U.S. Alternative Fund Investors More Densely Populated Along Coasts

By Gabe Berkowitz

While the hedge fund industry has experienced both subtle and significant changes during the past year, BHA analysts have remained dedicated to finding and speaking with investors that have an active interest in researching and allocating capital to alternative fund managers. When speaking with investors, BHA analysts determine the stage of investor research and due diligence, the types of vehicles they are potentially interested in, and the underlying characteristics they want in a fund and its management team. In order to actively monitor their interest, analysts reach out to investors every 90 days and update their searches.

But where are these investors? To find out, BHA analysts mapped U.S. investors’ active mandates across all fund categories as of September 1, 2009. As shown in the following graph, investors are concentrated along both coasts. The two most populous states in terms of fund mandates are California and New York, with each having more than 100 current, active mandates. Connecticut, Massachusetts, and Pennsylvania fall into the next tier with each state having between 50 and 100 active mandates. It is clear that the Northeast is the most densely populated area of the country with regards to alternative investors.

In spite of all the financial trouble currently being experienced on the state and local levels in California, investor interest in that state, as well up and down the entire western seaboard, remains fairly high. Oregon and Washington—states not traditionally thought of as being saturated with alternative investors—each have strong levels of interest, with Oregon housing 17 active mandates and Washington an additional 26. While interest across the Midwest and South is not as concentrated as it is in the Northeast and on the West Coast, Texas and Illinois each have more than 50 active mandates.

For fund managers looking to hit the road during the fall and winter, the map is extremely telling and should serve as an initial compass for determining where to prospect for new investors.

Active Investor Mandates in the United States

Financial Sector: Investors Strike While the Iron Is Hot

By CT McLean

John Paulson, the man synonymous with cashing in on the subprime mortgage crisis as his funds earned triple-digit returns, changed course and is once again, cashing in as the economy attempts to recover from a disastrous 2008. Much publicity has been given to his recent bets on financial stocks, which are providing returns eerily similar to last year’s. Since March’s stock market dip, financial stocks have gained over 137 percent, far exceeding any other sector; Citigroup alone has enjoyed more than a 225 percent jump from its low of under a dollar during March of 2009.

Financial stocks have a tendency to be the first mover in recovering economies, and with the help of government support, strong capital-raising campaigns, and favorable stress-test results, banks, financial institutions, and insurance companies are in a position to reward investors that have taken a chance on the most maligned sector of 2008.

Hedge fund investors are becoming increasingly aware of the opportunities present in funds trading financial stocks. The director of manager selection at a New York-based fund of long/short equity hedge funds strictly looks at sector-specific funds and financials are at the top of his list. The firm is looking to generate a short list of candidates for a potential allocation in the first quarter of 2010. Separately, a Texas-based fund of funds is targeting multiple investments of $5 million to $10 million each over the coming few months, and is seeking directional equity long/short funds with a heavy emphasis on financials. Both investors referenced the significant gains mentioned above and the improving economic outlook as factors in their evaluation process.

Many wonder just how long the financial sector will be able to sustain this dramatic recovery, and if it is simply an anomaly in the bigger picture. However, the actions of some of the world’s most sophisticated investors deserve substantial attention. Furthermore, if the Treasury’s Public-Private Investment Plan works as designed, financial institutions will be able to rid their balance sheets of toxic assets, putting them in even more attractive positions.

China & India Lead Resurgence in Asia-Focused Funds

By Michael Calore

During the past four weeks, BHA analysts have seen investor interest in Asian hedge funds increase significantly. Investors have cited three main reasons why their interest has amplified during this current economic environment. First, when compared with other regions, Asia’s regional interest rates are considerably lower. Second, the Central Bank of China has reported record loan growth. In March of this year, new loans hit a record high of 1.89 trillion Yuan ($276.6 billion). For investors, this is a sign that the economic conditions in Asia, and specifically China, may be poised to offer great opportunities. Finally, current policy actions are aimed at maintaining strong liquidity conditions and motivating domestic demand. In short, Asian economies are continuing to grow, especially the region’s two largest, China and India.

A family office based in Switzerland has realigned its entire hedge fund portfolio to concentrate solely on opportunities within Asia, specifically long/short equity funds focused on Indian equities, as well as convertible arbitrage funds that are taking advantage of the current economic environment. The firm feels that Asia is poised to present very lucrative opportunities over the next few quarters.

A large investment consultant based in the United States also sees great opportunities in Asia. The firm is researching new Asian funds to add to its portfolio by the fourth quarter, specifically emerging managers that have a new perspective on the Asian markets.

While most countries are experiencing very slow or stagnant growth if not continued economic decline, Asia has emerged as a strong and resilient region. Hedge fund investors have noticed and are willing to bet on it.

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 Hedge Fund Mandate

A private bank located in Paris, which manages assets for large private clients, is currently looking for UCITS III compliant funds, specifically long/short equity and global macro funds. The bank allocates about 4 percent of its assets under management to alternatives and has a preference for U.K.-focused funds. The size of its initial allocations varies greatly, but never exceeds more than 5 percent of a fund’s total assets under management.

Hot Real Estate Fund Mandate

A corporate pension plan in Europe is researching real estate fund managers for allocations during the first quarter of 2010. It is interested in core real estate strategies—traditional commercial, industrial, and residential—that are focused on developed markets and Asia. The pension plan will review managers of all experience levels, but it prefers investing in smaller funds. Due diligence can be completed in as little as a few weeks, and a typical allocation is about €20 million.

Hot Hedge Fund Mandate

An endowment located in New York is beginning to research hedge fund managers for allocations it plans to make in the next six to nine months. It is most interested in long/short equity and distressed funds—specialists or generalists—that are focused on Asia and developed markets other than the United States. The endowment evaluates each fund on its own merits with regards to liquidity and leverage, however, it prefers experienced managers that have at least $100 million in assets under management and a track record of five years. The endowment has not determined the size of its allocations; they will likely vary depending on the fund.

Hot Private Equity Fund Mandate

A family office in Europe is researching private equity fund managers. Given current market conditions, the office has no definitive time frame for allocations, however, it expects to make commitments in 2010. The office will invest only in funds based in Europe. It is searching for private equity funds—sector-focused and generalist funds—in developed as well as emerging markets. The office expects annualized returns of at least 15 percent and prefers well-established managers that have raised at least one fund. The office’s allocation to new managers ranges from $3 million to $5 million.

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.

In This Issue:

U.S. Alternative Fund Investors More Densely Populated Along Coasts

Financial Sector: Investors Strike While the Iron Is Hot

China & India Lead Resurgence in Asia-Focused Funds

Hot New Mandates

Investor Data