Staying the Course: The 2016 Credit Suisse Global Survey of ... Suisse 2016...Sources of Risk to the Hedge Fund Industry in 2016 16 4. Appetite for Start-ups 16 5. Interest in other

Staying the Course: The 2016 Credit Suisse Global Survey of Hedge Fund Investor Appetite and Activity

1 Please read important disclaimer at the end of this document. This document represents the opinion of the Prime Services and Capital Services teams and has not been prepared by Credit

Suisse Research. All the graphs and charts used in this document are sourced from the Credit Suisse Year End Investor Survey. January 2016

Credit Suisse

Credit Suisse AG is one of the world's leading financial services providers and is part of the Credit Suisse group of

companies (referred to here as 'Credit Suisse'). As an integrated bank, Credit Suisse offers clients its combined

expertise in the areas of private banking, investment banking and asset management. Credit Suisse provides advisory

services, comprehensive solutions and innovative products to companies, institutional clients and high-net-worth private

clients globally, as well as to retail clients in Switzerland. Credit Suisse is headquartered in Zurich and operates in over

50 countries worldwide. The group employs approximately 45,800 people. The registered shares (CSGN) of Credit

Suisse's parent company, Credit Suisse Group AG, are listed in Switzerland and, in the form of American Depositary

Shares (CS), in New York. Further information about Credit Suisse can be found at www.credit-suisse.com.

Credit Suisse Prime Services

Credit Suisse Prime Services delivers outstanding core financing and operating services that hedge fund and institutional

clients require, including start-up services, product access, high-touch client service, financing, access to sources of

capital and risk management. Prime Services delivers the strengths of Credit Suisse's investment banking, private

banking and wealth management business to a focused number of clients. As a partner, Prime Services is committed to

bridging the gap between idea and execution and ultimately functioning as the provider of choice for both the alternative

and traditional investment communities.

Credit Suisse Capital Services

Credit Suisse Capital Services has professionals located in New York, San Francisco, London, Zurich, Hong Kong, and

Tokyo, responsible for maximizing sustainable flow of capital between hedge fund managers and a broad range of

institutional investors (including Funds of Hedge Funds, Family Offices, Private Banks, Endowments and Foundations,

and Public and Corporate Pensions) who are seeking to allocate capital to Hedge Funds. It is critical to our success that

we treat both managers and investors as “clients”, and we strive to be of equal utility to both communities, providing

them with regular insight, as well as frequent opportunities to interact with each other.

For more information on this survey or on our Prime Services business generally, please contact:

Prime Services Capital Services

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http://www.credit-suisse.com/

Please read important disclaimer at the end of this document. This document represents the opinion of the Prime Services and Capital Services teams and has not been prepared by Credit


2

Table of Contents

Introduction 3 Investors at a Glance: Selected Highlights 4

The Participants 4

Key Industry Trends and Forecasts 4

Strategy Appetite 5

Alternative Routes to Absolute Return 5

Part 1 – Commentary and Key Findings 6 I. Where Investors’ Assets Are Likely to Flow in 2016 6

1. Current Investor Sentiment towards the Hedge Fund Industry 6

2.1 Where Investors’ Assets Are Likely to Flow in 2016 – by Strategy 6

2.2 Where Investors’ Assets Are Likely to Flow in 2016 – by Region 10

2.3 Where Investors’ Assets Are Likely to Flow in 2016 – by Size 12 II. Hedge Fund Performance and Benchmarking 13 III. Update on Key Industry Trends and Developments 14

1. Key Factors for Selecting Hedge Funds 14

2. Key Drivers of Redemptions 15

3. Sources of Risk to the Hedge Fund Industry in 2016 16

4. Appetite for Start-ups 16

5. Interest in other formats for investing into Hedge Funds 17

6. Most Significant Developments in 2016 17

Part 2 – Data Appendices 18 Appendices Table of Contents 18

Appendix I – The Participants 19 1. Breakdown of Participants 19 2. Portfolio Characteristics 23

Appendix II – Alternative Routes to Absolute Return 26 1. Alternative Investment Formats and Structures 26 2. UCITS 27 3. Co-investment (Equities) 28 4. Illiquid Credit including Direct Lending 29 5. Managed Accounts 30 6. Hybrid/Longer lock products 31 7. Co-investment (Credit) 32 8. Long only funds offered by Hedge Fund managers 33 9. US 40 Act funds 34 10. Smart Beta 35 11. GP equity stakes 36 12. Closed-end/listed hedge funds 37

Appendix III – Strategy Appetite 38 1. Equity Strategies 42 2. Fixed Income/Derivative Strategies 49 3. Other Strategies 54 4. By Geographic Focus 58 5. Regional Breakdown 60

3 Please read important disclaimer at the end of this document. This document represents the opinion of the Prime Services and Capital Services teams and has not been prepared by Credit


Introduction

In some respects, 2016 has begun in much the same fashion as the preceding year. Falling energy prices and continuing

questions about global growth continue to be top of mind to investors, and they also remain vigilant about the scope and pace

of the US Federal Reserve’s tightening of rates. This year, instead of Greece being the eight-hundred pound international

gorilla in the room, global markets are reacting to virtually every new piece of data that comes out of China with exceptional

volatility.

It was against this backdrop that the Credit Suisse Capital Services team sampled the sentiment of 369 institutional investors

from around the globe, in our annual effort to try and gain insights into what they are thinking and more importantly, how they

may act going forward. As always, we covered a range of topics, including attitudes towards industry growth, preferred

strategies, regional interest, investment structures and fees.

Based upon the results of this year’s survey, investors appear committed to hedge funds, as shown by the 87% who indicated

that they intend to maintain or increase their allocations this year. We regard this as a sign of positive sentiment on the part of

investors, who also indicated that they expect 2016 to be another year of growth for the hedge fund industry. Respondents

projected an increase of slightly over 3% this year; this represents a decline from last year’s forecast, but still anticipates

industry assets pushing past the $3 trillion mark.

In an indication of how investors intend to manage risk in 2016, Equity Market Neutral (both Fundamental and Quantitative)

have both risen to the top of the list of preferred strategies for the coming year. This would appear to indicate that investors

are anticipating yet another year of volatile markets and therefore looking for hedge fund strategies with low market exposure

and high alpha potential.

Following closely behind is Global Macro - Discretionary, which was ranked as the top preferred strategy in 2015 and remains

near the top again this year. Not surprising, given the ability of macro funds to potentially profit from a range of instruments

(i.e. equity, fixed income, foreign exchange, etc.) during periods of volatility.

Several Equity Long/Short strategies (including Trading, Fundamental and General) were also ranked highly. Particularly

noteworthy here is the rapid ascent of the Equity Long Short - Trading strategy, which ranked down in 15th place last year.

CTA/Managed Future funds (which as of this writing were among the best performing hedge fund strategies year to date)

were the next ranked strategy of preference; the only Fixed Income strategy in the top 10 is Fixed Income Relative Value.

Event Driven-General strategies witnessed the most significant year over year decline, with investors reporting anticipated net

redemptions for the first time in four years. In fact, it dropped from last year’s second highest ranked strategy by net demand,

to this year’s fourth lowest on the back of a poor 2015 performance where the CS Event Driven HF Index (-6.29%) lagged all

other strategies.

We also saw a decline in interest for Commodities and Natural Resources strategies, which in fact, swung to negative net

demand for the year, indicating potential net redemptions. Other strategies that struggled for interest include Convertible Bond

strategies, and Credit funds, particularly those focused on High Yield or Structured Credit.

From a regional standpoint, Developed Europe once again placed first in terms of where investors were most likely to consider

allocating this year, and in fact, exhibited higher net demand versus last year (36% in 2016 vs. 28% in 2015). This will be an

interesting space to watch as the Brexit debates continue to unfold ahead of the summer. Investors also indicated Global

strategies and those focusing on the Asia Pacific region as other key areas for consideration.

In response to our query of “what keeps you up at night”, investors indicated concerns over crowded trades and herding

behavior, last year’s top concerns, in addition to new heightened fears around market liquidity and risk complacency.

When asked what factors were most important when evaluating hedge funds, investors continue to list returns, lack of

correlation with the rest of the portfolio and pedigree of risk takers and consistency of team as the main drivers for investment.

Consistent with recent years, nearly 85% of investors did not include fees as among top 3 factors for consideration (despite

various media headlines).

Thanks to all the investors who completed this survey and we look forward to working with you again this year.

Robert M. Leonard

Global Head, Credit Suisse Capital Services

[email protected]

212-325-4866

mailto:[email protected]



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Investors at a Glance: Selected Highlights

The Participants

Scope: 369 respondents participated, representing $1.1 trillion in collective Single-Manager Hedge Funds (SMHF)

allocations.

Type: The investor base was well diversified; the largest groups of respondents included 24% of Family Offices, 16% of

Institutional Fund of Hedge Funds (FoHFs), 13% of HNW Fund of Hedge Funds (FoHFs), 10%

Advisor/Consultants, 10% Pensions & Insurance and 8% Endowments.

Regions: Participation was globally representative, with 60% of the total number of respondents headquartered in the

Americas, 32% in Europe, Middle East and Africa (EMEA) and 8% in Asia. Respondents headquartered in the

Americas represented 68% of the SMHF AuM, while EMEA and Asia represented 28% and 3%, respectively.

Key Industry Trends and Forecasts

Asset Flow Forecasts: On average, investors forecast continued growth for the hedge fund industry, with total assets

under management expected to reach an all-time high of $3.05T by the end of 2016, with an upper quartile

forecast of $3.2T.

Hedge Fund Return Expectations: Nearly two thirds of respondents expect their hedge portfolios to return 5 to 10%

in 2016. This compares favorably to Fixed Income (more than 90% expect less than 5%) and Equities (Nearly half

expect less than 5%), while Private Equity is expected to outperform with close to half of respondents expecting

returns greater than 10%.

Benchmarking: Only 15% of investors report using a publicly available Equity index like the S&P or MSCI World when

evaluating hedge fund performance, whereas more than 40% utilize a publicly available hedge fund index like the

Credit Suisse Broad Hedge Fund Indices. More than 10% of respondents do not use any benchmarks when

evaluating hedge fund performance.

Key Factors in Selecting Hedge Funds: The top three factors indicated when selecting hedge funds for an

institutional portfolio are: returns after fees, pedigree of risk takers & core team stability and non-correlation with

other investments. Other factors include degree of transparency and ability to lower volatility in overall portfolio.

Drivers of Redemptions: Two-thirds of respondents highlighted manager underperformance as the key reason for the

redemptions they made in 2015, followed by 25% indicating a top down shift in strategy preference as their main

reason. Interestingly, only 2% of investors highlighted a lower target weight of hedge funds in their portfolio as the

key driver of their redemptions last year. 10% of respondents made no redemptions last year.

AUM Size Preference: Over half of investors were most likely to allocate fresh capital to the $250m-$1bn fund AUM

range in 2016, the most frequently mentioned size segment of the fund spectrum.

Risks: Similar to last year, investors highlighted crowded trades/herd behavior as the most significant risk for the hedge

fund industry in the coming year. Market liquidity, the second most cited risk this year and last year, saw an uptick

in concern with 66% of respondents seeing it as a “significant” risk. Also moving up this year was concern over

navigating diverging global monetary policies.

Start-up Appetite: There remains a healthy appetite for start-ups, with 49% of respondents theoretically able to invest

on day one. Investor also indicated a preference for new funds where the Portfolio Manager has an excellent

pedigree, strong track record and robust risk management process.



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Strategy Appetite

Top Ranked: Equity Market Neutral (Fundamental) was cited by investors to be the most in-demand strategy for 2016,

with 34% net demand. This represents a move up from the #5 ranked strategy in our 2015 survey. Equity Market

Neutral (Quantitative) was the second most in-demand strategy, with 30% net demand, also improving from last

year when it was ranked 7th.

Global Macro: was the 3rd highest preferred strategy according to investor responses, falling slightly from last year’s

top spot, but notching its third year in a row with more than 30% net demand.

Equity Strategies: Equity Long/Short - Trading (#4) and Equity Long/Short – Fundamental (#5) rounded out the top 5,

with ELS – Fundamental slightly moving year over year from the #4 spot to #5. This year’s ELS - Trading ranking

represents a significant move up from last year, when it was the 15th ranked strategy.

Sector Funds: With respect to sector funds, appetite for TMT overtook Healthcare as the most sought after specialist

strategy, moving up from #16 in last year’s survey to #11 this year. Interest in Financials also jumped year on year,

increasing from #26 to #19.

Fixed Income/Derivative Strategies: Investors indicate that they will likely be withdrawing capital on a net basis for

the second year in a row from both Convertible Bond Arbitrage (-2%) and Leveraged Loan/ High Yield Credit

strategies (-4%) in 2016. Structured Credit strategies could also see redemptions, with (-10%) net demand.

Other Strategies: Other strategies identified by investors for potential allocations in 2016 include CTA/Managed

Futures (#7) with 17% net demand – a decline from its #3 position in 2015, but still markedly above its last place

rank in 2014. Additionally, despite a significant fall in demand for Event-Driven strategies in general, preference for

the Risk Arbitrage sub-strategy actually moved up from #23 in ‘15 to #12 in ‘16.

By Geographic Focus: The appeal of Developed Europe endures, ranking first overall and witnessing the largest year

over year increase in net demand. Asia Pacific and Globally focused funds landed in the #2 and #3 spots,

respectively, with 28% and 26% net demand. North America experienced the greatest negative swing of any region,

with a decrease of -13%.

Alternative Routes to Absolute Return

Alternative Routes: Co-investment vehicles (Equity) joined UCITS as the most preferred alternative format for

investing in hedge funds.

Illiquid Credit (including Direct Lending) also attracted considerable interest, with nearly 40% of respondents

indicating increasing or maintaining allocations to the each space.

Smart Beta remains a small, but growing, space with 20% of respondents indicating increasing or maintaining

allocations.

Long-only funds offered by hedge fund managers appear to have lost some interest from last year’s survey, with only

38% of investors indicating that they intend to begin, maintain or increase allocations, compared to 44% last year.



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Part 1 – Commentary and Key Findings

I. Where Investors’ Assets Are Likely to Flow in 2016

1. Current Investor Sentiment towards the Hedge Fund Industry

We asked investors to forecast industry assets at the end of 2016, assuming the industry assets were at $2.95 trillion at

the end of 2015. Investors were markedly less bullish on industry growth than in previous years. On average, investors

expect hedge fund assets to grow by a relatively modest 3.5% this year to reach $3.05T. Indeed, in a change from

previous years, the lower quartile actually forecasts the industry to contract to $2.90T.

Hedge fund industry AuM forecast

2.1 Where Investors’ Assets Are Likely to Flow in 2016 – by Strategy

Our survey asked investors strategy-by-strategy which ones are most likely to receive their capital in 2016. Table 2.1

and Figure 2.1 on the next page reflect the survey results, ranking strategies by investor net demand (percentage

increasing allocation minus percentage decreasing). Negative net demand indicates a higher likelihood of redemptions.



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Table 2.1: All principal strategies, ranked by current net demand

Rank Strategy 2016 2015 Change

1 Equity Market Neutral - Fundamental 34% 18% 16%

2 Equity Market Neutral - Quantitative 30% 18% 12%

3 Global Macro - Discretionary 29% 32% -3%

4 Long/Short Equity - Trading 21% 12% 8%

5 Long/Short Equity - Fundamental 18% 23% -5%

6 Long/Short Equity - General 18% 18% 0%

7 CTA/Managed Futures 17% 24% -6%

8 Fixed Income Arbitrage/Relative Value 14% 14% 0%

9 Multi-Strategy 13% 13% -1%

10 Equity Sector - TMT 11% 12% 0%

11 Global Macro - Systematic 11% 16% -5%

12 Event-Driven - Risk Arbitrage 11% 3% 8%

13 Equity Sector - Healthcare 7% 14% -7%

14 Long/Short Equity - Short-Biased 7% 1% 6%

15 Event-Driven - Distressed 7% 16% -9%

16 Emerging Markets - Equity 7% 11% -4%

17 Equity Sector - Natural Resources 6% 14% -7%

18 Equity Sector - Financials 6% 2% 4%

19 Equity Sector - Consumer / Retail 6% 7% -2%

20 Credit - Relative Value 5% 13% -8%

21 Environment, Social and Governance 4% 5% -1%

22 Equity Sector - Utilities 2% 5% -2%

23 Emerging Markets - Fixed Income/Credit 1% 5% -5%

24 Equity Sector - Real Estate 1% 3% -2%

25 Credit - Multi-Strategy 1% 8% -8%

26 Commodity Strategies -1% 11% -11%

27 Convertible Bond Arbitrage -2% -3% 1%

28 Event-Driven - General -3% 26% -29%

29 Convertible Bond Long-Only -3% -1% -2%

30 Credit - Leveraged Loans/High Yield -4% -7% 3%

31 Credit - ABS/Structured Credit -10% 3% -13%

Fig. 2.1 Strategy appetite by investor net demand



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In the chart below, we rank the top fifteen largest swings grouped by positive and negative changes. Equity Market

Neutral strategies, in addition to being among the top strategies by demand, also had the largest year on year net

positive swings. Perhaps in anticipation of a better shorting environment, Equity Long/Short – Short-Biased appeared in

our top positive year on year swings for the first time.

On the other hand, appetite for diversified Event Driven strategies fell off a cliff, dropping from #2 in last year’s survey to

#28 out of 31. The strategy performed poorly in 2015, both in absolute and relative terms. The Credit Suisse Event

Driven index lost 6.29% and was the worst performing strategy by a significant margin in 2015, against the Broad Index

only being marginally in negative territory for the year (-0.71%). Credit strategies in general, especially Asset Backed

Credit, also appear out of favor, as do Commodities-focused mandates.

Fig. 2.2 Top fifteen biggest year-on-year “swings”, ranked by absolute year-on-year change in net demand



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The graph below shows the evolution of net demand over the past three years across the major strategies.

At a high level, there is a clear trend toward favoring strategies which provide greater diversification to equities, i.e.,

trading strategies and lower net/market neutral fundamental and systematic strategies. This is consistent with the

challenging market backdrop for equity and commodity markets over the past two years, with investors looking for more

uncorrelated return streams.

At the individual strategy level, Discretionary Global Macro has experienced the most stable positive and relatively strong

net demand across the last three years, remaining firmly among the Top 3 most sought after investment approaches.

Multi-strategy appetite has also remained stable and positive, albeit at more muted levels than Macro.

Conversely, CTA/Managed Futures and Event Driven strategies have experienced the biggest absolute swings over the

period, albeit in opposing directions.

Net Demand for General Long/Short Equity strategy has remained positive, but is down relative to prior years, which

may be partially attributable to a desire to reduce net exposures in their portfolios, as these managers tend to be

relatively long-biased. This may also explain the stead gains in interest for Equity Market Neutral.

Yearly evolution of net demand across selected strategies



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2.2 Where Investors’ Assets Are Likely to Flow in 2016 – by Region

In this section, we hone in on geography. Developed Europe, Global, and Asia Pacific are the top three regions, with net

demand ranging from 26-36%. The next 3 top areas were country specific, with investors interested in Japan, India and

Greater China, despite questions about the strength of each of their underpinning economies.

For the second year running, Developed Europe has topped the survey and expanded its lead ahead of the second most

popular region, with a net demand of 36%. Asia-Pacific is the second most popular region with a net demand of 28%

followed by globally focused funds (26%). The enduring appeal of APAC, specifically Japan, India, and Great China, is

interesting considering the turbulent markets experienced over the past year. Interestingly, no region received negative

net demand, indicating at least minimal appetite across the globe and no overwhelming indications of regional

redemptions.

All principal geographies, ranked by current net demand

Year-on-year swings in net demand by region can provide more clarity on change in investor appetite from year to year.

Interestingly, the largest negative net swing for 2016 was for North America focused funds, which last year had 22% of

net demand vs. this year’s 9%. More individual countries than regions received net increases in demand this year,

despite “Country-specific funds in general” experiencing a decrease of 5% in net demand year over year.

Regional “swings” in net demand, ranked by year-on-year change in net demand



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Reviewing regional appetite over the course of three years can highlight any notable patterns and trends from our

investor universe. Investor appetite has endured over the last three years for the top three regions. Japan witnessed a

considerable drop from 2014 to 2015/16, but has stayed a top 5 region. India has witnessed some of the biggest

increase in appetite over the last three years, and focus on Greater China has ebbed year over year since 2014.

North America, after experiencing a spike in interest last year, witnessed the greatest year over year decline, but remains

ahead of Latin America, the U.K. and generally in line with appetite for Emerging Markets.

Yearly evolution of net demand across all regions



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2.3 Where Investors’ Assets Are Likely to Flow in 2016 – by Size

Investors indicated that this year they would be most likely to allocate capital to those managers in the $250 million to $1

billion range. This could be a function of several factors: first, investors appear to already be fully allocated to a number

of the largest funds, perhaps as part of a core/satellite allocations strategy, many of which remain capacity-constrained.

Secondly, with 66% of investors citing market liquidity as a significant risk (up from 48% last year), smaller, more nimble

hedge funds should be able to move in and out of positions more efficiently.

Fund AUM range most likely to see inflows

Unlike the previously mentioned trend, the view towards minimum fund assets under management has been fairly steady

for some time now. While only 26% of the investors who responded to the survey indicated that they could consider a

fund for allocation with less than $50 million in assets under management, the number rose to 78% when fund assets

reached $100 million. As one would expect, by the time fund assets reach $250 million, virtually our entire investor

universe indicated that they could consider a fund for allocation.

Minimum AUM to Invest



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II. Hedge Fund Performance and Benchmarking

Credit Suisse Hedge Fund Index performance in 2015

Broad Index -0.71%

Convertible Arbitrage 0.81%

Emerging Markets -0.22%

Equity Market Neutral 1.69%

Event Driven -6.29%

Distressed -5.30%

Event Driven Multi-Strategy -6.67%

Risk Arbitrage 0.42%

Fixed Income Arbitrage 0.59%

Global Macro 0.18%

Long/Short Equity 3.55%

Managed Futures -0.93%

Multi-Strategy 3.84%

Investor 2016 Portfolio Return Expectations

The outlook for their 2016 hedge fund performance is optimistic (particularly in light of the +4.1% and -0.7% returns for

the Credit Suisse Broad Hedge Fund Index for 2014 and 2015, respectively) with nearly 80% of investors expecting

their hedge fund portfolio to generate returns greater than 5% next year. This compares favorably to Fixed Income (more

than 90% expect less than 5%) and Equities (nearly half expect less than 5%), while Private Equity is expected to

outperform with close to half of respondents expecting returns greater than 10%.

Given the numerous headlines that often boil down hedge fund performance to simply how they compare with publicly

available equity indices like the S&P or MSCI World, we asked investors how they measure and benchmark their hedge

funds. More than 10% of investors don’t use a benchmark when evaluating their hedge fund performance, and the

greatest number (41%) use a publicly available hedge fund index like the Credit Suisse Broad Hedge Fund Indices. The

remaining respondents were more or less equally split as to whether they use an internal proprietary benchmark (12%),

a Libor based benchmark (14%) or a publicly available equity index (15%).

Though overall Hedge Fund performance was slightly down in 2015, seven out of 12 strategies delivered positive

returns. Multi-strats and Equity Long/Short funds had the strongest year, up 3.8% and 3.5%, respectively. A number of

other strategies finished the year about flat.



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III. Update on Key Industry Trends and Developments

1. Key Factors for Selecting Hedge Funds

When asked to identify the key factors for selecting hedge funds, 86% included net returns in the top three factors. In

addition to returns, investors also identified low correlation with the rest of their portfolio and the pedigree of risk takers

as material drivers for selection. This reinforces the case that many have made for the role of hedge funds in an

institutional portfolio, which is to improve risk-adjusted returns by enhancing diversification.

It is also interesting to note that fees, which are frequently a topic of discussion with respect to hedge funds, were not

listed in the top three factors by nearly 85% of respondents.

Top three factors when selecting hedge funds



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2. Key Drivers of Redemptions

90% of respondents redeemed from hedge fund managers in 2015; we asked them to identify their top reasons for

redemptions.

The most frequently mentioned driver of redemptions, by two-thirds of respondents, was manager underperformance.

Twenty-five percent of investors indicated that redemptions were primarily driven by a top down shift in their strategy

preference, and just 19% of those who redeemed cited a change in the manager’s investment framework as a

significant driver.

Most significant drivers of redemptions

Only 2% of respondents said that redemptions were a result of lowering their target weight of hedge funds in their

portfolio. This appears to indicate that the vast majority of institutional investors who participated in this year’s survey

continue to see a role for hedge funds in their investment portfolios.



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3. Sources of Risk to the Hedge Fund Industry in 2016

As with the past several surveys, investors continue to identify crowded trades and herd behavior as significant potential

risks to the industry. Risk complacency also remains top of mind for many investors. Market liquidity, the second biggest

perceived risk to the industry, witnessed heightened concerns this year as 66% of respondents cited it as a “significant”

risk. As they were last year, investors remain vigilant over any potential changes from a regulatory standpoint that might

impact the hedge fund space, including counterparty balance sheet reductions or regulatory changes in general.

Investors’ views on sources of risk for the hedge fund industry over the coming year

2016 2015

4. Appetite for Start-ups

Start-ups continue to generate considerable interest among our survey respondents, as half of them report making an

allocation to one a newly established manager in 2015. The three most important considerations when making an

allocation to a start-up include: the pedigree of the PM, the strength of their previous track record, and the manager’s

risk management process.



17

5. Interest in other formats for investing into Hedge Funds

The popularity of alternative alternatives continues to evolve as managers expand their product offering to meet demand.

UCITS hedge funds continue to be the most sought-after alternative format for investing into hedge funds for European

investors. But this year, Co-investment vehicles for Equities joined UCITS as most likely to welcome increased or

maintained allocations. A small, but growing number of investors have shown interest in Smart Beta products as close to

20% of the respondents plan to be active in the space next year.

6. Most Significant Developments in 2016

We also asked institutional investors to forecast what could be the most significant developments for the hedge fund

industry in 2016. Below are some common themes:

Fund conversions - looking ahead, investors anticipate a continuation of challenging market conditions, which could

lead to a higher than average number of funds converting to family offices, returning outside capital. Some investors also

mentioned that this consolidation could also affect industry capacity going forward.

Potential for Asset/Liability Mismatches – a number of respondents specifically referenced the liquidity issues

surrounding a number of prominent credit funds late last year, as an example of an issue that could impact the hedge

fund marketplace this year. Some investors believe that this could lead to further gating by impacted funds.

Fee Compression – a significant number of investors believe that fees will continue to be a topic of discussion in the

coming year, with downward pressure being exerted by factors such as founders share classes for new funds, discounts

for large institutions and proliferation of alternative hedge fund structures.

Focus on Short-selling - investors predicted those managers that can demonstrate a consistent ability to generate

alpha on the short side will be in high demand this year.

Alternative Hedge Fund Structures - Liquid Alternatives and Smart Beta funds were identified among a number of

alternative approaches which could potentially provide increased competition to traditional fund structures. Improved

liquidity and lower fees were frequently mentioned as drivers of interest in this space.

Ongoing Regulatory Developments An overwhelming number of respondents continue to expect the regulatory

landscape to continue evolving, be it transparency requirements, reporting standards, shorting rules or country specific

regulations, with focus now shifting to MIFID 2, despite the rule being pushed out to 2018.



18

Part 2 – Data Appendices

Appendices Table of Contents

Appendix I – The Participants 19 1. Breakdown of Participants 19 2. Portfolio Characteristics 23

Appendix II – Alternative Routes to Absolute Return 26 1. Alternative Investment Formats and Structures 26 2. UCITS 27 3. Co-investment (Equities) 28 4. Illiquid Credit including Direct Lending 29 5. Managed Accounts 30 6. Hybrid/Longer lock products 31 7. Co-investment (Credit) 32 8. Long only funds offered by Hedge Fund managers 33 9. US 40 Act funds 34 10. Smart Beta 35 11. GP equity stakes 36 12. Closed-end/listed hedge funds 37

Appendix III – Strategy Appetite 38 1. Equity Strategies 42 2. Fixed Income/Derivative Strategies 49 3. Other Strategies 54 4. By Geographic Focus 58 5. Regional Breakdown 60



19

Appendix I – The Participants

1. Breakdown of Participants

The respondents manage an aggregate $1.1 trillion in Single-Manager Hedge Funds (“SMHFs”)

We had 369 responses globally.

Our survey respondents were well diversified by type, by region, and by size.

Breakdown of participants by location of their headquarters

Regional distribution (by number) Regional distribution (by SMHF assets)

Breakdown of participants by investor type

Distribution of categories (by number) Distribution of categories (by SMHF assets)

Institutional FoHFs make up the largest sector by assets making up 26% of the survey respondent AuM, but only

represent 16% of the sample by number of respondents. HNW/Private Bank FoHFs represented 13% of the sample

and 7% of the AuM.

Family Offices and Advisors/Consultants were also well represented. Family offices contributed 24% of the respondents,

but only 5% of the AuM. Advisors/Consultants represented 10% of the sample and 25% of the AuM.

As in our previous survey reports, to avoid displaying 12 line items per data point, we have aggregated the12 investor

types into three broad categories based on similarities in their behavior:

• “End Investors” – Endowment/Foundation, Family Office, Bank Treasury/Proprietary Capital and Pension Funds and

Insurance Companies;

• “Institutional Intermediaries” – Advisor/Consultant, FoHF with primarily institutional investors and Seeder/Incubator;

• “Retail Intermediaries” – Private Bank and FoHF with primarily retail investors.



20

Distribution of categories (by number) Distribution of categories (by assets)

• End Investors make up the largest category by number (59%); Institutional Intermediaries make up the largest

category by assets (51%).

Regional distribution of categories (by number) Regional distribution of categories (by assets)



21

Distribution of SMHF AuM of respondents

By investor category

The average amount of assets allocated to Single-Manager Hedge Funds amongst our respondents is $3.33 billion.

42% of respondents have in excess of $1 billion invested into SMHFs, and 8% have less than $50 million.

Institutional Intermediaries have the highest average asset size of $6.4 billion, with 60% having greater than $1 billion in

assets. Within this category, Advisor/Consultants had the highest average SMHF AuM with $8.66 billion.

End Investors’ SMHF assets are smaller on average, with an average hedge fund portfolio size of $2.19 billion, and

30% in the mid-range of $101 million - $500 million.

Average AuM

• End Investors: $2,189 million

• Institutional Intermediaries: $6,406 million

• Retail Intermediaries: $2,358 million

• All: $3,326 million



22

By investor region

Average AuM

• Americas: $3,701 million

• EMEA: $3,028 million

• Asia: $1,510 million



23

2. Portfolio Characteristics

Allocation to SMHFs in US$ millions

The average size of single-manager hedge fund portfolios is $3.33billion.

Total number of distinct single-manager fund investments within hedge fund portfolios

The average portfolio concentration is 35 investments, which is more concentrated than the average of 42 a year ago

and 38 two years ago.



24

Typical allocation size in US$ millions, both initially and as a current average holding size, by Investor Type

All

End Investors

Institutional Intermediaries Retail Intermediaries

The average initial investment size of all respondents is $36 million; however, this typically increases to $94 million.



25

Typical allocation size in US$ millions, both initially and as a current average holding size, by Region

Americas

EMEA

Asia

Investors in EMEA and the Americas appear very similar in the sizing of their initial and average positions, while Asian

allocators appear to allocate significantly less initially, and significantly more on average.

Number of new hedge fund allocations in 2014/2015 (actual allocations)



26

Appendix II – Alternative Routes to Absolute Return

1. Alternative Investment Formats and Structures

Other formats investors’ absolute-return investments can take



27

2. UCITS

Year-on-year comparison of appetite for UCITS

Appetite for UCITS – by investor type

Appetite for UCITS – by region



28

3. Co-investment (Equities)

Year-on-year comparison of appetite for Co-investment (Equities)

Appetite for Co-investment (Equities) – by investor type

Appetite for Co-investment (Equities) – by region



29

4. Illiquid Credit including Direct Lending

Year-on-year comparison of appetite for Illiquid Credit including Direct Lending

Appetite for Illiquid Credit including Direct Lending – by investor type

Appetite for Illiquid Credit including Direct Lending – by region



30

5. Managed Accounts

Year-on-year comparison of appetite for Managed Accounts

Appetite for Managed Accounts – by investor type

Appetite for Managed Accounts – by region



31

6. Hybrid/Longer lock products

Year-on-year comparison of appetite for Hybrid/Longer lock products

Appetite for Hybrid/Longer lock products – by investor type

Appetite for Hybrid/Longer lock products – by region



32

7. Co-investment (Credit)

Year-on-year comparison of appetite for Co-investment (Credit)

Appetite for Co-investment (Credit) – by investor type

Appetite for Co-investment (Credit) – by region



33

8. Long only funds offered by Hedge Fund managers

Year-on-year comparison of appetite for Long only funds offered by Hedge Fund managers

Appetite for Long only funds offered by Hedge Fund managers – by investor type

Appetite for Long only funds offered by Hedge Fund managers – by region



34

9. US 40 Act funds

Year-on-year comparison of appetite for US 40 Act funds

Appetite for US 40 Act funds – by investor type

Appetite for US 40 Act funds – by region



35

10. Smart Beta

Year-on-year comparison of appetite for Smart Beta

Appetite for Smart Beta – by investor type

Appetite for Smart Beta – by region



36

11. GP equity stakes

Year-on-year comparison of appetite for GP equity stakes

Appetite for GP equity stakes – by investor type

Appetite for GP equity stakes – by region



37

12. Closed-end/listed hedge funds

Year-on-year comparison of appetite for Closed-end/listed hedge funds

Appetite for Closed-end/listed hedge funds – by investor type

Appetite for Closed-end/listed hedge funds – by region



38

Appendix III – Strategy Appetite

All principal strategies, ranked by current net demand

All principal strategies, ranked by current net demand

Rank Strategy 2016 2015 Change





















21 Environment, Social and Governance 4% 5% -1%













39

All principal strategies, grouped by Strategy Type

Rank Equity Strategies 2016 2015 Change















Rank Credit/FI Strategies 2016 2015 Change









Rank Macro Strategies 2016 2015 Change





Rank Event-Driven Strategies 2016 2015 Change




Rank Multi-Strategy 2016 2015 Change




40

Strategy “swings”, ranked by year-on-year change in net demand



41

Yearly evolution of net demand across main strategies



42

1. Equity Strategies

Long/Short Equity – General

Long/Short Equity – Trading



43

Long/Short Equity – Fundamental

Long/Short Equity – Short-Biased



44

Equity Market Neutral – Quantitative

Equity Market Neutral – Fundamental



45

Equity Sector – Healthcare

Equity Sector – Natural Resources



46

Equity Sector – Financials

Equity Sector – Real Estate



47

Equity Sector – TMT

Equity Sector – Consumer/Retail



48

Equity Sector – Utilities



49

2. Fixed Income/Derivative Strategies

Fixed Income Arbitrage/Relative Value

Convertible Bond Arbitrage



50

Convertible Bond Arbitrage – Long-Only

Credit – Multi-Strategy



51

Credit – Relative Value

Credit – ABS/Structured Credit



52

Credit – Leveraged Loans/High Yield

Global Macro - Discretionary



53

Global Macro – Systematic

CTA/Managed Futures



54

3. Other Strategies

Event-Driven – General

Event-Driven – Distressed



55

Event-Driven – Risk Arbitrage

Emerging Markets – Equity



56

Emerging Markets – Fixed Income/Credit

Multi-Strategy



57

Commodity Strategies

Environment, Social and Governance (Socially Responsible Investing) Strategies



58

4. By Geographic Focus

Major geographies, ranked by current net demand

Specialized geographies, ranked by current net demand



59

Regional “swings”, ranked by year-on-year change in net demand

Yearly evolution of net demand across all regions



60

5. Regional Breakdown

Global

North America



61

Developed Europe

Emerging Markets



62

Asia-Pacific

Country-Specific Funds in General



63

Greater China

Japan



64

India

UK



65

Eastern Europe/CIS

Australia



66

Latin America

Africa/MENA



67

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