Author Archive
How’d They Manage That?
Posted by: Michael Marolda in Hedge Funds on March 18th, 2010
In the wake of the recent financial crisis, many investors are looking for a higher degree of control. As clients of hedge funds, they were horrified to learn of the illiquidity and lack of transparency associated with the fund structure as losses mounted. Fraud cases such as Madoff Securities further heightened investors’ awareness of the need for greater transparency in this opaque industry.
For investors that enjoy the advantages of hedge fund investments but cannot stomach the risks involved, there is a solution: managed accounts. Managed accounts are an optimal way for investors to mitigate risk and develop a properly diversified portfolio. They provide investors with the opportunity to have a more transparent and liquid investment.
The type of investors using managed accounts has changed since the crisis. In the past, hedge funds generally required a minimum investment of about $10 million before they would create a separately managed account for an investor. Recently, however, investment managers have lowered the bar. Some managers are now offering managed accounts for an allocation as low as $5 million. This is due to the overall trend towards greater liquidity, transparency, and proper risk management in a hedge fund-like portfolio.
As we track investor trends, BHA has found many types of investors looking at managed-accounts investments, but the biggest change has happened in the fund of funds space. Many funds of funds managers have reported that going forward they will be investing only through managed accounts. Scores of funds of funds were burned by gates towards the end of 2008 and, in an effort to avoid making a similar mistake, are changing their current investment paradigm.
A fund of funds based in London noted that it now requires managed accounts and funds to undergo annual corporate financial audits. Another fund noted it was changing its investment structure to be 80 percent managed accounts and UCITS III investments due to the risky market environment.
Investors are starting to learn their lesson from the financial collapse. By demanding a higher degree of liquidity and transparency, investors are also demanding change in the financial system.
Interest in Asia Is Undaunted
Posted by: Michael Marolda in Hedge Funds on February 18th, 2010
In recent months, China has been taking measures to slow its growth trajectory. This past Friday, the country raised its bank reserve requirements for a second time in a month. This is due in part to economists’ fears of a speculative bubble. Investors, however, are reacting with indifference to these proclamations. BHA has tracked investor interest in Asia-focused hedge funds and, from the mandates received during the past six months, interest has held steady at about 20 percent. It seems investors are undaunted by the maneuvering of China’s central bank.
China, the continent’s largest economy, grew by 8.7 percent in 2009. Meanwhile, just south of China, India’s economy grew by 6.6 percent. Although there may be some evidence of a slowdown throughout the year, these healthy numbers indicate the economies were resilient enough to post solid gains despite reeling developed markets. This is one reason why investors have indicated to BHA that they believe these emerging economies can still bring strong gains to their alternative investments portfolios. For example, a wealth advisor based in Chicago said he sees great upside potential in the Asian continent for years to come and mentioned that his firm was making a long-term investment at this point.
Investors interested in Asia-focused funds include family offices and funds of funds among others. These institutional investors have mentioned their interest in event-driven, relative value, and distressed strategies specifically. They are looking not only to benefit from the potential upside inherent in the Asian markets but also from the regional diversification added to their portfolios.
Currently, there may be problems underlying the markets in Asia. However, alternative investors can benefit from the strong potential for long-term growth and the advantage of diversification. Hedge funds that focus on the Asian markets possess real opportunity even in our troubled times and remain attractive options.
Copenhagen and Climate Change
Posted by: Michael Marolda in Misc. on December 18th, 2009
The U.N. Climate Change Conference is wrapping up after two weeks of discussion, leaving many questions unanswered. However, the agenda of climate change mitigation has put the spotlight on some interesting opportunities for the enterprising investor. As countries craft policies to reduce their carbon emissions, entrepreneurs are developing businesses around green technologies. These same policies that will cut emissions will also spur economic growth. As guidelines change and carbon emission reduction gains more momentum, investors are poised to take advantage of this emerging sector.
Alternative energy and clean tech are two green technology sectors that are attracting strong interest among alternative investors. Groups investing in these sectors range from government pension plans to funds of funds. These investors are not only seeking private equity funds but also hedge funds that have green tech strategies, such as carbon trading and long/short equities that focus on the clean tech space. During the month of November, approximately 8 percent of the investors BHA analysts spoke with were considering green technologies. Nearly 10 percent of the investors that were researching hedge funds were interested in clean tech and alternative energy investments. Finally, close to 20 percent of all investors researching new private equity commitments were looking into the clean tech and alternative energy sectors.
The Copenhagen Climate Conference has pushed climate change politics back to the forefront as the economic recovery continues, and governments are proposing drastic cuts to carbon emissions. The European Union is looking to reduce greenhouse gas emissions to 30 percent below 1990 levels by 2020, and the United States aims to cut carbon emissions to 17 percent below 2005 levels by 2020. These goals are going to make for some attractive opportunities in the near term and investors are keeping their ears to the ground. Climate change is creating prospects for high returns from alternative investment fund managers.
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he U.N. Climate Change Conference is wrapping up after two weeks of discussion, leaving many questions unanswered. However, the agenda of climate change mitigation has put the spotlight on some interesting opportunities for the enterprising investor. As countries craft policies to reduce their carbon emissions, entrepreneurs are developing businesses around green technologies. These same policies that will cut emissions will also spur economic growth. As guidelines change and carbon emission reduction gains more momentum, investors are poised to take advantage of this emerging sector. Alternative energy and clean tech are two green technology sectors that are attracting strong interest among alternative investors. Groups investing in these sectors range from government pension plans to funds of funds. These investors are not only seeking private equity funds but also hedge funds that have green tech strategies, such as carbon trading and long/short equities that focus on the clean tech space. During the month of November, approximately 8 percent of the investors BHA analysts spoke with were considering green technologies. Nearly 10 percent of the investors that were researching hedge funds were interested in clean tech and alternative energy investments. Finally, close to 20 percent of all investors researching new private equity commitments were looking into the clean tech and alternative energy sectors. |
The Copenhagen Climate Conference has pushed climate change politics back to the forefront as the economic recovery continues, and governments are proposing drastic cuts to carbon emissions. The European Union is looking to reduce greenhouse gas emissions to 30 percent below 1990 levels by 2020, and the United States aims to cut carbon emissions to 17 percent below 2005 levels by 2020. These goals are going to make for some attractive opportunities in the near term and investors are keeping their ears to the ground. Climate change is creating prospects for high returns from alternative investment fund managers. |
Commodities Interest Stable Through Recovery
Posted by: Michael Marolda in Hedge Funds on October 15th, 2009
As positive economic recovery news continues to make headlines, more and more investors are moving from the dollar into riskier assets. Investors have pushed gold to above $1,060 an ounce and oil past $70 per barrel. Industry analysts attribute these increases to the weak dollar. In an effort to move away from the dollar, some investors have turned to commodities. The Federal Reserves apparent inclination to keep interest rates low along with the decisions of other governments to begin raising their rates has impacted the market by pushing commodity prices higher.
However, BHA analysts have begun to notice a reverse trend among alternative investors: investor interest in commodities has begun to recede from its peak over the summer. During July, investor interest in CTA funds hit a high, with over 37 percent of investors interviewed considering CTA/managed futures funds. That percentage held steady through August. However, there was a slight drop in September, when nearly 30 percent of investors expressed interest in CTA funds. And during the first two weeks of October, while interest in commodities remained relatively high compared with other BHA strategies, it was still off from its July peak.
For the year, commodities-related strategies have been one of the three most-popular approaches among investors profiled. Initially, this was due to their relative safety compared with other asset classes and the possibility for higher returns. However, as markets have stabilized, more assets have moved into other areas, including equities, which have experienced a bounce-back in 2009 as global markets have recovered. Taken as a whole, while investor interest in the commodities related space may have peaked during the summer months, there still remains a strong interest in these types of strategies from investors.
Mandates Rise with Investor Confidence
Posted by: Michael Marolda in Misc. on August 27th, 2009
Global investor confidence has risen steadily for the past seven months after the worst period of the financial crisis. State Street Global Markets’ Investor Confidence Index rose 3.6 points in July to 119.4 from 115.8 in June. This is a high from the index’s overall low of 82.1 points in October of 2008. BHA measures investor interest in alternative investments through investor mandates. On average, BHA generates about 100 to 120 mandates per week. BHA has experienced a 10 percent increase in year-over-year growth in the number of mandates generated during the summer months, from the first week of June through the second week of August.
This abnormal increase in investor activity likely stems from the market’s turnaround. Traditionally, the summer months are slow as key decision makers take their vacations and due diligence is put on hold until the last week of August or first weeks of September.
However, this extraordinary year has seen investment teams searching for the best opportunities throughout the summer. Investors are trying to leverage unique market opportunities to make up for the abysmal losses of 2008 and early 2009 when the S&P 500 was off as much as 50 percent from its peak.
As of this writing, the NASDAQ-100 has erased half of the losses it incurred during the bear market and reached 1,637 for the first time since last fall. Similarly, the HFRI Equity Hedge (Total) Index is up 15.94 percent for the year and the HFRI Fund of Funds Composite Index is up 6.16 percent for the year.
Investors are taking advantage of the market’s rising tide to find the proper investments and they are taking advantage of BHA to better source managers for their investment needs.
Regulatory Reform Aligning with Investors’ Self-Interest
Posted by: Michael Marolda in Misc. on August 6th, 2009
Increased regulation of the alternative investment industry has been a much-discussed subject in the months since the bursting of the financial bubble. The loss of wealth has led many investors to increasingly demand transparency. At the same time, regulatory bodies have been swiftly moving to overhaul the alternatives sector in an effort to hold fund managers more accountable.
One of the most controversial pieces of potential legislation is the draft of President Obama’s Financial Regulation Proposal. This plan would have every hedge fund, private equity fund, and venture capital fund register under the Investment Advisers Act. This would require funds to report information to the government so that it could assess systemic risks associated with funds’ activities.
In the European Union and elsewhere, similar proposals are popping up. The Alternative Investment Fund Directive could completely change the EU’s current regulatory system. Key points of contention lie in the directive’s ability to place limits on funds’ debt levels and require funds to hold capital to cover potential losses and redemptions. This proposed legislation takes President Obama’s requirements one step further in establishing strict rules for alternative investment products.
These proposed changes to the regulatory framework are largely in line with investors’ current demands of transparency. One large fund of hedge funds has recently tightened its reporting requirements for all underlying hedge funds. The group is seeking monthly reports on the funds’ positions. Another wealth advisory firm recently told Brighton House it is seeking funds that will give it access to all reasonable facets of funds’ strategies. While some investors may still understand the necessity of maintaining walls around these opaque products, many investors’ requirements are aligned with the current government proposals.
Government Funds Ready
Posted by: Michael Marolda in Hedge Funds on July 16th, 2009
The number of government funds seeking alternative investment products has been increasing in the past two weeks. In the past week alone, 10 government institutions have indicated their interest in alternatives. This number is an increase from an average of two to three government mandates per week for the month prior. These institutions not only include U.S. pension plans, but also sovereign wealth funds and international plans based in Europe and other regions. Pension funds in particular seem ready to pounce on new opportunities caused by changes in the alternatives market.
The increase in alternatives mandates shows that government funds are considering that this recently underperforming space might be ripe for recovery and adjustment. China’s sovereign wealth fund’s plan to increase its allocation to hedge funds highlights this trend. According to The Wall Street Journal, the fund chose The Blackstone Group’s hedge fund unit for a $500 million allocation. (See “China Ready to Place Bets on Hedge Funds,” The Wall Street Journal, June 19, 2009.) Reuters reports CalPERS is making a move in the private equity space by increasing its overall exposure by 40 percent. The pension has also reduced its exposure to equities during this recent move. (See “CalPERS to Boost Private Equity Target,” FINalternatives, June 9, 2009.) Similarly, Teachers’ Retirement System of the State of Illinois is adjusting its alternatives targets from 8 percent to 10 percent for private equity and from 2.5 percent to 5 percent for absolute returns. (See “Illinois Teachers Ups Commitment to Alternatives,” FINalternatives, May 22, 2009.)
These investors that once shied away from the alternatives sector might be giving it another go because the market turmoil has adjusted the mind-set of many funds in the industry. Due to Madoff and other scandals, hedge funds might be lifting their veil of secrecy. BHA research indicates an increase in demand for more transparent funds since these scandals have occurred. Another key factor might be the improved liquidity of alternative investments; some funds are reducing the length of the average lock-up. Also on the liquidity side, managed accounts are coming of age as a source of capital for many alternative investment products. To top all this off, some funds are lowering fees on alternative products due to poor performance in the prior year and lack of demand from investors. This confluence of factors is leading large government institutions to rethink their stale asset allocations and increase their funds’ allocations to altern ative products.
Industry Insight: An Interview with Saul Rubin on the Automotive Crisis
Posted by: Michael Marolda in Industry Insight on April 30th, 2009
This week, Senior Research Manager Michael Marolda interviewed Saul Rubin, an auto industry specialist, who shared his observations and timely comments on some important topics. The interview follows:
MM: What changes will we see in the automotive industry in the months and years to come?
SR: There will be major changes. The governments around the world seem intent on doing everything they can to delay those changes, but I don’t believe their efforts will prevail. I think that market dynamics will ultimately prevail. The pressure has been building up for years and years. They are going to spill over and create major problems at some point in the next couple of years.
The root of the problem is typical: there are too many companies making cars. That’s a very simple issue and I think it’s been known for many years. But through rosy economic times, the problem wasn’t obvious to all. It took a recession for this problem to become clear. But there are too many car companies and this is an industry begging for consolidation. It’s going to have to occur at some point.
In the short term, governments are very intent on trying to prop up these companies. In the U.S., the problems are worse than anywhere else. GM has been running an unsustainable business model for years. There’s probably no alternative at this point other than bankruptcy. I think the government has recognized that. Hopefully, this will mark the beginning of a process that will occur not only in the U.S. but also in Europe and in Asia. This is not just a U.S. problem. It is a global problem of over capacity, and, yes, companies will fail not only in the U.S., but also in Europe and Asia. It will start with a vengeance in the supplier space. You’re going to see many failures among car suppliers. But it will ultimately fall upon the manufacturers as well. Hopefully, by the end of it, you’ll have a better industry.
MM: Do you think a restructuring effort for General Motors will ultimately be successful?
SR: If GM finds itself in a Chapter 11 bankruptcy proceeding, it will likely be fairly rapid. It will be a process whereby the good parts of GM-and there are good parts-will be spun out of bankruptcy into a viable company. The rest of the assets and liabilities will be left to wither away. If it is to be a viable company, it will have to be a much smaller GM, and that’s the key. It could be a GM that is rapidly snapped up by a competitor and that would aid in the overall consolidation of the industry.
MM: Do you see any opportunities in the auto-supplier industry?
SR: Yes, there are loads of opportunities in the auto-supplier industry. In many ways, the supplier space is more interesting than the manufacturer space. Car manufacturers like to make themselves out as high-tech companies, but largely [manufacturing] is a consumer and assembly business. A lot of the real technology lies in the supplier space, and therefore a lot more of the value lies in the supplier space.
If you look at the supplier space, there are some positive and negative aspects. The positive aspect is the technology, and the negative aspect is that your customers are these big lumbering giants that all have massive problems. If you get tied to one of them, you may go down with the ship. Within the supplier base, there are a number of companies that will just disappear because they will not be able to cope with the pressures. They don’t get the government support that the manufacturers do, so I think you’ll see on the one hand a large number of bankruptcies, but on the other hand, those that survive and have real valuable technology could actually come out of this extremely well-positioned and better off.
MM: When you go through a time such as this, there’s always opportunity, right?
SR: Well, there is. Suppliers that go through it and come out alive will see their competition left behind.
Saul Rubin is an investment manager at Silverstone Capital Ltd. (“Silverstone”).
Michael Marolda is a special features contributor to Brighton House Associates Investor Monitor.
Industry Insight is a bi-weekly special feature of the Brighton House Investor Monitor. The feature is designed to take advantage of Brighton House Associate’s unique position between investors and fund management companies. It provides readers insights from leaders in the field.
Opportunities in Financials
Posted by: Michael Marolda in Private Equity Funds on March 12th, 2009
There has recently been increasing opportunity for private equity funds focused on the financial sector. The failure of several large investment firms and the merging of several others, has created space for newcomers with innovative ideas. The relative weakness of some of the larger firms has opened the door for private equity funds. This sentiment has been echoed through conversations Brighton House Associates’ analysts have had with investors.
Since the start of February 16 private equity investors mentioned financials as a sector they would like to see exposure to in a private equity offering, and so far in 2009, 15 percent of all private equity investors indicated a similar interest. Two examples of investors looking to evaluate funds with exposure to financials include a large institutional investor who is emphasizing opportunities from private equity funds focused on global financial services firms.
This group sees potential for returns from distressed and turnaround situations at financial companies. Another investor, a California-based wealth advisory firm, mentioned its current interest in venture capital funds targeting companies in the financial sector.
The group seeks funds that take advantage of displaced human capital and entrepreneurial spirit. The firm sees potential for an internal rate of return of 15 to 20 percent from this type of an investment.
The interest of investors seems to suggest a willingness to invest in these types of products within a short time period. This may be due to the current market conditions or a general sense that the timing for these types of investments may be at hand.
Funds of Venture Capital Funds as Diversification Tool
Posted by: Michael Marolda in Private Equity Funds on February 12th, 2009
Funds of venture capital funds offer some unique opportunities for investors to diversify much of the risk associated with private equity investments given the present market conditions. First, funds of venture capital funds offer investors-that are large enough to make venture capital allocations but lack the capital for proper diversification-exposure to a broad range of venture capital funds and underlying start-up investments, and let them offset risks associated with single-manager investments. Second, funds of venture capital funds provide access to closed funds that individual investors may not otherwise be able to include in their portfolio. In addition, these funds let investors have better exposure to geographic regions that may not be accessible through individual investments.
On a day-to-day basis, Brighton House Associates seeks out investors interested in this investment strategy. One institutional investment advisor specifically mentioned its interest in funds of venture capital funds as a means for diversifying its clients’ underlying portfolios. This consultant represents the U.S. interests of a large sovereign wealth fund, which shows the breadth of investors interested in these products. A family office located in Hong Kong told us of its active interest in funds of private equity funds. This particular investor mentioned its interest in funds of venture capital funds as a means to obtain exposure to U.S.-focused venture capital funds, as it did not have the infrastructure necessary to make the proper investments itself.
As the present market turmoil shapes investors’ portfolios, funds of venture capital funds remain one of the last opportunities to diversify risk and achieve positive returns. With a balance of diversification and proper risk control, these funds allow for better exposure to venture capital funds by geography and sector.
