Investment trends in the global hedge fund
business
Antoine Massad – CEO, Man Investments Middle East Limited
May 2006
A member of the Man Group
Important notes
This document is not an invitation to make an investment in any product to which Man Investments
Limited (or any other member of Man Group plc’s group of companies) provides investment advisory or
any other services, nor does it constitute an offer for the sale or purchase of bonds (or any other
instruments) issued by any entity.
Information contained herein is provided from the Man database except where otherwise stated.
Potential investors should note that alternative investments can involve significant risks and the value of
an investment may go down as well as up. There is no guarantee of trading performance and past or
projected performance is not necessarily a guide to future results.
This material is communicated by Man Investments Limited, which is authorised and regulated by the
Financial Services Authority.
This material is only to be communicated to investment professionals, market counterparties or
intermediate customers and must not be relied upon by any other person.
www.maninvestments.com
2
Three broad themes
•
Growth and consolidation of the hedge fund industry
•
Shifting client need
•
New styles, strategies and sources of alpha
3
Projected growth of the global hedge fund industry
FYI: This chart is updated to 31 Dec 2004
20000
Number of hedge funds
Projected number of hedge funds – 20% growth p/a
Projected number of hedge funds – 10% growth p/a
Hedge fund assets
2500
Projected hedge fund assets – 20% growth p/a
15000
Hedge fund attrition rate1
3000
25000
2000
Projected hedge fund assets – 10% growth p/a
1500
10000
1999
4.7 %
2000
6.4 %
2001
4.3 %
2002
3.8 %
2003
5.3 %
2004
5.3 %
5000
500
0
0
USD bn
Number of funds
1000
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: Hedge Fund Research, Inc (HFRI).
Please note that from 2005 to 2010 the chart
Take this disclaimer
shows a projection of how the number of funds
and hedge fund assets may increase. The lower
projection shows a 10% increase and the upper projection
a 20% increase in the number of fund and hedge fund assets
each year from 2004. Please note that as at 31 December 2004,
the actual number of funds is 7,436 and the hedge fund assets is
USD 973 billion.
Source: Hedge Fund Research, Inc. (HFRI) and Hennessee Group LLC. Please note that from 2006 to 2010 the chart shows a projection of how the number of funds and hedge fund assets may increase. The lower projection shows
a 10% increase and the upper projection a 20% increase in the number of fund and hedge fund assets each year from 2002. Please note that as at 31 December 2005, the actual number of funds is 8,664 and the hedge fund assets
is USD 1,105 billion. 1Please note the hedge fund attrition rates are for the Hennessee Hedge Fund Index.
4
Average assets per hedge fund
2D Graph 1
140
•
Since 1997 average assets per
hedge fund around the USD 120
million mark
•
Steady continuous growth for the
last 9 years
120
100
80
60
20
0
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
USD mn
40
Source: HFR Industry Report.
5
…But is it a two way street
Life time of hedge funds that ceased reporting
1978 to 2005
Year
Funds closed
2005
335
2004
348
2003
287
2002
261
2001
272
500
400
300
Number of funds
200
100
0
1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Life time in years
Source: Man database and TASS Research.
Please note that 2486 hedge funds were used in this analysis.
6
Industry size in context
Rank
Manager
Country
Total assets
(USD millions)
1.
UBS
Switzerland
1,975,000
2.
Allianz Group
Germany
1,459,323
3.
Barclays Global Investors
UK
1,361,949
4.
State Street Global Advisors
US
1,354,330
5.
Fidelity Investments
US
1,286,107
6.
AXA Group
France
1,185,316
7.
Crédit Suisse
Switzerland
1,078,815
8.
Capital Group
US
1,020,952
 Top 20 managers = USD 18.2 trillion
Source: Pensions & Investments/Watson Wyatt Global 500 survey September 2005. Ranked by total global assets under management as at 31 December 2004.
7
Strategy compositions 1990 vs 2005
Industry adapts to changing opportunities
AUM by strategy 1990
1
2
3
4
5
6
7
8
Global macro
Managed futures
Relative value arbitrage
Equity hedge
Event driven
Distressed securities
Convertible arbitrage
Emerging markets
AUM by strategy 2005
58.3 %
17.9 %
12.3 %
5.2 %
3.6 %
2.0 %
0.4 %
0.3 %
4
1
2
3
4
5
6
7
8
Equity hedge
Relative value arbitrage
Event driven
Global macro
Managed futures
Distressed securities
Emerging markets
Convertible arbitrage
36.9 %
20.4 %
14.7 %
10.0 %
6.7 %
4.4 %
3.8 %
3.1 %
78
5 6
7
8
6
5
3
1
4
1
2
3
2
Source: HFR Industry Report and Stark & Co, Inc.
8
Strategy performance1
Returns remain stable
16 %
14.7%
12 %
10.7%
10.7%
9.3%
8.2%
8%
6.7% 7.2%
6.2% 6.6%
7.5%
7.4%
6.7%
6.3% 6.2%
5.9%
4.1%
4%
0.4%
Returns
0%
-1.9%
-4 %
t
s
o
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nds
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acr
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Eq
Ma
tive
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onv
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Re
Average annual return (last 5 years)
Return last 12 months
Source: Bloomberg. There is no guarantee of trading performance and past performance is not indicative of future results. 1As of 31 December 2005.
Please note that the HFRI index data over the past 4 months may be subject to change. All indices represented by HFRI except for Managed futures, which is represented by Stark & Co., Inc.
9
US inflation/base rate
2D Graph 1
•
10%
8%
High inflation/base rates in the late
’80s.
– Desire for more volatile
products
6%
•
Low inflation/base rates in the ’90s
– Desire for lower volatile and
guaranteed products
4%
2%
0%
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
US Inflation
US Base rate
Source: Bloomberg. There is no guarantee of trading performance and past performance is not indicative of future results.
10
Recent growth rates of hedge fund styles
12%
10%
8%
6%
4%
2%
0%
Growth rate
-2%
-4%
-6%
-8%
s
y
s
n
e
ts
al
ro
es
ge
ge
nd
dg
ive
ke
bia
teg
ac
ur
utr
ra
ra
r
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a
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d
a
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r
m
h
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l
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rb
m
st
y
rib
tn
nt
Al
al
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sh
ltiuit
ea
ve
ob
ng
ea
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a
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at
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me
inc
Ma
ve
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ho
dic
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n
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s
d
e
/
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D
Eq
Co
ng
Fix
Lo
Average quarterly growth rate period1
Q3 2005 growth rate
Source: TASS Research.
1Average quarterly growth rate is for the period 1 January 1994 to 30 September 2005.
11
Investable indices vs. non-investable indices
31 July 2003 to 31 December 2005
Good performance….
Non-investable indices
Ann.
return
CSFB/Tremont Hedge
Fund Index
10.1 % CSFB/Tremont Investable Index
HFRI Composite Index
11.3 %
MSCI Hedge Fund
Composite Index
N/A¹
Investable indices
HFRX Global Hedge Fund
Index
8.8 % MSCI Hedge Investable Index
N/A¹ S&P Hedge Fund Index
Ann.
return
Underperformance
5.3 %
4.8 %
4.1 %
7.2 %
5.1 %
3.7 %
4.6 %
N/A¹
But can you buy it?
Source: Bloomberg.
Please note that the HFRI index data over the past 4 months may be subject to change. There is no guarantee of trading performance and past performance is not indicative of future results.
¹No non-investable indices exist for Standard & Poors.
12
New styles/strategies
•
New styles
– Commodities
– Credit
– Insurance
– Longer term alpha
– Emerging local market debt
•
New strategies
– Asian opportunities
– Healthcare
– Special situations
13
Conclusion
•
Is the industry too big?
•
There are new sources of alpha
•
Investable indices are not what they appear
•
Well managed fund of funds can deliver better returns
•
Structured products offering guaranteed return of capital are another safe way into hedge
funds
14