Key Areas In The Hedge Fund Industry in 2010
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This presentation presents the key areas in the hedge fund industry in 2010. It is based on the second edition of the book "Introduction aux Hedge Funds" and was presented at a educational event from the CAIA association in Luxembourg in April 2010.
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Key Areas In The Hedge Fund Industry in 2010
- 1. KEY AREAS IN THE HEDGE FUND INDUSTRY IN 2010 Daniel Capocci, PhD – CAIA dc@dc-advisory.com CAIA Luxembourg Educational Event APRIL 2010
- 2. Today’s objective Discuss the hedge fund industry in 2010 and illustrate our views using updated information 1. Why a second edition? 2. Hedge Fund in 2010: some updated figures 3. Hedge Fund in 2010: strategies evolution 4. Hedge Fund in 2010: the consolidation of the industry 5. The future of the hedge fund industry 6. Conclusion
- 3. « Introduction aux hedge funds » Why a second edition?
- 4. 1. Why a second edition? The world of hedge fund changed dramatically between 2003 & 2010 The industry grew rapidly between 2004 & 2007 The industry has been strongly hurt by the financial crisis Star hedge fund managers emerged Hedge fund strategies emerged/died Hedge funds became more standard New regulations have been implemented (Europe) Performance stabilized in 2009 The industry is back but it is different…
- 5. 1. Why a second edition? Categories Strategies Sub‐strategies Equity market neutral Statistical arbitrage Market neutral Fixed income arbitrage Mortgage‐backed securities Convertible arbitrage Event driven Risk arbitrage Distressed securities Event driven Special situations Non‐directional strategies PIPE/regulation D Activism Relative value arbitrage Option arbitrage Arbitrage Closed‐end fund arbitrage Volatility arbitrage Multi‐strategy arbitrage Multi‐strategy arbitrage Asset based lending Other Other Developed markets Long/short equity Emerging markets Global Sector Sector Credit High yield Directional strategies Short selling Short selling Long only (leveraged) Long Only (leveraged) Macro Macro CTA Managed futures Short term trader Diversified Diversified Fund of funds Niche Niche Source; Introduction aux hedge funds, 2nd edition, Economica 2010
- 6. 1. Structure of the second edition Chapter 1: What is a Hedge Fund? (55 pages) Chapter 2: Hedge Fund Characteristics (76 pages) Chapter 3: Hedge Fund Strategies (226 pages) Chapter 4: Hedge Fund Performance over Time (42 pages) Chapter 5: Hedge Fund Regulation (27 pages) Chapter 6: Hedge Fund, LTCM & recent Crisis (33 pages) Chapter 7: Hedge Funds versus Mutual Funds (12 pages) + websites + index + glossary
- 7. 1. What’s new? 1st EDITION 2nd EDITION CHAPTERS 6 chapters 7 chapters PAGES 350 pages 550 pages STRATEGIES PRESENTED 17 22 IN DETAILS EXAMPLES PER STRATEGY 1‐2 (25 in total) 2‐3 (> 40) 100% updated 100% from HF managers HEDGE FUND 11 countries broadly covered 14 countries in details REGULATION 100% update analysis HEDGE FUND & CRISIS / Including the subprime crisis GRAPHS & SCHEMAS Around 75 graphs & schemas More than 150 graphs & schemas
- 8. Hedge Funds in 2010: updated figures Where are we today?
- 9. 2. Hedge Fund in 2010: some updated figures 12 2 500 12 2 500 In 2003 In 2010 10 10 2 000 2 000 8 8 1 500 1 500 6 6 1 000 1 000 4 4 500 500 2 2 0 0 0 0 88 90 92 94 96 98 00 02 88 90 92 94 96 98 00 02 04 06 08 Nombre Actifs Nombre Actifs Source; Introduction aux hedge funds, 2nd edition, Economica 2010
- 10. 2. Hedge Fund in 2010: some updated figures Attrition rate: percentage of funds that stopped reporting Number of funds Estimated Funds exiting Funds entering on 01/01/08 attrition rate All HFR funds 3221 894 170 28 % Long short equity 1566 404 74 26 % Relative value 702 259 46 37 % Credit 215 71 11 33 % Directional trading 599 119 30 20 % Systematic funds 114 29 8 25 % Others 25 12 1 48 % Roughly 30% of the funds stop to report Source; Introduction aux hedge funds, 2nd edition, Economica 2010
- 11. 2. Hedge Fund in 2010: some updated figures Hedge Fund domicile Hedge Fund managers based on number of funds domicile Latin Others Europe America 2% 1% ex- Asia London Asia 10 % 8% 10 % New York Europe 36 % 12 % London 18 % United- States Offshore USA 33 % 42 % ex-NY 28 % Source; Introduction aux hedge funds, 2nd edition, Economica 2010
- 12. 2. Hedge Fund in 2010: some updated figures Hedge Fund investors US Hedge Fund investors repartition repartition Others 25 % Others 15% Instit. United investors States 31% 50 % Funds of funds Japan 5 % 18% Private investors Switzerlan 36% d 20 % Institutional investors continue to grow Source; Introduction aux hedge funds, 2nd edition, Economica 2010
- 13. 2. Hedge Fund in 2010: some updated figures Use of hedge funds by Institutional investors Institutional investors allocation to Hedge Funds 80 12 70 10 60 50 8 40 6 30 4 20 10 2 0 0 2001 2003 2005 2007 2001 2003 2005 2007 2009 Source; Introduction aux hedge funds, 2nd edition, Economica 2010
- 14. 2. Hedge Fund in 2010: some updated figures Based on number of funds Based on AUM Distressed Convertible 4% arbitrage Fixed Convertible Risk 1% Distressed income arbitrage Autres Event driven Fixed Autres Event driven 8% 2% arbitrage Sector income 8% 7% 8% 10 % 16 % 2% 6% 7% Sector Macro Emerging Risk 7% 6% market arbitrage CTA 6% 3% Emerging 6% Equity market 8 % Equity non hedge Macro 2% CTA 10 % non hedge Long/short Long/short 2% Equity 10 % equity equity Equity 30 % market 20 % market neutral neutral 6% 7% Source; Introduction aux hedge funds, 2nd edition, Economica 2010
- 15. 2. Hedge Fund in 2010: some updated figures Performance of HF, bonds & equities during the worst 20 months for equities over the last 20 years 5% The HF index offered a positive performance 11 0% months (12 for bonds) Moyenne 10-2008 08-1998 09-2008 09-2002 09-1990 02-2009 08-1990 09-2001 01-2009 02-2001 07-2002 06-2008 01-2008 08-1997 03-2001 11-2008 06-1991 11-2000 06-2002 03-1990 The average performance for -5% the stock index is -9% against 0.4% for bonds and -2.4% for HF. -10% $100 000 invested during these 20 months in the -15% indices (impossible practically) would have resulted in $13 680 for shares, -20% $108 610 for bonds and Actions mondiales Obligations mondiales Hedge fund global $59 900 for HF Source; Introduction aux hedge funds, 2nd edition, Economica 2010
- 16. 2. Hedge Fund in 2010: some updated figures Performance of HF, bonds & equities during the worst 20 months for bonds over the last 20 years 10% The HF index offered a 5% positive performance 11 months (7 for equities) 0% The average performance for 07-2003 04-2004 03-1994 10-2008 02-1999 02-1994 02-1996 03-2002 09-1994 11-2001 01-1992 09-2008 08-1990 10-1992 01-1990 03-1997 09-2005 03-2006 10-2003 12-1996 Moyenne the bond index is -1.6% -5% against -2.1% for equities and -0.2% for HF -10% $100 000 invested during these 20 months in the -15% indices (impossible practically) would have -20% resulted in $71 200 for bonds, Obligations mondiales Actions mondiales Hedge fund global 61 290 for equities and 95 100 for HF Source; Introduction aux hedge funds, 2nd edition, Economica 2010
- 17. 2. Hedge Fund in 2010: some updated figures Performance of HF, bonds & equities during the worst 20 months for hedge funds over the last 20 years 10% The equity index was negative 5% 20 times but the bond index was up 13 times 0% The average performance for 07-2003 04-2004 03-1994 10-2008 02-1999 02-1994 02-1996 03-2002 09-1994 11-2001 01-1992 09-2008 08-1990 10-1992 01-1990 03-1997 09-2005 03-2006 10-2003 12-1996 Moyenne the HF index is -3.2% against - -5% 7% for equities and -0.5% for bonds -10% $100 000 invested during these 20 months in the -15% indices (impossible practically) would have -20% resulted in $50 560 for HF, Obligations mondiales Actions mondiales Hedge fund global 21320 for equities and 95 000 for bonds Source; Introduction aux hedge funds, 2nd edition, Economica 2010
- 18. Hedge Fund in 2010: hedge fund strategies What changed or what is changing?
- 19. 3. Hedge Fund in 2010: strategy repartition The hedge fund industry evolves quickly and the strategy repartition has always evolved dramatically 1970ies: long/short funds 1980ies: macro funds 1990ies: mix (long/short, macro & new strategies) 1999- early 2000ies: end of very large macro, real long/short, CTA, CB arb, etc. Starting 2005: long biased funds, emerging markets, less liquid strategies (private investments, asset based lending, distressed, event driven)
- 20. 3. Hedge Fund in 2010: strategy repartition Since 2005, many new strategies became available: the more exotic, the more attractive In terms of products, of markets and of tools used Hedge fund investors focused more on returns & the background of hedge fund selector was too often light on technicals to understand the real risks. Less liquid strategies became common The frontier between hedge funds and private equity funds disappeared After the crisis, most hedge fund managers went back to basics and they are more focused In 2010, hedge fund selectors should go deeper in the understanding of the strategies
- 21. 3. Hedge Fund in 2010: new strategies PIPE Asset based lending Activism Event driven Trade finance Equity non hedge Convertible Arbitrage Multi-strategy Long/short Fixed income arbitrage Funds of funds Master Limited Sector High Yield Partnership Short selling Climate-related funds Emerging Markets Macro CTA Equity market neutral Electricity trading Wine investing (and other commodities) Closed-end fund arbitrage Source; Introduction aux hedge funds, 2nd edition, Economica 2010
- 22. 3. Hedge Fund in 2010: strategies more complex than many thinks FIXED INCOME ARBITRAGE Curve trade Volatility CDS Interest rates Credit Correlation Basis trading Spread between Relative value Long/short countries Spread trade Capital structure Various maturities Bonds/ CDS New issuances Curve Inter-currency trades arbitrage Source; Introduction aux hedge funds, 2nd edition, Economica 2010
- 23. 3. Hedge Fund in 2010: strategies more complex than many thinks Convertible arbitrage Interest rate curve Delta Credit spreads Gamma Share price Theta Stock volatility Inputs Outputs Vega Currency Sensitivity to Dividend policy credit Structure of the Sensitivity to interest bond rates Source; Introduction aux hedge funds, 2nd edition, Economica 2010
- 24. 3. Hedge Fund in 2010: strategies more complex than many thinks Event driven Distressed Merger & companies acquisitions Other special PIPE Activists situations Source; Introduction aux hedge funds, 2nd edition, Economica 2010
- 25. 3. Hedge Fund in 2010: strategies more complex than many thinks Event driven Distressed Merger & companies acquisitions Other special PIPE Activists situations Source; Introduction aux hedge funds, 2nd edition, Economica 2010
- 26. 3. Hedge Fund in 2010: strategies more complex than many thinks Other special situations Government Balance sheet Exchange listing Rating change privatisation restructuring Partial sale New regulation Recapitalisation refinancing LBOs Shares buyback Reorganisation Deconsolidation Source; Introduction aux hedge funds, 2nd edition, Economica 2010
- 27. 3. Hedge Fund in 2010: strategies more complex than many thinks Asset Based Lending Specialized agent Transactions sources Internal origin Documents describing the transaction Intellectual Land rights Cash to Tangible non Intangible Tangible fixed receive fixed Real estate Life-insurance Forest Shopping Orders Securities center Plane Merchandises Long term contracts Droit Raw intellectuel Train Boat Machinery commodities <------------------------ Follow up of the collateral ------------------------ Very frequent Spaced out Very spaced out
- 28. 3. Hedge Fund in 2010: strategies more complex than many thinks Trade finance Real estate financing Autres Courtier Fonds ABL intervenants Spécialisé Fonds ABL Produits Produits pré-vendus Financement Intérêt Entité et Producteur Revendeur Entité capital d’investissement Emprunteur d’investissement Avance Cash Collatéral Life insurance Fonds ABL Actif immobilier Cash Cash Détenteur de Intermédiaire Entité police d’assurance Polices Polices d’investissement Auto loans d’assurance d’assurance Emprunteurs peu solvables Consumer finance Collatéral : véhicules Véhicules Fonds ABL Intérêts et capital Vendeur de Société de Entité Prime Intérêts et capital voitures financement d’investissement Entité Financement Vente des Assureur Prêteur original prêts d’investissement Assurance Prêt Fonds ABL
- 29. 3. Hedge Fund in 2010: hedge fund & private equity Many hedge funds invested during the private phase & several private equity players shortened the life of the funds Price LIFE OF A COMPANY FOUNDER PRIVATE LISTED SECURITIES INVESTMENT Private Equity Fund Hedge fund IPO PRIVATE INVESTMENT PUBLIC INVESTMENT Time Source; Introduction aux hedge funds, 2nd edition, Economica 2010
- 30. Consolidation of the hedge fund industry How is the industry consolidating?
- 31. 4. Consolidation of the hedge fund industry Before the crisis, not only original but also small funds (in terms of assets) became attractive because of the competition between hedge fund investors. After the crisis, investors look for: Funds that went through the crisis Funds that are giving enough transparency Funds that (looks like) have(ing) the capacity to make stables returns and manage liquidity …avoid fraud and liquidity issues Large established funds closed for years opened to investors and got the main inflows
- 32. 4. Consolidation of the hedge fund industry The new talents cannot raise assets to reach the minimum size to grow further Many funds made significant losses in 2008 and are still far from high watermark Many managers/traders join the large hedge fund groups A significant part of the new assets comes from institutional investors that loose confidence in banks and classic asset management companies but the need institutionalized funds Is it the end of the « entrepreneur of finance »? The industry is splitting with a few hundreds big ones and the other ones
- 33. 4. Consolidation of the hedge fund industry In number of funds $500m to $1 $1 000m to >2 000m 000m $2 000m 3% $200m to 5% 2% $500m 10 % < USD20m $100m to 38 % $200m 10 % $20m to $50m 20 % $50m to $100m 12 % Source; Introduction aux hedge funds, 2nd edition, Economica 2010
- 34. 4. Consolidation of the hedge fund industry In assets under management Assets in billions of Number of Assets in the bucket in Percentage of the dollars funds billions industry 20 10 200 14% 10 25 250 17% 5 50 250 17% 1 100 100 7% NA 185 800 55% Assets in millions of Number of Assets in the bucket in Percentage of the dollars funds billions industry 70 9 315 650 45% Source; Introduction aux hedge funds, 2nd edition, Economica 2010
- 35. 3. Consolidation of the hedge fund industry: why? Because of the institutionalization of the large funds No exposure to unwanted risks like operational risks (operational DDQ + quantitative analysis) Fraud People Change of management infrastructure External events OPERATIONAL RISK Valuation or execution Electricity Reconciliation Computer breakdown problem Source; Introduction aux hedge funds, 2nd edition, Economica 2010
- 36. 3. Consolidation of the hedge fund industry: why? Repartition of hedge fund Repartition of operational failures failures Source; Introduction aux hedge funds, 2nd edition, Economica 2010 – originally from Capco
- 37. The future of hedge fund investing The easy part?
- 38. 5. The future of the hedge fund industry 100 90 80 70 60 50 40 30 20 10 0 W… T… P… Source : Alternative Investment Solutions, International Financial Services London based on Watson Wyatt, Merrill Lynch/Capgemini, BCG, World Federation of Exchanges, BIS.
- 39. 5. The future of the hedge fund industry My (published) view in 2007 was… Emergence Start Catch up Consolidation USA Europe Asia Latin America East Europe & Russia Africa Source; Introduction aux hedge funds, 2nd edition, Economica 2010
- 40. 5. The future of the hedge fund industry For the future, 3 phases were possible Rapid growth Catch up Consolidation Persistent consolidation USA Europe Des-interest Asie Source; Introduction aux hedge funds, 2nd edition, Economica 2010
- 41. Conclusion Almost done…
- 42. 6. Conclusion The industry is back on track but it is different and will continue to evolve rapidly. In 2010, hedge fund selector should know more than the basics of every strategy even if many managers went back to basics. Larger established funds opened to investors after the crisis and they are getting the main inflows The short to medium term future of the industry is probably persistent consolidation
- 43. Q&A If you enjoyed it please become fan on the FACEBOOK page: « Introduction aux Hedge Funds de D. Capocci chez Economica V2 – 2010 » Thank you for your interest