From April 1 through June 9, 2009, BHA collected 135 mandates for funds of hedge funds. Remarkably, that is the same number we collected this year during the same time frame. Although the number of mandates have stayed the same, investors’ preferences have not.

The most significant change from this time last year is the increased demand for liquidity. Additionally, many investors are avoiding lock-ups. The pain of the financial crises is still being felt by many investors. Although the market has improved, they are reluctant to go back to the old ways. Needless to say, funds that don’t have at least quarterly redemption periods and rigidly impose hard lock-ups are finding themselves out of the running with an overwhelming majority of investors.

Perhaps most interesting, though, is a shift in investor preference for smaller funds. Last year, the majority of investors BHA spoke with required funds of hedge funds to have $200 million to $500 million in assets. This year, many investors are evaluating funds of funds with as little as $75 million to $100 million under management.

A wealth advisory firm in Geneva is an example of an investor that has changed its assets-under-management requirements. The firm recently began searching for a specialized fund of funds that invests only in long/short equity funds. It wanted funds that offer superior liquidity, however, it specifically requested that funds have only $100 million in assets. Prior to this, the firm required funds of hedge funds have a greater amount of assets under management in order to be seriously considered.

As the graphs below show, during the past year investors have become increasingly comfortable with smaller funds. In 2009, only 35 percent of investors with active mandates for funds of funds indicated a comfort level with less than $200 million in assets; that number has jumped to 48 percent in 2010.

Throughout the rest of the summer, BHA analysts will continue to monitor the trend to see if investors continue to be comfortable investing in smaller funds.

During the first five and a half months of the year, investor interest in hedge funds focused on Asia has increased when compared with the same period a year ago. To date, the BHA research team has collected 232 mandates from investors seeking Asia-focused funds, which represents a sizable and significant increase over the same time period in 2009 when 174 mandates were collected for Asia-focused funds.

The leads came primarily from Europe (51 percent), North America (32 percent) and Asia (15 percent). The remaining few investors with interest in Asia came from Africa, Latin America, and the Middle East (2 percent).

One U.S. endowment that has primarily been on the sidelines with regards to new hedge fund investments during the past two years has recently begun a passive search to seek out fundamentally driven, long/short equity funds focused on Southeast Asia. While the endowment is just in the beginning stages of its search, it feels as though the opportunity for such a fund is more promising now than at any time since 2008.

As we head into the second half of the second quarter, BHA analysts will continue to monitor interest in Asia-focused funds, as well as the regions this interest is coming from.

BHA analysts often receive specific search requests from investors that are looking for fund managers. Many investors want funds not only to be a specific type but also to meet certain conditions and criteria before they will kick the research and due diligence process up a notch. Recently, analysts have noted not only a significant increase in the number of investors interested in evaluating funds focused on emerging markets but also in the number requiring that funds be located on the ground, in the market the fund is investing in.

From the beginning of the year through the end of the second week of April, 197 hedge fund investors indicated an interest in funds specifically trading in emerging markets. The interest was quite profound, came from across the globe, and accounted for slightly more than 26 percent of hedge fund mandates. Over the same time frame in 2009, only 113 investors or 18 percent of active mandates indicated an interest in funds specifically trading in emerging markets.

A midsized, multifamily office indicated an interest in long/short equity funds trading in emerging countries across the Asia-Pacific region. Its particular requirement was that all of a fund’s operations be located in Asia. Its thinking was that a fund trading Asian markets remotely would not have the same insight as a fund located “in the trenches.” It wants to be sure its managers have their fingers on the pulse of the market.

With the number of mandates for emerging-market-focused hedge funds spiking during the early part of 2010, it will interesting to see if investors begin to favor specific countries or regions over others. It also will be interesting to see if there is an advantage to being located in the market the funds are trading rather than remotely when it comes to attracting investor dollars.

Since January concluded, many investors and fund managers alike have been anxiously anticipating results from the first month of the year. Over the past week, many funds and indexes have tallied their month-end numbers, and it appears global macro fund investors have reason to smile. The Credit Suisse Global Macro Liquid Index, LAB Global Macro Liquid Index, finished up 1.18 percent for the month.1

January saw a major uptick in the number of investors that expressed interest in global macro funds. During the month, 118 investors expressed interest in researching and allocating capital to these funds. That figure represents a sizeable increase from January of 2009 when only 67 investors were actively looking for global macro funds. January’s interest also represents a significant increase from the 73 investors that BHA spoke with in December of 2009 that indicated an interest in the strategy.

From their daily phone calls with institutional investors, BHA analysts reported hearing interest in global macro strategies from a wide array of investors across the globe. Some cited the potential for positive performance as driving their interest; many others cited diversification of assets combined with the potential to provide for uncorrelated returns.

A family office based in California currently has a unique approach to a potential fund investment. Although it is in the early stages of evaluating funds, and is very much still framing the particulars for its search, the family office is pursuing diversified macro funds that are trading a variety of underlying assets using a discretionary approach. The family office is especially interested in funds trading in developed yet off-the-radar markets, such as Australia, New Zealand, and Norway. Because each of these markets sees far less activity than the United States, Western Europe, or Asia, it believes the potential for a fund to provide uncorrelated returns is high.

A family office based in Hong Kong similarly expressed interest in global macro funds, but it has a different reason: it wants to see a fund that is exclusively trading assets it can evaluate fundamentally. As part of the firm’s search, it has included discretionary macro funds that have a history of providing consistent returns when trading throughout the United States, Western Europe, and China. The family office feels that funds experienced in trading in and out of major markets are poised to provide strong returns over the next couple of years.

Although global macro funds started off the year with a strong month of performance, it will be interesting to monitor how the strength of the returns in the short term affects investor interest over the next quarter. In all likelihood, investor interest will be closely tied to economic growth, the stabilization of global markets, and the ability of individual funds and managers to trade in and out of specific markets effectively. It is undoubtedly a trend that BHA analysts will continue to monitor in the weeks and months ahead.

1 FINalternatives, “Global Macro Advances, Long/Short Declines in January,” February 2, 2010, http://www.finalternatives.com/node/11220.