors per week and gather information about specific mandates or investor searches. These investor mandates include the qualifications and characteristics they are searching for currently in an alternative investment fund.

Hot Fund of Hedge Funds Mandate

A corporate pension plan based in Portland, Oregon, is currently looking to allocate to a fund of hedge funds. The firm is in the process of an asset liability study, and hopes to move quickly on allocation decisions once the process is complete. It is most interested in single-strategy funds of hedge funds, primarily ones that are exposed to U.S. and European long/short equity funds. It prefers to invest in smaller funds with less than $100 million in assets under management.

Hot Hedge Fund Mandate

A large multi-national asset manager with offices in London and New York is currently researching fund managers specializing in high-frequency, short-term trades in the global macro space. It will consider all managers, however, it most interested in managers with a primarily quantitative approach. The firm typically does not hold a stake larger than 10 percent of any one fund. Funds should have a clear means of differentiating themselves from their peers.

Hot Private Equity Fund Mandate

An endowment of a private university located in Indiana (USA) is currently seeking private equity opportunities. The group is hoping to expand its allocations within the next calendar year and will consider various fund strategies. Most of its investments have been with U.S.-based and U.S.-focused funds, however, it will consider a European fund. The endowment’s goals are to enhance its returns and diversify its investments away from public equity markets.

Hot Hedge Fund Mandate

A Boston-investment advisory firm whose primary business is focused on managing several single manager hedge funds manages a global multi-strategy fund of funds primarily on behalf of the firm’s partners. The firm is actively researching opportunities and is most interested in high-quality discretionary global macro funds. It wants to see funds that are diversified with exposures to many different underling assets, as well as a global investment mandate. It prefers fundamentally-driven funds that have minimal volatility currently. The firm has $400 million in assets under management and typically allocates between $500,000 and $1,500,000 initially.

Hot Real Estate Fund Mandate

A New York-based family office with $200 million in assets under management has an active search for a distressed real estate fund manager. The firm will consider both commercial- and residential-focused funds. U.S. managers are preferred but global opportunities will be considered as well. Ideally, the firm is looking for fund managers with a minimum track record of two to three years managing a similarly structured fund.

Investor Data

Editors-in-Chief

Richard Rapacki

rr@brightonhouseassociates.com

508-786-0480, ext. 215

Gabriel Berkowitz

gb@brightonhouseassociates.com

508-786-0480, ext. 214

President and COO

Dennis Ford

df@brightonhouseassociates.com

508-786-0480, ext. 201

Dennis Ford is President and COO of BHA. His expertise is in database marketing, using the Web to create interactive dialog, and using analysis and profiling to understand customer prospects. He is also the author of a well received book on selling called The Peddler's Prerogative.

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.