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For more information contact: [email protected] Dominique Grandchamp, CFA Senior Investment Consultant at Mercer (Switzerland) SA delivered his presentation titled "Gauging Institutional Interest and the Role of Regulated Investment Funds in a Post Crisis World - Presentation: Dominique Grandchamp" at the marcus evans European Pensions and Investments Summit Join the 2015 Summit along with leading regional pension investors and global asset managers in an intimate environment for a focused discussion of key new drivers shaping institutional investment strategies today. For more information contact: [email protected]
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www.mercer.com
Gauging Institutional Interest and the Role of Regulated Investment Funds in a Post Crisis World
04 October 2011
Dominique Grandchamp, CFASenior Investment ConsultantMercer (Switzerland) [email protected]+41 22 918 10 15
2Mercer
Agenda
2) The Present - Where is the Performance?2) The Present - Where is the Performance?
3) The Future - How to invest in Hedge Funds?3) The Future - How to invest in Hedge Funds?
4) Ucits Hedge Funds Growth4) Ucits Hedge Funds Growth
1) The Past - Hedge Funds in a Less Regulated World1) The Past - Hedge Funds in a Less Regulated World
5) Conclusions5) Conclusions
3Mercer
The Past - Hedge Funds in a Less Regulated WorldWhat Hedge Funds Have to Do Better….
Black boxes (lack of transparency)
Operational and investment risks– Counterparty– Concentration– Leverage
Valuation independence
Liquidity mismatch
Remoteness and lack of regulation of offshore domiciles
Limited asset control and weak corporate governance
Stronger correlation with markets than advertised and expected
4Mercer
Agenda
2) The Present - Where is the Performance?2) The Present - Where is the Performance?
3) The Future - How to invest in Hedge Funds?3) The Future - How to invest in Hedge Funds?
4) Ucits Hedge Funds Growth4) Ucits Hedge Funds Growth
1) The Past - Hedge Funds in a Less Regulated World1) The Past - Hedge Funds in a Less Regulated World
5) Conclusions5) Conclusions
5Mercer
The Present – Where is the Performance?Example: Switzerland’s Pension Fund System
Cash
Bonds35%
Equities
30%
Real Estate 20%
Commodities, HFs, PE
8% 7%
6Mercer
The Present – Where is the Performance?Example: Performance last 10 years
Cash
Bonds
Equities
Real Estate
Alternatives
Liabilities
1%
4%
0%
3.5%5%
3%
7Mercer
The Present – Where is the Performance?Example: Low Yield on Bonds
1.50
2.43
3.79
5.67
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
Dec-
00
Dec-
01
Dec-
02
Dec-
03
Dec-
04
Dec-
05
Dec-
06
Dec-
07
Dec-
08
Dec-
09
Dec-
10
YT
M (
%)
SBI AAA-BBB Global Agg Global Agg Corp Global EM
8Mercer
The Present – Where is the Performance?Challenges ahead…
Yield on bonds < Liability growth
Uncertain performance of equities coupled with high volatility
Look at more defensive, absolute return strategies
9Mercer
Agenda
2) The Present – Where is the Performance?2) The Present – Where is the Performance?
3) The Future – How to Invest in Hedge Funds?3) The Future – How to Invest in Hedge Funds?
4) Ucits Hedge Funds Growth4) Ucits Hedge Funds Growth
1) The Past - Hedge Funds in a Less Regulated World1) The Past - Hedge Funds in a Less Regulated World
5) Conclusions5) Conclusions
10Mercer
The Future – How to invest in Hedge Funds?Take into account Investor Expectations Post-2008
Liquidity
Transparency
Regulatory Oversight + Onshore Domiciles
Asset Control + Security
Tax Efficiency
Performance and preference for low volatility (defensiveness)
11Mercer
Embed defensiveness in the equity bucket…
… so as to reduce the overall risk
The Future – How to invest in Hedge Funds?Hedge Funds increase Defensiveness
Low Volatility
Small Cap
Broad market
strategies Emerging Markets
Defensive Strategies
SmallCap
IndexedEquities Emerging
Markets
Performance Drivers
12Mercer
The Future – How to invest in Hedge Funds?Hedge Funds increase Defensiveness
Index-Strategies (MSCI World)
Beta =1
0 0.25 0.5 0.75 1 1.25 1.5
Beta
Beta > 1
• Emerging Markets
• Small CapsE
qu
ity
Str
ateg
ies
Beta < 1
• Minimum Variance-Strategies
• Quality +YieldStrategies
• Absolute Return
Strategies
Expand the in
vestable universe
13Mercer
The Future – How to invest in Hedge Funds?Hedge Funds increase Defensiveness
Heuristic(Fundamental Indexing) Quality Strategies
Optimized(Minimum Volatility)
Absolute ReturnVariable Bias
DefensiveStrategies
IndexedStrategies
ActiveManagers
14Mercer
The Future – How to invest in Hedge Funds?Hedge Funds increase Defensiveness
CTAs
Global Macro
Relative Value
Long/Short Equity
Equities
15Mercer
Long-only Funds
Offshore Hedge Funds + FoFs
Onshore Hedge Funds(SIFs)
1 2
3
4 Mandates+Managed Account
Platforms
5Ucits Hedge Funds
6Indices+Replication
The Future – How to invest in Hedge Funds?Old and New Access Points
16Mercer
The Future – How to invest in Hedge Funds? The Great Convergence
Long-only Ucits IIIMandates
+ MacsOnshore HFs
(XIFs)Offshore HFs
Liquidity High High High Medium Low
Transparency Medium Medium High Medium Medium
Asset Control Medium Medium High Low Low
Tax Efficiency High High Low Medium Low
Low Beta Low Medium High High High
Regulatory oversight High High Low High Low
Benchmark awareness High Medium Low Low Low
Trend towards absolute returnIncreasingly benchmark-agnostic
Trend towards “onshorisation”Preference for liquidity and transparency
Long-only Ucits IIIManaged Accounts
Onshore HFs Offshore HFs
17Mercer
The Future – How to invest in Hedge Funds?Which Access Point for Whom?
Banks
PensionPlans
Insurance
FamilyOffice
FATCA
LPCC UCIT
S
Solven
cy
AIFM
D
18Mercer
The Future – How to invest in Hedge Funds?Which Access Point for Whom?
Onshore, Ucits III Offshore HFs
Family Office Banks Insurance Pension Plans F,D,I,S,P Pension Plans CH, UK, Holland, Nordics
19Mercer
The Future – How to invest in Hedge Funds?UCITS Drivers…
Factors which will drive the further development of Ucits Hedge Funds:
Wealth Management / Retail Distribution– Regulatory pressure– Search for tax efficiency– Distribution efficiency (Ucits IV)– Investor preference for liquidity
Institutional Investors– Regulation in some EU jurisdictions– Growing acceptance from early adopters– Search for yield, absolute return, defensiveness in liquid+regulated format– Size of investable universe (length of track record and AuM)
20Mercer
The Future – How to invest in Hedge Funds?EU goes UCITS….
21Mercer
The Future – How to invest in Hedge Funds?Who does not love UCITS???
22Mercer
The Future – How to invest in Hedge Funds?Who loves UCITS???
23Mercer
Agenda
2) The Present – Where is the Performance?2) The Present – Where is the Performance?
3) The Future – How to invest in Hedge Funds?3) The Future – How to invest in Hedge Funds?
4) Ucits Hedge Funds Growth4) Ucits Hedge Funds Growth
1) The Past - Hedge Funds in a Less Regulated World1) The Past - Hedge Funds in a Less Regulated World
5) Conclusions5) Conclusions
24Mercer
Ucits Hedge Funds Growth 750+ Ucits Hedge Funds Up and Running
# Funds # New Launches
Source: Absolute Return
25Mercer
Ucits Hedge Funds Growth120 Billion EUR AuM reached
Source: Absolute Return
26Mercer
Ucits Hedge Funds GrowthLength of Track Record
55%
30%
15%
Short (< 2y)
Medium (2-5y)
Long (>5y)
Length of track record (years)
27Mercer
Ucits Hedge Funds GrowthFund AuM (EUR)
< 50 MM 50%
50-200 MM 30%
> 200 MM 20%
28Mercer
Ucits Hedge Funds GrowthRisks
Performance expectations of investors (less leverage + illiquidity)
Higher beta rather than alpha generation
High barriers to entry for entrepreneurial ventures
Counterparty risks and hidden fees (total return swaps)
Corporate governance issues remain (related parties + directors)
Regulatory oversight (NOT regulatory protection)
Lower due diligence standards applied by investors
29Mercer
Agenda
2) The Present – Where is the Performance?2) The Present – Where is the Performance?
3) The Future – How to invest in Hedge Funds?3) The Future – How to invest in Hedge Funds?
4) Ucits Hedge Funds Growth4) Ucits Hedge Funds Growth
1) The Past - Hedge Funds in a Less Regulated World1) The Past - Hedge Funds in a Less Regulated World
5) Conclusions5) Conclusions
30Mercer
Conclusions
Ucits and onshore Hedge Funds will continue to grow
Convergence with long-only products
Lower performance than in the past, defensiveness is welcome
Institutional interest is taking off in selected jurisdictions
Fund of Hedge Funds model challenged and struggling
Stick to a robust due diligence process
Traditional Hedge Funds remain to capture illiquidity premium
www.mercer.com
Dominique Grandchamp
Mercer (Switzerland) SAAvenue Reverdil 8-10
1260 NyonSwitzerland
+41 22 918 10 [email protected]
www.mercer.com