Credit suisse 2013 investor survey report final

Reaching New Heights

The 2013 Credit Suisse Global Survey of

Hedge Fund Investor Appetite and Activity

Copyright © 2013 Credit Suisse Group. All rights reserved.

Page 2 of 90 Confidential

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 49,700 people.

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, risk management, and managed lending. Prime Services delivers the strengths of Credit Suisse's investment

banking, private banking and asset 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 is 30 person team with professionals located in New York, Philadelphia, San Francisco,

Boston, London, Zurich, Geneva, Dubai, Hong Kong and Tokyo, responsible for maximising 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 and research, as well as frequent

opportunities to interact with each other. Credit Suisse was the first firm to combine into a single team the 3 services

that managers and investors use to connect with each other – Capital Introductions for Prime Services clients seeking to

diversify and upgrade their capital base, a Placement Agent for established managers seeking to accelerate their growth

strategy and Capital Solutions in cooperation with our market-leading Fund-Linked Products Group.

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

Prime Services Capital Services

Americas + 1 212 325 3116 + 1 212 325 3156

Europe + 44 (0)20 7888 8165 + 44 (0)20 7888 1212

Asia + 852 2101 7287 + 852 2101 7471


Table of Contents

PART 1 – COMMENTARY AND KEY FINDINGS 4

Investors at a Glance: Selected Highlights 5

Introduction 7

I. Where Investors’ Assets Are Likely to Flow in 2013 8

Current Investor Sentiment towards the Hedge Fund Industry

Where Investors’ Assets Are Likely to Flow in 2013 – By Strategy

Where Investors’ Assets Are Likely to Flow in 2013 – By Region

Where Investors’ Assets Are Likely to Flow in 2013 – By Size

II. Return Expectations for 2013 14

III. Update on Key Industry Trends and Developments 16

Sources of Risk to the Hedge Fund Industry in 2013

Appetite for Start-ups

Interest in other formats for investing into Hedge Funds

Fee structures

Most Interesting Developments in 2013

IV. Focus on Pensions and Institutions 23

Pensions and Institutions are Leading Flows to Hedge Funds

Investment Expectations

Selection Process and Due Diligence

Hedge Funds in the Portfolio

Outside of Traditional Hedge Funds

PART 2 – DATA APPENDICES 33

Appendix I – The Participants

Appendix II – Key Industry Trends and Forecasts

Appendix III – Focus on Pension and Insurance Activity

Appendix IV – Alternative Routes to Absolute Return

Appendix V – Strategy Appetite


PART 1 – COMMENTARY AND KEY FINDINGS


Investors at a Glance: Selected Highlights

The Participants

Size: Close to 550 institutional investors participated, representing $1.03 trillion in collective Single-Manager Hedge

Funds (SMHF) allocations.

Type: The investor base was well diversified and included 25% institutional fund of Hedge Funds (FoHFs), 20%

Family Offices, 12% Advisor/consultants, 12% Pension Funds/Insurance companies and 6% Endowments.

Regions: Participation was globally representative, with 42% of total respondents headquartered in the Americas,

39% in Europe, Middle East and Africa (EMEA) and 19% in Asia.

Key Industry Trends and Forecasts

Asset Flow Forecasts: On average, investors expect the industry to grow 10% in 2013, to reach $2.42 trillion in

total assets, with the upper quartile prediction at $2.50 trillion.

Market Return Predictions: Markets are predicted to return between 2.9% and 10.4% on average this year, with

investors most optimistic about Equity markets across regions, predicting returns of between 7.3% and 10.4%.

Strategy Return Predictions: Long/Short Equity is predicted to be the top performing strategy this year by 34% of

investors, with Emerging Markets Equities and Structured Credit behind as numbers two and three respectively.

Risks: Investors consider crowded trades/herd behaviour and regulatory changes to be the top two sources of risk to

the industry.

Start-up Appetite: There remains a healthy appetite for start-ups, with 69% theoretically able to invest on day one,

however, with an increasing demand for fee discounts or equity share.

Hurdle Rates: 77% of investors prefer managers to have a hurdle rate, with the majority indifferent to the type of

hurdle rate (40%).

Focus on Pension and Insurance Activity

Objectives: In addition to high-risk adjusted returns, diversified/uncorrelated returns versus equity markets were the

notable key objectives that pension funds particularly looked for in their hedge fund investments.

Selection and Due Diligence: 73% of institutions require hedge fund assets to be greater than $250 million

before they can invest and 80% take at least 4 months to 1 year to complete due diligence on funds.

Terms: Almost half of pension funds and insurance companies always negotiate performance and management fees.

Asset class buckets: 79% of pensions allocate to Hedge Funds through a dedicated hedge fund/alternatives

bucket, with 50% integrating both Equities and Fixed Income Hedge Funds into the traditional asset class bucket.

Turnover: Hedge Fund turnover for pensions, at 8%, is lower than the average of other investors, at 10%.

Alternative Routes to Absolute Return

UCITS/Regulated Funds: 21% of investors plan to increase their allocations this year, up from 20% last year, with

the majority of these coming from Retail Intermediaries in EMEA.

Managed Accounts: Appetite decreased slightly to 35% from 40% last year, distributed evenly across investor

types and regions.

Alternative Routes: For other alternative formats, such as closed-ended Hedge Funds, replication products and US

40 Act funds, over 70% of investors have no allocations or plans to allocate, however 27% are looking to allocate to

Long-only funds offered by Hedge Fund managers.

Strategy Appetite

Overall: Long/Short Equity (General) is the most sought-after strategy, with Emerging Markets Equities ranking

second and Event-Driven close behind.


Equity Strategies: Net demand for Long/Short Equity (General) has increased by 24% from last year, while

appetite for trading oriented Long/Short fell by 11% from last year.

Fixed Income/Derivative Strategies: Fixed Income strategies in general decreased in net demand, with Fixed

Income Arbitrage/Relative Value decreasing by 16% and Credit (RV and Leverage Loans/High-Yield) by 11%.

Other Strategies: Net demand for CTA/Managed Futures along with Global Macro fell by 30%.

By Geographic Focus: Net demand across geographies increased on average, with Developed Europe increasing

by 26% from -2% net demand last year to +24% this year. Emerging Markets and Asia-Pacific remain in the top

two geographies for preference, while North America saw net demand fall to 14%.


Introduction

As we emerge from a year in which the hedge fund industry experienced relatively low levels of net inflows, investors are

approaching 2013 with a good deal of optimism and purpose. Expectations for growth are strong, with a consensus of

our survey respondents forecasting the hedge fund industry to grow by over 10% this year. This would equate to an

additional $220B for the industry during 2013, with overall assets reaching a projected all time high of $2.42T by year

end, with the upper range of our forecast reaching as high as $2.5T.

Investors were also optimistic about the potential for higher hedge fund returns in 2013, with a forecast of 6.9% average

annual return for the industry versus a forecast of 5.4% at this same time last year. Perhaps there is greater confidence

in central bankers and their ability to avoid deflationary scenarios while keeping rates, equity volatility and correlations at

moderate levels. Given this backdrop and positive performance in 2012, it is not surprising to see increased expectations

for 2013.

We observed some dramatic changes in this year's survey results with respect to investor appetite, both by strategy and

region. Perhaps the most dramatic being the rebound in investor appetite for equity long/short strategies, which was

ranked as the top strategy of interest by investors. Long/Short Equity had the biggest year-on-year “swing” of any one

strategy. Emerging Markets Equity and Event-Driven strategies were also ranked very highly by investors this year.

From a regional standpoint, there was a similarly pronounced increase in interest for strategies covering Developed

Europe. Investors appear to have had some of their confidence restored for now by political action taken, though they

continue to closely monitor the situation. Emerging Markets and Asia-Pacific now hold the top two spots in the survey

as risk appetite clearly seems to be on the mend.

Interest in new and emerging managers continues to remain strong, though more investors this year indicated that they

expect to receive some level of fee discount for being an early-stage investor. This corresponds with the rise of

founders’ share classes, which typically offer investors a discounted fee arrangement. The bar remains high for investors,

as they apply a highly selective approach towards new funds. In addition, investors indicated that those mid-sized Hedge

Funds with assets under management between $500M and $2B continue to be of interest for potential allocations this

year.

This year, for the first time, we have broken out the results of our survey to specifically show responses from pension

funds. We believe that this fast growing investor segment is of critical importance to the future growth of the hedge fund

industry, therefore we felt compelled to share as much insight as possible. Our aim in doing so, is to shed additional

light on some of the key trends and developments within this influential investor segment.

Looking forward, many investors anticipated that crowded trades and herd mentality may pose continued risks to the

industry in addition to risk on underperformance and political uncertainty. Additionally, many predicted that there would

be further fee compression this year, as well as growth in additional formats for investing, such as long-only funds,

longer dated vehicles and US 40 Act funds.

As our title indicates, investors are forecasting that 2013 is a year in which the hedge fund industry reaches a new all-

time high with respect to assets under management. As we are now several years removed from the last financial crisis,

the climb back has been a difficult one and not without peril. We hope this survey can provide some insights into what

that path may look like going forward.

Sincerely yours,

Robert Leonard

Global Head, Credit Suisse Capital Services


I. Where Investors’ Assets Are Likely to Flow in 2013

1. Current Investor Sentiment towards the Hedge Fund Industry

Before diving into the breakdown of investor appetite and their implications for where assets are likely to flow, we wanted

to open the survey assessing the general sentiment towards the hedge fund industry and whether the prediction by many

commentators of a more bullish market outlook in 2013 is echoed within the universe of hedge fund investors.

We asked investors to forecast industry assets at the end of 2013, assuming the industry had assets of $2.2 trillion at

the end of 2012. The chart below shows the distribution of results. It indicates that even the lower quartile of predictions,

estimate a growth of 4.5%, with the average sitting at a predicted growth of over 10%. Three quarters of investors

predicted growth rates of between 4.5% and 13.6%. Investors expect this to be fairly evenly balanced between

performance and net asset flows. It is worth noting that investors’ prediction last year of 12% growth was in line with the

actual growth rate at the end of 2012 according to HFR data ($2.008 trillion at the beginning of 2012 to $2.252 trillion

at the end of 2012).

Hedge fund industry AuM forecast

2.50

2.30

2.2

2.42

2

2.3

2.6

(US

$ t

rn)

Upper Quartile

Lower Quartile

Average

10.1%

`

31-Dec-2012 31-Dec-2013

With the many systemic risks we saw emerging in 2012, such as the many political risks in Europe and the US along

with sovereign default risks emerging across peripheral Europe, several investors looked to maintain higher than normal

levels of cash/near-cash assets. However, with real interest rates at historical lows and the continued demand for

absolute returns, we looked to investigate whether investors continued to hold high cash levels in the coming year and in

the long-term, or whether would be looking to redeploy some of this cash.

As we can see from the chart below, FoHFs ramped up their cash buffer post-crisis to an average of 12% in 2009,

which subsequently saw a steady reduction to 5% as sentiment improved in the period up to the start of 2011. This

trend reversed slightly leading up to 2012 when the average went up to 6%, however, this reversal was short-lived with

FoHFs reverting to 2011 levels of cash, which is further predicted to reduce as market conditions improve, to an average

of 3% of holdings in cash.

Allocation to cash as a percentage of FoHFs’ overall portfolios


2.1. Where Investors’ Assets Are Likely to Flow in 2013 – by Strategy

We note in 2013 a shift in investor strategy appetite compared to 2012. The chart below ranks investors’ net demand

(percentage increasing or considering increasing minus percentage decreasing or considering decreasing) by strategy.

Rather unsurprisingly, the positive equity market sentiment which we saw in the final quarters of 2012 has yielded

considerable demand for equity related strategies for the year ahead. Long/Short Equity-General has topped this year’s

list with 35% of net demand compared with 12% in 2012 – this represents an 18 place rise year-on-year. Closely

following is Emerging Market Equity with a rise from 6th to 2nd place highlighting that investors are looking to broaden

their choice of geographies in search for greater returns. Also ranked highly this year is Event Driven Strategies.

In the fixed income space, Fixed Income Arbitrage/Relative Value has fallen to 10th place, from 3rd in 2012, whilst

Credit – ABS/Structured Credit continues to remain a strategy of interest, currently ranked 8th place.

Macroeconomic uncertainty, which has previously dictated market trends and performance, continues to remain a factor

in investor allocations but to a lesser extent. Ranked 1st in 2012, Global Macro has been divided this year into

discretionary and systematic strategies in the 2013 survey, and our results highlight significant dispersion in appetite for

the two sub-strategies. Global Macro – Discretionary is currently in 5th place with a net demand of 22% whilst Global

Macro – Systematic is at 19th place with net demand of 7%. If we are to aggregate these two strategies for year-on-

year analysis Global Macro net demand in 2013 is 15% compared with 45% in 2012.

All principal strategies, ranked by current net demand

Per the chart below we rank the largest absolute swings in net demand year-on-year. Global Macro and CTA/Managed

Futures have experienced the largest negative swings with investor appetite swaying towards Equities. Poor performance

in CTA/Managed Futures strategies on the back of lack of noticeable trends has resulted in a 30% fall in net demand


year-on-year, equal to the decline in appetite for Global Macro. The results imply that, after significant decreases in net

demand between 2011 and 2012, fundamental and valuation driven strategies are the most sought after for investors in

the year ahead. Long/Short Equity - General and Long/Short Equity - Fundamental both increased net demand year-on

-year 24% and 22% respectively. Another notable swing can be seen with Event Driven – General. After a significant

drop in net demand of 38% between 2011 and 2012, we have now seen investor confidence returning to the sector

highlighted by an 11% increase this year. Commodity Strategies continue their decline from 2012 into 2013 with a

further 15% decline in net demand.

Top ten biggest year-on-year “swings”, ranked by absolute year-on-year change in net demand

The chart below shows how strategy appetite has evolved over the last three years. One can say that whilst Global

Macro and CTA/Managed Futures has seen the most sustained net demand over previous years, 2013 brings much

more sporadic developments in strategy demand evolution. Fluctuations in net demand can be seen in all of the main

strategies with Credit – Relative Value appearing to be the most stable.

Yearly evolution of net demand across main strategies


2.2. Where Investors’ Assets Are Likely to Flow in 2013 – by Region

In this section, we examine investor appetite by region for the year ahead. A continuation on last year’s theme sees

Emerging Markets and Asia-Pacific dominating investor net demand by region. On the back of relatively strong

performance in 2012, the return opportunities apparent in Emerging Markets continue to be vast and lucrative. Growing

dividend payouts, high saving levels and strong economic growth are all stark contrasts to the indebtedness which we

see in the developed world. In conjunction with these regions, we also see increased investor appetite for Developed

Europe with 24% net demand.

All principal geographies, ranked by current net demand

42%

35%

24% 24%22%

16%14% 14%

12%10%

6%

3%

0%0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

The chart below represents the largest swings in investor net demand year-on-year with Developed Europe experiencing

the largest swing of +26%. 2012 saw managers and investors escaping the region for fear of inevitable sovereign

default and the terminal decline of the single currency. Nevertheless, political action in the latter half of 2012 appears to

have restored some confidence in the region for the time being, and austerity and structural reforms will continue for

many years to come. Consequently, investors appear to be rebalancing their portfolios with greater conviction towards

Developed Europe in 2013. Whilst the sovereign debt concerns appear muted for now, we await to see if there is an

awakening of fiscal issues later in the year.


Top ten biggest “swings”, ranked by absolute year-on-year change in net demand

A common pattern emerging over numerous years has been the solid demand for exposure in Asia-Pacific and Emerging

Markets. Emerging Market net demand has also remained relatively consistent. Asia-Pacific only experienced a +1%

increase in net demand year-on-year. We also see considerable decrease in year-on-year net demand for North America.

As risk appetite picks up, investors are willing to redirect some of their allocations to other parts of the world to meet

their risk-return desires. Lastly, the strategies implemented by the newly elected government in Japan, including a 2%

inflation target and unlimited asset purchasing, appear to have led to a more positive outlook on Japan amongst

investors, which has resulted in a 9% increase in net demand (from 7% last year to 16% this year).

The most volatile of net demands in the chart above can be seen in Developed Europe. As we have already discussed,

after a significant withdrawal from the region in 2012, we are now seeing increased intentions to allocate in 2013 which

exceed 2011 net demand levels. Even though there remains some uncertainty regarding the longer term outcome of

Europe, investors appear to see significant upside in the region, and fear of missing out on such returns poses risks to

their projected annual returns.

Yearly evolution of net demand across all regions

49%47%

30%

40%

30%

21%

30%

18% 18%21%

23%

16%

10%

34%31%

18%

23%20%

16%

28%

4%

10%7%

1% 2%

35%

42%

14%

22%24%

10%

14%

6%

12%

16%

24%

3%0%

0%

10%

20%

30%

40%

50%

60% 2011 2012 2013


2.3. Where Investors’ Assets Are Likely to Flow in 2013 – by Size

The topic of the consolidation of assets with the biggest funds i.e. “the big getting bigger” has been raging on for a while

now. According to Hedge Fund Research, hedge fund firms with greater than $5 billion in assets have 57.7% of industry

assets at the beginning of 2009. Today, such funds make up 65% of industry assets.

We wanted to investigate whether this bias in flows towards funds with size was reflected in investors’ preference and

ability to invest in funds at various sizes. The results reveal a more nuanced preference for size than reports suggest.

Investors’ interest and ability rises steadily from $1-49 million to $500 million-2 billion, with $100 million representing a

turning point where the investor universe expands significantly. However, when assets expand beyond $2 billion there is

somewhat of a drop in the percentage of investors that report that AUM is irrelevant. It hints at the fact that while for

some investors, the stability that comes with scale is an advantage hence a driver of their flows, for others, size is a

factor to take into consideration depending on the funds’ strategy.

Effect of the following asset sizes on investors’ decision to invest in a fund

17%

19%

30%

37%

39%

30%

25%

18%

33%

53%

56%

54%

44%

32%

34%

31%

14%

6%

6%

23%

5%

32%

18%

4%

1%

1%

3%

6%

0% 20% 40% 60% 80% 100%

US$1-49 million

US$50-99 million

US$100-249 million

US$250-499 million

US$500 million-1.99

billion

US$2-5 billion

>$5 billionAuM irrelevant

Potential interest

Interest only in exceptional

cases

No ability to allocate


II. Return Expectations for 2013

Entering 2013, we asked investors about their return expectations for a range of global markets and hedge fund

strategies. Versus a year ago, our survey shows that investors have clearly gained confidence in risk assets and are less

worried about tail risk events or macro uncertainty. For the time being, there appears to be greater confidence in central

bankers and their ability to avoid deflationary scenarios while keeping rates, equity volatility and correlations at moderate

levels. Given this backdrop and positive performance in 2012, it is perhaps not surprising to see high expectations for

Equity-based strategies in 2013. Indeed, our survey showed that return expectations for global equity markets, Europe

and Emerging Markets were all higher than the year prior.

Investors’ predictions on best performing hedge fund strategies in 2013

When asked what strategy would perform best in 2013, allocators had a clear preference for Long/Short Equity,

choosing the strategy 34% of the time - by far the most popular choice. Emerging Market Equities and Credit–

Structured strategies selected by a 16% and 11% of respondents respectively, after each produced double-digit returns

in 2012 and outperforming Long/Short Equity strategies (as measured by the Dow Jones Credit Suisse Hedge Fund

Index below) by more than 200bps. After recording 27% of the vote in last year’s survey, Global Macro strategies

generally under-performed Event Driven and Fixed Income Arbitrage strategies in 2012, but still recorded 9% of the vote

for best performing strategy in 2013 and remain an important part of investors’ portfolios.

As can be seen in the table below, Hedge Fund performance was largely positive in 2012, (as measured by the Dow

Jones Credit Suisse Broad Hedge Fund Index) with 12 out of 14 strategies producing positive returns and 6 producing

returns greater than 10%. Event Driven Distressed was the top performer, followed closely by Multi-Strategy and Fixed

Income Arbitrage strategies. Managed Futures produced negative returns for the second straight year but still

outperformed the Dedicated Short Biased funds considerably.

Hedge fund performance in 2012

Broad Index 7.67%

Convertible Arbitrage 7.82%

Dedicated Short Bias -20.39%

Emerging Markets 10.28%

Equity Market Neutral 0.85%

Event Driven 10.63%


Distressed 11.77%

Event Driven Multi-Strategy 10.14%

Risk Arbitrage 2.82%

Fixed Income Arbitrage 11.04%

Global Macro 4.58%

Long/Short Equity 8.21%

Managed Futures -2.93%

Multi-Strategy 11.19%

When asked to choose between a range of return scenarios for individual asset classes/regions, investors predicted that

Emerging Market as well as European and US equity markets would outperform all others with average expected

performance of 10.4%, 7.5% and 7.3%, respectively. The greatest expected potential for 10%-plus returns was also

seen in Emerging Markets, followed by Commodities and US Equity markets.

Investors’ predictions on market returns for 2013

With higher expectations for Equities, we have concurrently seen moderating expectations for US Credit markets.

Although 80%+ of respondents predicted that the US credit market will return between 0% and 10% (similar to last

year) 13% of respondents predicted negative performance and only 4% believed US Credit markets would return more

than 10%. Expectations for European Credit are a more varied but have certainly rebounded quickly versus the year prior

with 84% of investors predicting positive performance (versus just 52% last year) and 18% expecting double digit

returns.

Finally, return expectations appear to be more optimistic about the potential for higher hedge fund returns in 2013, with

a forecast of 6.9% average return for the industry versus a forecast of 5.4% at this same time last year." Additionally,

investors continue to believe in the ability of hedge fund allocations to protect capital with none of our respondents

expecting negative returns for the Hedge Fund asset class in 2013.


III. Update on Key Industry Trends and Developments

1. Sources of Risk to the Hedge Fund Industry in 2013

As we asked investors to look down the road in 2013 and try to assess what the biggest risks to the hedge fund industry

might be, they continue to express concern over the inability of some managers to generate uncorrelated alpha in the

current environment. As per our last two surveys, investors are convinced that crowded trades and herd mentality pose

the single biggest threat to the industry, by making it more difficult for Hedge Funds to achieve truly differentiated

performance. That said, as market correlations have declined somewhat over the past few months, 2013 may perhaps

present a better environment for managers to produce differentiated returns, especially in stock picking strategies in

general.

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

2013 2012

20%

23%

28%

32%

33%

39%

41%

51%

60%

65%

55%

54%

57%

57%

49%

44%

20%

12%

17%

14%

10%

5%

10%

5%

0% 20% 40% 60% 80% 100%

Asset/liability mismatches in FoHFs

Asset/liability mismatches in hedge

funds

Hedge funds taking on excessive

betas

Regulatory changes

Attrition in assets due to

underperformance

Counterparty/credit risk

Sovereign default risk

Crowded trades/herd behaviour

Significant risk Somewhat of a risk Negligible risk

13%

13%

13%

16%

18%

22%

37%

38%

41%

48%

54%

56%

64%

56%

50%

55%

49%

51%

47%

46%

33%

30%

23%

27%

31%

23%

14%

11%

12%

6%

0% 20% 40% 60% 80% 100%

Asset/liability mismatches in FoHFs

Sovereign default risk

Counterparty/credit risk

Asset/liability mismatches in hedge

funds

Acceleration in Hedge Fund Closures

Hedge funds taking on excessivebetas

Political uncertainty

Attrition in assets due to

underperformance

Regulatory changes

Crowded trades/herd behaviour

Significant risk Somewhat of a risk Negligible risk

Investors now regard additional regulatory changes as the second biggest threat to the hedge fund industry in 2013,

which is up from the fifth spot last year. This is not surprising, given the ever increasing number of new and proposed

regulations the financial industry faces across many jurisdictions (e.g. Financial Transactions Tax, AIFMD, Basel III, Short

selling restrictions, etc.).

The risk of sovereign default, which has been considered as the second greatest risk for the last two years in a row, has

fallen off dramatically, dropping to ninth place with only 13% of respondents identifying it as a significant

risk. Counterparty/credit risk, also once a primary concern for investors, experienced a sharp decline as well, now

ranking just ahead of the risk of sovereign default. This is somewhat intuitive in the context of the global economy

continuing its slow recovery from the last financial crisis.

Instead, these risks have been now replaced by the risk of underperformance and political uncertainty. While investors

were focused on potential left tail risk events last year, it appears that they now view the risk of underperformance to be

of greater concern in 2013. Similarly, the risks associated with political uncertainty have grown significantly according to

this year's survey, illustrating investor concern over the unsettled political landscape in many parts of the world.


Other potential risks identified by investors included Hedge Funds taking on excessive beta, accelerated hedge fund

closures (impacting capacity), as well as asset/liability mismatches between Hedge Funds and their clients (impacting

liquidity).

2. Appetite for Start-ups

Start-ups continue to generate considerable interest among our survey respondents. Overall demand for start-ups

remains healthy, with appetite declining only marginally year over year. While appetite for start-ups remains healthy,

investors have become more discerning with regards to the organizational quality of the start-ups. Additionally, fees and

terms concessions have increasingly become a prerequisite for investment. As the chart below shows, investors are

increasingly looking for initial fee discounts (which we would attribute to growing demand for founders’ share class).

Although the reasons for investors to participate in seeding/emerging manager activities are varied (e.g. performance,

nimbleness, favourable terms and talent), investors continue to place a high premium on track record, continuity and

pedigree. As the graph below shows, 69% of respondents are theoretically able to invest in a manager with a 3+ year

track record carve-out from an established hedge fund, versus 25% who require some sort of relevant experience but

not necessarily a track record.

Investor appetite for start-ups and yearly evolution in ability to invest day one

25%

26%

14%

15%

28%

30%

20%

17%

47%

52%

38%

26%

61%

61%

51%

38%

65%

67%

56%

39%

3%

6%

11%

10%

5%

9%

13%

13%

6%

14%

22%

23%

6%

14%

24%

28%

6%

13%

20%

30%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

2010

2011

2012

2013

2010

2011

2012

2013

2010

2011

2012

2013

2010

2011

2012

2013

2010

2011

2012

2013

We can theoretically invest on day 1

We can theoretically invest on day 1 only for a fee discount/equity share

New carve-out of 3+

year sub-strategy within

an established multi-strategy hedge fund firm

Start-up manager with 3+ year track record

from another hedge fund

Spin-out of bank prop-trading desk with 3+

year track record

Start-up manager with

directly relevant

investing experience but no explicit track record

Start-up manager with somewhat relevant

investment experience (e.g. in long-only)

Within Day 1 investing, 22% of the respondents in the survey are already active in seeding, and an additional 30% are

interested/considering seeding. Overall, a quarter of institutional intermediaries and end investors that responded to the

survey are active in seeding.


Active or interested in Seeding

In addition to seeding, some investors are also running “Emerging Managers” programs, which invest in managers under

a certain AUM (depending on the region and investor). In exchange for investing in early stage or small funds, investors

receive preferential terms and lower fees, such as founders’ share class terms. Fewer than 10% of our respondents

have an Emerging Manager platform; 8% intend to launch one and 83% have no intention of launching one.

Dedicated Emerging Manager Programmes

The new launch landscape continues to evolve, as start-ups navigate through the dynamic regulatory landscape, rising

management costs and heightened investor requirements. Investors continue to show strong interest in Day 1

investments, as fee and term concessions are increasingly becoming the expected norm.


3. Interest in other formats for investing into Hedge Funds

The landscape of alternatives continues to evolve with new product offerings and innovative structures as managers look

to access new pools of capital and allocators are looking for innovative solutions to help them achieve their risk/return

objectives. The largest increase in this demand appears to be for long only fund structures offered by hedge fund

managers. A full 27% of respondents indicated plans to either begin allocating to the product or increase their current

allocation. Interest for longer dated vehicles was also significant, with 19% of investors planning to increase their

allocations or begin allocations and more than 30% of respondents already invested in the structure.

4. Terms and Fees

Amongst the options available to managers for improving asset/liability matching, fund level gates are viewed most

favorably by investors, with 71% reporting that they are generally able to invest in such funds or that the structure will

have no impact on their investment decision if justified. On the flip side, obligatory side pockets pose the greatest barrier

to investment for investors, with 45% reporting that they will have no interest/ability to allocate should a fund impose

side pockets.


Investors’ views on the following approaches to improving asset/ liabil ity matching

8%

21%

25%

28%

35%

11%

25%

35%

31%

36%

36%

38%

30%

30%

21%

45%

15%

11%

11%

8%

0% 20% 40% 60% 80% 100%

Obligatory Side Pockets

Staggered Redemption

Hybrid Gates

Investor Level Gates

Fund Level Gates

We are generally able to invest

No impact on our decision if clearly justified by asset liquidity

Materially increases the hurdle to invest

No interest/ability to allocate

Investors anticipate hedge fund fees to continue its downward trend across the board. This has often been accompanied

by concessions in exchange for lower fees, such as large tickets and longer liquidity terms. Of note, investors want fees

to be justified by investment performance.

Investor predictions on the hedge fund ‘market standard’ (2/20) fees

6%

32%

62%

0% 20% 40% 60% 80%

Generally unlikely to decrease

Likely to decrease only in specific

situations (large ticket, longer lock-up

etc)

Likely to decrease across the board

Fees continue to be a primary consideration for both investors and managers. Close to half of the respondents

occasionally negotiate fees and almost a quarter always negotiate, often for concessions mentioned above.

Percentage of investors to negotiate fees when making hedge fund investments

9%

27%

42%

21%

0% 20% 40% 60%

Never

Rarely

Sometimes

Always

Over 75% of the respondents would prefer a hurdle rate, with the remainder being indifferent although most are

indifferent to the type of hurdle rate, with a slight preference for a benchmark based over fixed percentage hurdle.


Investor preferences towards managers having hurdle rates

23%

15%

22%

40%

0% 20% 40% 60%

Indifferent

Prefer managers to have a hurdle rate based on a fixedpercentage

Prefer managers to have a hurdle rate based on a

benchmark (e.g. libor)

Prefer managers to have a hurdle rate; indifferent totype

5. Most Significant Developments in 2013

When we asked investors to predict what might be the most significant developments for 2013, the below are common

themes that emerged, ordered by frequency of mentions. What is interesting to note is that themes are similar to what

was predicted by investors for our 2012 survey, encouragingly with a more positive prediction for performance.

Hedge fund closures and consolidation: Like in 2012, the most commonly predicted development by investors for

the hedge fund industry in 2013 was further consolidation and closures. This may be tilted towards high profile manager

closures and managers that decide that they are fed up with running a hedge fund, and prefer to convert their

investments into a family office. Several respondents specifically identified beta driven or underperforming Hedge Funds

as prime candidates for fund closures. With costs increasing for funds and fees under pressure, talented risk takers may

be dissuaded from setting up their funds or smaller hedge fund managers will be forced to consolidate.

Fees and terms: Another overwhelming prediction by our respondents is that there will be continued hedge fund fee

compression. In addition, some respondents have raised the possibility that the standard 2/20 fee structure may be

modified, such as further introduction of hurdles and carry forward loss provisions. Of course, the expectation is that

there will be continued trade-offs for lower fees; namely, larger tickets, longer lock up, early stage investment.

UCITS and other fund structures: We continue to see interest and growth in UCITS vehicles, particularly from our

clients in Europe. Additionally, respondents mentioned increased likelihood of higher demand for managed accounts

particularly in Asia. Also raised is the possibility of increased convergence between Hedge Funds and retail vehicles and

the demand for 40 Act funds. Lastly, given market performance, liquidity and fee considerations, long only vehicles have

also become more of an interest for our respondents.

Performance: Our respondents generally expect funds to perform well in 2013. That said there is some divergence on

the predictions of the strategy that will be the best performer this year – such as L/S Equity, Emerging Market Equities

or Event Driven.

Appetite for new and emerging managers: This has led to respondents generally expecting higher appetite for

emerging managers, given the potential for higher returns, more nimble portfolio management and flexible terms.

Additionally smaller managers can often capitalize on niche strategies which may give them an advantage over their

larger counterparts. In terms of strategies, there were also several mentions for hedge fund managers launching long

only products and predictions for Equity Long /Short remain disputed.

Regulations: The regulatory environment remains dynamic and respondents overwhelmingly expect the regulatory

landscape to continue evolving, irrespective of the regions. Whether it is the continuing transparency or reporting


standards, shorting rules, taxation or country specific regulations such as QFII, the effects of course will be higher

trading, compliance and technology costs.

Other notable predictions made for 2013 include:

Increased transparency throughout the industry, more appetite for illiquid assets, revival of fundamental security selection

and continued focus on potential insider trading violations.

In any case, the hedge fund landscape continues to evolve and 2013 is already shaping up to be an exciting year. We

look forward to continuing our dialogue with you on some of these trends.


IV. Focus on Pensions and Institutions

Public and corporate pensions have increasingly been driving flows for the past several years and we expect to see

continued growth in allocations ahead. This year we focus on pension plans and insurance companies to take a closer

look at the behaviour of this influential group of institutional investors.

1. Institutions are leading flows to Hedge Funds Public pension plans reported the highest on average allocation to Hedge Funds of our investors surveyed. Per the chart

below, public pension plans ranked ahead of all other investor groups with the average dollar amount of capital allocated

to hedge funds.

Allocations to SMHFs in US$ millions

1,800 1,450 370 1,000

463

874

3,075

1,300

2,175

5,275

2,475

138

100 100 80 200 75 104 300 200

250

1,225

173 83

2,037

3,720

376 755

484 1,539

3,427

1,220

1,318

4,064

1,760

120 -

1,000

2,000

3,000

4,000

5,000

6,000 Upper Quartile Lower Quartile Average

SM

HF

inve

stm

ents

today

-U

S$

mill

ions

SM

HF

inve

stm

ents

today

-U

S$

mill

ions

Looking closer, public pension funds reported a wide range of allocations, with the highest cited top end of the range of

all investors surveyed. The median percentage allocation to Hedge Funds is typically 5-8% of an investment portfolio.


Allocation to SMHFs in US$ millions – Pensions and Insurance

2,175

5,275

1,300

250

1,225

200

1,318

4,064

1,220

-

1,000

2,000

3,000

4,000

5,000

6,000

Pension Fund -Private /

Corporate

Pension Fund -Public

InsuranceCompany

Upper Quartile Lower Quartile Average

SM

HF

inve

stm

ents

today

-

Public pension funds are planning to increase the number of hedge fund allocations made in 2013 at a higher rate than

most other investors as seen on the chart below, an increase of 19% above existing allocations.

Number of new hedge fund allocations in 2012/2013

In line with the above trend, public pension plans are expecting to increase their allocations to Hedge Funds more so

than corporate pensions and insurance companies.

Number of new hedge fund allocations in 2012/2013 – Pensions and Insurance

4.4 4.4

5.65.0

5.4 5.5

0.0

2.0

4.0

6.0

8.0

Pension Fund - Private /Corporate

Pension Fund - Public Insurance Company

2012 2013

+12% +19%-2%


Furthermore, pensions have larger average allocations to Hedge Funds than other investors. As visible in the charts

below, both public and corporate pensions allocate significantly larger amounts of capital to Hedge Funds per investment

than do other investors.

Typical allocation size in US$ millions – Initial and long-term target

All

25

50

3 8

25

50

-

20

40

60

80

Typical initial

investment size

Typical long-term

holdings


`

Pension Fund – Private/Corporate Pension Fund – Public

50

75

20 20

60

82

-

20

40

60

80

100

Typical initial

investment size

Typical long-term

holdings


`

200

294

79 79

141 193

-

100

200

300

Typical initial

investment size

Typical long-term

holdings


`

Pension funds typically hold smaller numbers of hedge fund investments in their portfolios than other invesors. Compared

with the rest of the investor universe, they have fewer total allocations.

Total number of distinct SMHF investments within hedge fund portfolios

45

34 41

25 30

45

70

34

15

20

85

16

15 10 10 11 15 18

25

9 5 5

24

4

37 41

29 19 25

41

53

21 17 16

66

13

-

20

40

60

80


SM

HF

inve

stm

ents

today

-

num

ber


As per the graph below, both corporate and public pensions typically have fewer hedge fund investments than do

insurance companies, or other investors as shown above, although a wide range of dispersion does exist.

Total number of distinct SMHF investments within hedge fund portfolios – Pensions and Insurance

2. Institutions’ Objectives for their Hedge Fund Portfolios

Investors look to Hedge Funds for high risk-adjusted returns primarily as well as diversified returns versus equity markets,

as shown in the chart below.

In the context of underfunding that is frequent amongst pensions as well as the challenge of meeting targeted rates of

return using traditional asset classes, Hedge Funds have become part of the solution in the search for consistent returns.

As many plans pay out 60-80% of all benefits out of their investment returns, it is essential to lock in consistent risk-

adjusted returns that can be achieved with Hedge Funds.

Further, since 2008 there has been a meaningful shift away from Equities as plans have de-risked following the

drawdowns post credit crisis. Much of that capital has been redeployed to Alternatives, within which Hedge Funds have

been amongst the largest recipients of capital inflows.

Importance of the following objectives for Institutions’ Hedge Fund Portfolio

23%

35%

46%

72%

73%

68%

51%

43%

25%

25%

9%

14%

11%

4%

2%

0% 20% 40% 60% 80% 100%

Low volatility of returns

Diversified/uncorrelated returns, vs other

hedge fund holdings

High absolute returns

Diversified/uncorrelated returns, vs equity

markets

High risk-adjusted returns

Very important Somewhat important Not important


Per the chart below, a majority of pension investors expect 5-10% target returns from their hedge fund investments.

Somewhat below expectations for the Equities market, these target returns highlight investor focus on risk-adjusted

returns that are diversified from equity markets rather than high absolute returns.

Target Hedge Fund Returns

3. Selection Process and Due Diligence

Per the chart below, the majority of pension plans require AUM to be greater than $250 million before they can invest

and nearly 50% require funds to be $500 million in size. Due to the typically large position sizes highlighted above,

pension plans look to invest in larger managers in order to avoid owning an outsized portion of any particular fund.

However, a subset of pensions that can invest in smaller, more nimble managers does exist.

Minimum AUM that institutional investors require to consider investing

4% 4%

20%

31%

38%

4%

0%

10%

20%

30%

40%

$1-49

million

$50-99

million

$100-249

million

$250-499

million

$500

million-1.99

billion

$2-5 billion

As shown below, the vast majority of pensions take 4-12 months to perform due diligence on a hedge fund manager.

However, oftentimes the investment process can take longer, especially if pensions work with consultants or advisors.

Institutions’ typical lead time for making a hedge fund allocation from first contact


Once a pension fund has made the decision to move forward with an allocation, it is common to negotiate terms. As the

chart below illustrates, management and performance fees are frequently challenged whereas performance hurdles and

“clawbacks” are less frequently contested.

Furthermore, it has become commonplace for pensions to establish strategic partnerships with managers whereby they

receive lowered fees and other preferential treatment in exchange for a high minimum level of invested assets.

How frequently institutions negotiate the following terms

The way that pension plans are allocating to Hedge Funds is changing as more are choosing to invest directly with

managers rather than utilize fund of funds. Much of this can be attributed to the knowledge that institutional investors

have gained from investing through funds of funds over time and a desire to limit fees going forward.

The shift towards direct investments has caused fee compression for fund of funds, and changed the tradition model to

more of an advisory relationship where the fund of funds offering resembles a consultant relationship.

Institutions’ percentage allocation to Hedge Funds via SMHFs (versus FoHFs)

55%61%

0%

20%

40%

60%

80%

Jan-13 Expected Dec

2013

The majority of pension plans utilize consultants for their investment needs and place significant emphasis on the advice

that hedge fund consultants provide. Over the past several years, several consultants have become increasingly popular

and influential. The preferred lists of Hedge Funds that they generate influence the choices of many investors in the

industry. Therefore, consultants are oftentimes seen as the gatekeepers of capital. Per the chart below, the majority of investors rely on hedge fund specialist consultants for advice on their hedge fund

allocations rather than traditional consultants that may have other areas of expertise.


Preference for various types of Advisors/Consultants for purposes of hedge fund investments

Most investors rely on consultants for both investment and operational due diligence, which highlights the importance of

positive ratings in both areas. However, there is a subset of investors that prefers to use consultants only for operational

due diligence, these groups typically have in-house teams to perform investment due diligence. While conclusions may

be reached internally, consultant views may still be influenctial factors on final investment decisions.

Use of Advisors/Consultants for purposes of Investment and Operational due diligence

4. Hedge Funds in the Portfolio

Once a pension decides to allocate capital to a hedge fund, the position is most likely held in a dedicated hedge

fund/alternatives category of the portfolio as per the findings below. However, some pension plans may decide to bucket

some or all of their hedge fund positions into the traditional asset class.


Allocations to Hedge Funds through dedicated Hedge Funds vs. traditional asset class buckets

Depending on the composition of the traditional portfolio, it is fairly common to include certain hedge fund allocations in

the traditional asset class bucket, especially in Equities. Funds that have a long bias with exposure to market beta, for

instance, would be considered prime candidates for inclusion into a traditional asset class category.

As pension funds reduced their Equities positions in the wake of the credit crisis following large drawdowns, some

substituted their Equities holdings with Equities Hedge Funds in their traditional Equities bucket, in order to inject some

downside protection.

Asset classes that investors allocate into traditional asset class buckets

Hedge fund turnover of 8% in pension portfolios is relatively low compared with other investor segments, where the

average percentage of annual turnover is closer to 10%. This can be explained by the nature of the investment process,

which is often dictated by an annual investment meeting during which key portfolio re-balancing decisions are made. The

tendancy for pension plans to turn the portfolio over with less frequency aligns with the prime investment goals shared by

the group to invest for the long-term.

Annual turnover of each investor’s hedge fund portfolio

Average Turnover = 8%




5. Outside of Traditional Hedge Funds

In addition to investing in Hedge Funds, investors cited existing activity in longer-dated vehicles and co-investment

opportunities. These investment vehicles are popular with the pension community given the focus on long-term

investments. Further, twice as much involvement and activity was cited in dedicated emerging manager programmes as

by other investors. Not surprisingly, least interest was reported in equity stakes in funds.

In addition to Hedge Funds, investors are interested in the following

9%

7%

14%

16%

11%

29%

16%

23%

21%

20%

34%

25%

75%

70%

64%

64%

55%

46%

0% 20% 40% 60% 80% 100%

Seeding vehicles

Equity stakes in funds

Yield-oriented products

Dedicated Emerging manager/seedingprogrammes

Co-investment opportunities

Longer dated vehicles (3-5yr)

Already Active Not active but interested Not interested

Of the various means available for investing via a managed account, the use of single manager funds or “funds of one”

as they are otherwise known attracts the largest proportion of active or very interested investors. These arrangements

grant investors special privileges in exchange for locking up capital, putting a significant amount of assets into the fund,

or entering into an early investment arrangement.

As seen below, more interest was cited for funds of one than traditional managed accounts, illustrated by “segregated

accounts in a 3rd-party platform” and “commingled accounts in a 3rd-party platform”. Least interest was reported in

owning a proprietary platform, since this group of investors prefers active management by an outside party.

Institutions’ preferred routes for investing via managed accounts

4%

12%

6%

14%

18%

4%

10%

0%

4%

8%

29%

24%

24%

29%

30%

63%

53%

69%

53%

44%

0% 20% 40% 60% 80% 100%

Commingled accounts in a 3rd-party

platform

Segregated accounts in a 3rd-party

platform

Own proprietary platform

Ad hoc/opportunistic managed accounts

Single investor funds

Already active Very interested Somewhat interested Not interested

The majority of pension plans are either already active or interested in Multi-Strategy Hedge Funds as well as dedicated

advisors and consultants. Funds of funds providing advisory-only services are relatively out of favour amongst the group.


Institutions’ interest in allocating to Hedge Funds via the following vehicles

5%

18%

13%

16%

25%

50%

13%

4%

16%

15%

16%

26%

82%

78%

71%

69%

58%

24%

0% 20% 40% 60% 80% 100%

FoHF providing Advisory-only service

Broad/diversified FoHF's

Niche FoHFs (e.g. credit funds only)

Bespoke/customised FoHFs

Dedicated Advisor/Consultant

Multi-strategy SMHFs



PART 2 – DATA APPENDICES


Appendices Table of Contents

Appendix I – The Participants 35

1. Breakdown of Participants 35

2. Portfolio Characteristics 38

Appendix II – Key Industry Trends and Forecasts 42

1. Forecasts and Risks 42

2. Market Returns 43

3. Appetite for Start-Ups 46

4. Fees and Economics 48

Appendix III – Focus on Pensions and Institutions 50

1. Pension Funds are Leading Flows to Hedge Funds 50

2. Institutions’ Objectives for their Hedge Fund Portfolios 53

3. Selection Process and Due Diligence 54

4. Hedge Funds in the Portfolio 56

5. Outside of Traditional Hedge Funds 57

6. Strategy Preferences 58

Appendix IV – Alternative Routes to Absolute Return 59

1. UCITS/Regulated Funds 59

2. Managed Accounts 60

3. Alternative Investment Formats and Structures 62

Appendix V – Strategy Appetite 63

1. Equity Strategies 65

2. Fixed Income/Derivative Strategies 72

3. Other Strategies 77

Important Information and Disclaimers 90


Appendix I – The Participants

1. Breakdown of Participants

The respondents manage an aggregate $1.034 trillion in Single-Manager Hedge Funds (“SMHFs”).

We had close to 550 responses globally. In order to minimise double-counting of assets, we trimmed our data to 522

unique pools of capital.

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 assets)

Americas represented the largest region by number of respondents and by assets. While Asia-based investors

account for 19% of respondents by number, they account for 5% by AuM.

Breakdown of participants by investor type

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

Institutional FoHFs are the largest sector, making up 25% of respondents by number and 43% by assets. Family

Offices as a group constituted 20% of all respondents, but their chunk of total assets was much smaller, at 5%.

Pension Funds/Insurance Companies are also well represented, making up 12% of respondents by number and also

by assets

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

types into 3 broad categories based on similarities in their behaviour:

“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.

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

End Investors make up the largest category by number (42%); Institutional Intermediaries make up the largest

category by assets (66%).

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

17%

28%

8%

39%

40%

36%

44%

33%

56%

0%

20%

40%

60%

80%

100%

Americas EMEA Asia

End Investors

Institutional

Intermediaries

Retail

Intermediaries

9%

30%

2%

74%

47%

54%

18%23%

44%

0%

20%

40%

60%

80%

100%

Americas EMEA Asia

End Investors

Institutional

Intermediaries

Retail

Intermediaries

Across Americas, EMEA and Asia, Institutional Intermediaries represent 39%, 40% and 36% respectively by number.

By assets, this proportion increases to 74%, 47% and 54% respectively.


Distribution of SMHF AuM of respondents

By investor category

The average amount of assets allocated to Single-Manager Hedge Funds amongst our respondents is $2.04 billion.

42% of respondents have in excess of $500 million invested into SMHFs, and only 16% have less than $50 million.

Institutional Intermediaries have the highest average asset size, with nearly half having more than $1 billion in assets.

End Investors’ SMHF assets are much smaller on average, with an average hedge fund portfolio size of $996 million,

and 18% managing under $50 million.

By investor region

Asia has the highest percentage of smaller investors, 37% having less than $50 million allocated to hedge fund

managers, and 12% having more than $1 billion allocated, whereas 41% of investors in the US have more than $1

billion invested in Hedge Funds.

Average AuM

All: $2,037 million

End Investors: $996 million

Institutional Intermediaries: $3,461million

Retail Intermediaries: $1,471 million

Average AuM

Americas: $3,232 million

EMEA: $1,469 million

Asia: $498 million


2. Portfolio Characteristics

Allocation to SMHFs in US$ millions

1,800 1,450 370 1,000

463

874

3,075

1,300

2,175

5,275

2,475

138

100 100 80 200 75 104 300 200

250

1,225

173 83

2,037

3,720

376 755

484 1,539

3,427

1,220

1,318

4,064

1,760

120 -

1,000

2,000

3,000

4,000

5,000


SM

HF

inve

stm

ents

today

-U

S$

mill

ions

SM

HF

inve

stm

ents

today

-U

S$

mill

ions

The average size of single-manager hedge fund portfolios is $2.04 billion. Family Offices and Bank Treasury or

Proprietary Capital have the smallest portfolios on average, and Public Pensions, Advisors/Consultants and

Institutional FoHFs have the largest.

In this question, we also asked respondents their target allocation to Hedge Funds by year-end (in dollar terms). The

average asset-weighted target increase in SMHF assets is 10.36%.

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

45

34 41

25 30

45

70

34

15

20

85

16

15 10 10 11 15 18

25

9 5 5

24

4

37 41

29 19 25

41

53

21 17 16

66

13

-

20

40

60

80


SM

HF

inve

stm

ents

today

-

num

ber


The average portfolio concentration is 37 investments, which is slightly more concentrated than the average of 39 a

year ago.

On average, Seeders/Incubators and Pensions have the most concentrated portfolios, whereas FoHFs have the

most diversified portfolios.

Typical allocation size in US$ millions, both initially and as a longer-term target

All End Investors

Institutional Intermediaries Retail Intermediaries

The average initial investment size of all respondents is $25 million; however, this typically increases over time by

100% to $50 million.

End Investors have the highest initial investment size at $33 million; however, Institutional Intermediaries have the

highest average long-term holding at $59 million.

Americas EMEA


Asia

Investors in America have the highest average initial investment size at $33 million and also have the highest average

long-term holding at $63million.

Typical annual turnover of different investors’ portfolios

(Ranked in order of average turnover)

The average turnover of a typical hedge fund portfolio is 11% per annum.

FoHFs appear to have the highest turnover, redeeming on average approximately 13% of holdings per year.

Pensions redeem on average 8% of holdings in a typical year.


Typical annual turnover by region

(Ranked in order of average turnover)

25%

14%

17%

17%

22%

25%

37%

30%

33%

35%

30%

32%

14%

18%

14%

16%

6%

7%

3%

5%

0% 20% 40% 60% 80% 100%

Asia

EMEA

Americas

All

<5% 5%-10% 10%-15% 15%-20% >20%





There is marginal difference in the average number of funds redeemed per year across the regions, with Europe and

Asia having a slightly lower average number of redemptions per year than the US.


The average number of new investments respondents expect to make in 2013 is 6.7, which is marginally higher than

the number made in 2012.


Appendix II – Key Industry Trends and Forecasts

1. Forecasts and Risks

Hedge Fund Industry AuM Forecast

2.50

2.30

2.2

2.42

2

2.3

2.6

(US

$ t

rn)

Upper Quartile

Lower Quartile

Average

10.1%

`

31-Dec-2012 31-Dec-2013

We asked investors for their forecast of total hedge fund industry assets by the end of 2013, assuming the industry

ended 2012 with $2.2 trillion in assets. Investors predict a 10.1% increase in industry assets to $2.42 trillion, with a

lower quartile of $2.30 trillion and an upper quartile of $2.50 trillion.

Allocation to cash as a percentage of FoHFs’ overall portfolios

Fund of Hedge Funds increased their average cash allocation from 6% at the beginning of last year to 5% at the

beginning of this year. This level is 2% above their long-term target cash allocation.


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

2013 2012

Just as in our last two surveys, investors are convinced that crowded trades and herd mentality pose the single

biggest threat to the industry, by making it more difficult for Hedge Funds to achieve truly differentiated performance.

In addition, investors now regard additional regulatory changes as the second biggest threat to the hedge fund

industry in 2013, which is up from the fifth spot last year.

The risk of sovereign default, which was the second greatest risk for the last two years in a row, and

counterparty/credit-risk which was the third greatest risk last year, have fallen off dramatically, dropping to tenth and

ninth place respectively with only 13% of respondents identifying each as significant risks.

Other potential risks identified by investors included Hedge Funds taking on excessive beta, accelerated hedge fund

closures (impacting capacity), as well as asset/liability mismatches between Hedge Funds and their clients (impacting

liquidity.

2. Market Returns

Investors’ predictions on market returns for 2013


Average return prediction – by market type

On average, investors predict markets to return between 2.9% and 10.4% this year, with investors most optimistic

about Equity markets across regions, predicting Equity markets to return between 7.3% and 10.4% this year.

Credit Markets, particularly European and US, have the lowest predicted returns; however 80% of respondents

predicted that the US credit market will return between 0% and 10%, while 84% predicted European credit would

have positive performance.

Return expectations for Hedge Funds in 2013 appear optimistic, forecasting 6.9% versus a forecast of 5.4% last

year, with no investors expecting negative returns in the year.

Investors’ predictions on best performing hedge fund strategies in 2013

The most number of investors (34%) predict that Long/Short Equity will be the top performing strategy this year,

while the least number predict that Dedicated Short-Biased


Investors’ predictions on best performing hedge fund strategies in 2013 – by investor type

Investors’ predictions on best performing hedge fund strategies in 2013 – by region

By investor type, there are slight discrepancies within almost all strategies: Retail Intermediaries are slightly more

bullish than other investor types on Long/Short Equity and Managed Futures, however, less bullish on Global Macro,

a reversal from last year, and Credit-Structured.

By region, there is not a great deal of dispersion within each strategy, though US investors are slightly more bullish

on Emerging Markets and Event-Driven, while investors from Asia are slightly more bullish on Multi-Strategy.

Investors from EMEA are on par with the average across the regions, and are particularly bullish on Long/Short

Equity and Managed Futures.


3. Appetite for Start-Ups

Yearly evolution in ability to invest on day one

25%

26%

14%

15%

28%

30%

20%

17%

47%

52%

38%

26%

61%

61%

51%

38%

65%

67%

56%

39%

3%

6%

11%

10%

5%

9%

13%

13%

6%

14%

22%

23%

6%

14%

24%

28%

6%

13%

20%

30%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

2010

2011

2012

2013

2010

2011

2012

2013

2010

2011

2012

2013

2010

2011

2012

2013

2010

2011

2012

2013

We can theoretically invest on day 1

We can theoretically invest on day 1 only for a fee discount/equity share

New carve-out of 3+

year sub-strategy within

an established multi-

strategy hedge fund

firm


3+ year track record

from another hedge

fund

Spin-out of bank prop-

trading desk with 3+

year track record


directly relevant

investing experience but

no explicit track record


somewhat relevant

investment experience

(e.g. in long-only)

Effect of the following track records on investor’s decision to invest

15%

17%

17%

26%

38%

39%

5%

7%

7%

16%

22%

24%

4%

6%

6%

7%

6%

5%

34%

36%

36%

36%

26%

23%

41%

34%

34%

15%

8%

8%

0% 20% 40% 60% 80% 100%

Start-up manager with somewhat relevant investment

experience (e.g. in long-only)

Start-up manager with directly relevant investing experience

but no explicit track record

Start-up manager with directly relevant investing experience

but no explicit track record

Spin-out of bank prop-trading desk with 3+ year track record

Start-up manager with 3+ year track record from another

hedge fund

New carve-out of 3+ year sub-strategy within an established

multi-strategy hedge fund firm

Can invest on day 1 Can invest on day 1 only for a fee discountCan invest on day 1 only for a revenue share or equity stake Can only invest 12 months post-launchCan only invest 36 months post-launch

69% of respondents are able to invest in a manager with a 3+ year track record carve-out from an established hedge

fund, versus 25% of respondents for managers who have somewhat relevant investment experience and no explicit

track record.


Active or interested in Seeding

22%

30%

48%

26%

32%

42%

25%

29%

47%

14%

27%

59%

0%

10%

20%

30%

40%

50%

60%

Already active Not active but interested Not interested

All End Investors

Institutional Intermediaries Retail Intermediaries

Within Day 1 investing, 22% of the respondents in the survey are already active in seeding, and an additional 30%

are interested/considering seeding. Overall, a quarter of institutional intermediaries and end investors that responded

to the survey are active in seeding.

Dedicated Emerging Manager programmes

9% 8%

83%

8%3%

89%

8%

13%

78%

11%

6%

83%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Yes No, but we intend to

launch one

No, and we do not intend

to launch one

All End Investors Institutional Intermediaries Retail Intermediaries

Within Day 1 investing, Fewer than 10% of investors have an Emerging Managers platform, with only 8% looking

intending to launch one.


4. Fees and Economics

Investors’ views on the following approaches to improving asset/ liabil ity matching

8%

21%

25%

28%

35%

11%

25%

35%

31%

36%

36%

38%

30%

30%

21%

45%

15%

11%

11%

8%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Obligatory Side Pockets

Staggered Redemption

Hybrid Gates

Investor Level Gates

Fund Level Gates

We are generally able to invest

No impact on our decision if clearly justified by asset liquidity

Materially increases the hurdle to invest

No interest/ability to allocate

Investor predictions on the hedge fund ‘market standard’ (2/20) fees

Investors anticipate fees to continue its downward trend with 62% of respondents predicting that the standard 2/20

fee structure will likely decrease across the board.


Percentage of investors to negotiate fees when making hedge fund investments

Fees continue to be a primary consideration for both investors and managers. Close to half of the respondents

occasionally negotiate fees and almost a quarter always negotiate.

Investor preferences to managers having hurdle rates

77% of investors prefer managers to have a hurdle rate. The majority are indifferent to the type of hurdle rate (40%)

however, 22% preferred a hurdle rate based on a benchmark as opposed to a fixed percentage.


Appendix III – Focus on Pensions and Institutions

1. Pension Funds are Leading Flows to Hedge Funds

Public pension plans reported allocating an average of $4.1billion to Hedge Funds, a higher total than any other

investor type. Further, the top end of the range at $5.3 billion is also the highest allocation cited of all investors.

Allocations to SMHFs in US$ millions

1,800 1,450 370 1,000

463

874

3,075

1,300

2,175

5,275

2,475

138

100 100 80 200 75 104 300 200

250

1,225

173 83

2,037

3,720

376 755

484 1,539

3,427

1,220

1,318

4,064

1,760

120 -

1,000

2,000

3,000

4,000

5,000


SM

HF in

vest

ments

today

-U

S$

mill

ions

SM

HF in

vest

ments

today

-U

S$

mill

ions

Within the pension and insurance segment of investors, public pension plans have the highest reported allocations to

Hedge Funds, with a range of $1.2 billion to $5.3 billion and an average of $4.1 billion.

Allocation to SMHFs in US$ millions – Pensions and Insurance

2,175

5,275

1,300

250

1,225

200

1,318

4,064

1,220

-

1,000

2,000

3,000

4,000

5,000

6,000

Pension Fund -Private /

Corporate

Pension Fund -Public

InsuranceCompany


SM

HF

inve

stm

ents

today

-


Public pension funds planned to increase the number of hedge fund allocations made in 2013 at a higher rate than

most other investors as seen on the chart below, an increase of 19% above existing allocations.


Public pension plans expected to increase their allocations to Hedge Funds more so than corporate pensions and

insurance companies, at a rate of 19% rather than 12% and -2%, respectively.

Number of new hedge fund allocations in 2012/2013 – Pensions and Insurance

4.4 4.4

5.65.0

5.4 5.5

0.0

2.0

4.0

6.0

8.0

Pension Fund - Private /Corporate

Pension Fund - Public Insurance Company

2012 2013

+12% +19%-2%


Public plans allocated $141 million on average initially and $198 million long-term, corporate plans allocated $50

million on average initially and $75 million long-term, while the consolidated average of all investors is $25 million

initially and $50 million long-term.

Typical allocation size in US$ millions – Initial and long-term target

All

25

50

3 8

25

50

-

20

40

60

80

Typical initial

investment size

Typical long-term

holdings


`

Pension Fund – Private/Corporate Pension Fund – Public

50

75

20 20

60

82

-

20

40

60

80

100

Typical initial

investment size

Typical long-term

holdings


`

200

294

79 79

141 193

-

100

200

300

Typical initial

investment size

Typical long-term

holdings


`

Compared with the rest of the investor universe, pension plans had fewer total allocations, with 16 on average for

public plans and 15 on average for corporate plans.

Total number of distinct SMHF investments within hedge fund portfolios

45

34 41

25 30

45

70

34

15

20

85

16

15 10 10 11 15 18

25

9 5 5

24

4

37 41

29 19 25

41

53

21 17 16

66

13

-

20

40

60

80


SM

HF

inve

stm

ents

today

-

num

ber


Corporate and public pensions typically had fewer hedge fund investments than did insurance companies, with

averages of 15 and 20 investments, respectively, while insurance companies had an average of 21 investments.

Total number of distinct SMHF investments within hedge fund portfolios – Pensions and Insurance

2. Institutions’ Objectives for their Hedge Fund Portfolios

The top priorities as ranked by investors were high risk-adjusted returns and diversified returns versus equity markets,

with 73% and 72% of respondents ranking the goals as very important, respectively.

Importance of the following objectives for Institutions’ Hedge Fund Portfolio

23%

35%

46%

72%

73%

68%

51%

43%

25%

25%

9%

14%

11%

4%

2%

0% 20% 40% 60% 80% 100%

Low volatility of returns

Diversified/uncorrelated returns, vs other

hedge fund holdings

High absolute returns

Diversified/uncorrelated returns, vs equity

markets

High risk-adjusted returns

Very important Somewhat important Not important

73% of pension investors expected target returns of 5-10% from their hedge fund investments.

Target Hedge Fund Returns


3. Selection Process and Due Diligence

31% of pension plans and insurance companies required AUM to be greater than $250 million before they can invest

and nearly 50% required funds to be $500 million in size.

Minimum AUM that institutional investors require to consider investing

Nearly 80% of pension plans reported taking 4-12 months to perform due diligence on a hedge fund manager.

Institutions’ typical lead time for making a hedge fund allocation from first contact

Once a pension fund has made the decision to move forward with an allocation, it is common to negotiate terms.

43% of pension plans reported always negotiating performance fees, and 42% reported always negotiating

management fees.

How frequently institutions negotiate the following terms


A recent trend highlights the shift away from fund of funds towards direct investment. The percentage allocation of

direct allocations to Hedge Funds looked to shift from 55% to 61% on average by the end of 2013.

Institutions’ percentage allocation to Hedge Funds via SMHFs (versus FoHFs)

55%61%

0%

20%

40%

60%

80%

Jan-13 Expected Dec

2013

The majority of investors (79%) relied on hedge fund specialist consultants for advice on their hedge fund allocations

rather than traditional consultants that may have other areas of expertise (14%).

Preference for various types of Advisors/Consultants for purposes of hedge fund investments

Most investors relied on consultants for both investment and operational due diligence (79%), while some (14%)

relied on consultants for operational due diligence only.

Use of Advisors/Consultants for purposes of Investment and Operational due diligence


4. Hedge Funds in the Portfolio

70% of hedge fund positions were held in dedicated hedge fund/alternatives buckets, while 21%held at least some

hedge fund positions in traditional asset class buckets.

Allocations to Hedge Funds through dedicated hedge fund vs. traditional asset class buckets

Of those pension funds and insurance companies that allocate into traditional asset class buckets, 50% did so with

both Equities and fixed income Hedge Funds whereas 38% did so only with Equities funds.

Asset classes that investors allocate into traditional asset class buckets

Hedge fund turnover of 8% in pension portfolios was relatively low compared with other investor segments, where

the average percentage of annual turnover was closer to 10%.

Annual turnover of each investor’s hedge fund portfolio





5. Outside of Traditional Hedge Funds

In addition to investing in Hedge Funds, investors cited existing activity in longer-dated vehicles and co-investment

opportunities. 29% of pension plans were already active in longer-dated vehicles and 25% cited interest. Further,

more interest was cited in dedicated emerging manager programs than from other investor types with 36% of the

segment citing existing allocations or interest.

In addition to Hedge Funds, investors are interested in the following

9%

7%

14%

16%

11%

29%

16%

23%

21%

20%

34%

25%

75%

70%

64%

64%

55%

46%

0% 20% 40% 60% 80% 100%

Seeding vehicles

Equity stakes in funds

Yield-oriented products

Dedicated Emerging manager/seeding

programmes

Co-investment opportunities

Longer dated vehicles (3-5yr)


Of the various means available for investing via a managed account, the use of single manager funds or “funds of

one” as they are otherwise known attracted the largest proportion of active or very interested investors with 18%

already active and 8% showing interest.

Institutions’ preferred routes for investing via managed accounts

4%

12%

6%

14%

18%

4%

10%

0%

4%

8%

29%

24%

24%

29%

30%

63%

53%

69%

53%

44%

0% 20% 40% 60% 80% 100%

Commingled accounts in a 3rd-party

platform

Segregated accounts in a 3rd-party

platform

Own proprietary platform

Ad hoc/opportunistic managed accounts

Single investor funds

Already active Very interested Somewhat interested Not interested

The majority of pension plans were either active or interested in multi-strategy Hedge Funds, 50% of pension plans

and insurance companies were active in multi-strategy SMHFs and 26% showed interest. Also popular were

dedicated advisors/consultants with roughly 40% of pension plans citing existing investments or interest.


Institutions’ interest in allocating to Hedge Funds via the following vehicles

5%

18%

13%

16%

25%

50%

13%

4%

16%

15%

16%

26%

82%

78%

71%

69%

58%

24%

0% 20% 40% 60% 80% 100%

FoHF providing Advisory-only service

Broad/diversified FoHF's

Niche FoHFs (e.g. credit funds only)

Bespoke/customised FoHFs

Dedicated Advisor/Consultant

Multi-strategy SMHFs


6. Pensions and Institutions’ Strategy Preferences

For Pensions and Insurance groups, the top 3 most sought after strategies are Credit - Relative Value, Event Driven and

Credit – ABS/Structured Credit. Long/Short Equity, which is ranked first by the universe surveyed is ranked 10th by

Pensions and Insurance groups

All principal strategies, ranked by current net demand – Pensions and Insurance

31%

25% 24%23% 23%

19% 18% 18%

14% 13%

10% 10% 9% 9% 9%

6% 6%4% 4% 4%

2%0% 0%

-2%-4% -4% -4% -4% -4%

-6%-8%-10%

0%

10%

20%

30%

40%


Appendix IV – Alternative Routes to Absolute Return

1. UCITS/Regulated Funds

Year-on-year comparison of appetite for UCITS Hedge Funds

The percentage of investors with some level of activity in UCITS Hedge Funds has increased to 21% this year, from

20% last year.

Appetite for UCITS Hedge Funds – by investor type

Retail Intermediaries have the most active interest in UCITS, with 32% planning to increase allocations, versus 6%

for End Investors.

Percentage active in 2012 = 20% Percentage active in 2013 = 21%

2012 2013


Appetite for UCITS Hedge Funds – by region

European investors are the most active in UCITS, with 32% planning to increase their allocation, versus 3% of

investors in the Americas.

2. Managed Accounts

Year-on-year comparison of appetite for managed accounts

The percentage of investors with some level of activity in managed accounts has increased to 35% this year, from

26% last year.

Percentage active in 2012 = 26% Percentage active in 2013 = 35%

2012 2013


Appetite for managed accounts – by investor type

There is a fairly even distribution of managed account appetite among investor types, although a slightly higher than

average proportion of Institutional Intermediaries plan both to increase and maintain allocations this year (24% and

21% respectively)

Appetite for managed accounts – by region

Breaking managed account appetite down by region, the distribution is fairly even, with no major shifts from the

average.


3. Alternative Investment Formats and Structures

Other formats investors’ absolute-return investments can take

2012 highlighted over 70% of respondents had no allocation and no plan to allocate for all alternative formats.

However, this year indicates more interest in alternative formats with plans to increase current allocation in long only

funds offered by Hedge Fund managers to 15% versus 4% last year.


Appendix V – Strategy Appetite

All principal strategies, ranked by current net demand



Yearly evolution of net demand across main strategies


1. Equity Strategies

Long/Short Equity – General

Long/Short Equity – Trading

Percentage actively increasing or considering increasing allocations: 42%

Net percentage actively increasing or considering increasing allocations: 35%




Long/Short Equity – Fundamental

Long/Short Equity – Short-Biased




Net percentage actively increasing or considering increasing allocations: -7%


Equity Market Neutral – Quantitative

Equity Market Neutral – Fundamental






Equity Sector – General

Equity Sector – Natural Resources






Equity Sector – Financials

Equity Sector – Real Estate






Equity Sector – TMT

Equity Sector – Consumer/Retail






Equity Sector – Utilities




2. Fixed Income/Derivative Strategies

Fixed Income Arbitrage/Relative Value

Convertible Bond Arbitrage






Convertible Bond Arbitrage – Long-Only

Credit – Multi-Strategy


Net percentage actively increasing or considering increasing allocations: -2%




Credit – Relative Value

Credit - ABS/Structured Credit






Credit – Leveraged Loans/High Yield

Global Macro - Discretionary






Global Macro - Systematic

CTA/Managed Futures






3. Other Strategies

Event-Driven – General

Event-Driven – Distressed






Event-Driven – Risk Arbitrage

Emerging Markets – Equity






Emerging Markets – Fixed Income/Credit

Multi-Strategy






Commodity Strategies

Environment, Social and Governance (Socially Responsible Investing) Strategies






4. By Geographic Focus

All principal geographies, ranked by current net demand



Yearly evolution of net demand across all regions

49%47%

30%

40%

30%

21%

30%

18% 18%21%

23%

16%

10%

34%31%

18%

23%20%

16%

28%

4%

10%7%

1% 2%

35%

42%

14%

22%24%

10%

14%

6%

12%

16%

24%

3%0%

0%

10%

20%

30%

40%

50%

60% 2011 2012 2013


5. Regional Breakdown

Global

North America






Developed Europe

Emerging Markets






Asia-Pacific

Country-Specific Funds in General






Greater China

Japan






India

UK






Eastern Europe/CIS

Latin America






Africa/MENA




Important Information and Disclaimers

This document is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident

of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use

would be contrary to law or regulation or which would subject Credit Suisse or its subsidiaries or affiliates (collectively

“CS”) to any registration or licensing requirement within such jurisdiction. All trademarks, service marks and logos used in

this document are trademarks or service marks or registered trademarks or service marks of CS. CS disclaims any and

all liability relating to these materials, including, without limitation, any express or implied representations or warranties for

statements or errors contained in, or omissions from, these materials. The information and material presented here are

provided to you for informational purposes and is intended for your use only. Nothing in this document constitutes

investment, legal, accounting or tax advice, or a representation that any investment or service is suitable or appropriate to

your individual circumstances, or otherwise constitutes a personal recommendation to you. This document is not to be

relied upon in substitution for the exercise of independent judgement. Additional information is, subject to duties of

confidentiality, available on request.

Copyright ©2013 CREDIT SUISSE GROUP and/or its affiliates. All rights reserved.

Economy & Finance

Credit suisse 2013 investor survey report final