A Perspective on the Industry
Marc Charon, Executive Vice President & Managing Director, COO
Managed Funds Association
MANAGED FUNDS ASSOCIATION
STRATEGIC COMMUNICATIONS PLAN
COMPREHENSIVE RESEARCH FINDINGS
Most Damaging Critiques
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Shorting = Destroying Companies, Hurting Workers
Don’t Create Anything of Value
Manipulate the Market
Gamble with Investors’ Money
Greedy and Overpaid
Unregulated
Use of Leverage Creates Systemic Risk
Rich Getting Richer
Over-Leveraged and Really Big
KEY FINDINGS
1. The Hedge Fund Industry Is An Unknown Quantity
2. Despite Low Levels Of Awareness, People Instinctively Do Not
Like Hedge Funds
3. Negative Views Are Driven By Misperceptions
4. Greed, Shorting, Market Manipulation And Risk Primarily Drive
Negative Views
5. Low Awareness And Misperceptions Create Opportunity
6. Simple, Clear Messages Can Shift Initial Perceptions And
Inoculate Against Criticism
7. Goal is to Move Hedge Funds From “Actor” To “Tool”
8. We Need To Positively Define Hedge Funds
9. Given Lack Of Knowledge, Factual Proof Points To Support
Messaging Are Critical
Knowledge Level Is Low Across
Audiences
Current Perceptions Of Hedge Funds
CURRENT PERCEPTIONS OF
HEDGE FUNDS
• Misperceptions Abound - Even Among Elite Audiences
• Different Target Audiences Hold Differing Perspectives
• Instinct Is To Dislike Hedge Funds - Especially Among
DC Elites
• Enmity Exists… Often For No Real Reason
• Associated Attributes Frame Industry Negatively
 Hedge funds are viewed comparably to Movie Stars and Professional
Athletes: greedy, selfish, elitist, overpaid and only benefitting the
wealthy
THE OPPORTUNITY
Lack of knowledge is a challenge,
but also an opportunity.
Simple, clear messages can educate
audiences and shift perceptions.
We can get target audiences to understand
the value and utility of the industry.
Messaging: What Doesn’t Work
• Insider Language: Mentions of liquidity and capital
availability either go over people’s heads or sound too
slick
• Less Leveraged: Drawing any type of comparison to
Wall Street is dangerous, especially when discussing
being less exposed financially
• Pension Shortfalls: While pensions are important, this
argument is too complex for most to understand
• Small Industry: Another Wall Street contrast that has
the potential to do more harm than good
Core Messages
Hedge funds are
one tool of many
used by
pensions,
colleges, nonprofits and other
qualified
investors to build
a diversified
portfolio.
Hedge funds
help pensions,
colleges,
non-profits and
other qualified
investors
manage risk
and reduce the
volatility of their
investments
Hedge funds
have produced
generally
higher, more
consistent
returns than
other types of
investments in
all market
conditions
Supporting Messages
Proven Performance
• Over the last ten years, hedge funds have outperformed the major stock market indices,
returning investors 88% while the S&P 500 lost 23%.*
Less Volatility
• Hedge funds have a proven track record of managing risk and even making money in down
markets; they’ve been one-third less volatile than the S&P 500.*
Aligned Interests
• Fund managers become partners with their investors, investing up to 50% of their own
money in their funds, clearly aligning their interests with the interests of their investors.
Supportive of Smart Financial Reform
• Unlike lobbyists for the big banks, the hedge fund industry supports smart financial reforms
to reduce risks to the global financial system and help avoid future financial crises.
*Source: Hennessee Group LLC
MANAGED FUNDS SSOCIATION
WHO IS INVESTING IN
HEDGE FUNDS?
Who is Investing in Hedge Funds?
Corporate Pension Funds
Corporate Pensions are UNDERFUNDED
Aggregate US Corporate funded status is 75% (10.31.11)
In Q3 2010, Aggregate US Corporate funded status was 74%
Mercer L.L.C. Analysis, October 2011
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Who is Investing in Hedge Funds?
Public Pension Funds
State and Local Pension Plans are UNDERFUNDED
85% of US State and local pensions plans’ funded status is
less than 80%
Those pension hold roughly $2.6 T in financial assets, but
liabilities for future pension payments are $3.3T
In 2010, Aggregate Public Pension funded status was 65%
Congressional Budget Office, May 2011
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Who is Investing in Hedge Funds?
Endowments – Preliminary FY 2011 Results
Large endowments allocate 58% to
alternatives
Smallest endowments allocate 9% to
alternatives
July 1, 2010 – June 30, 2011
NACUBO-Commonfund Study of Endowments
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Who is Investing in Hedge Funds?
Endowments – FY 2011 Preliminary Results
Endowments averaged 19.8% for FY 2011
The highest return was 31.8%
The lowest return was 3.7%
Endowments returned an average of 12.6% in FY 2010
Endowments returned an average of -18.7% in FY 2009
July 1, 2010 – June 30, 2011
NACUBO-Commonfund Study of Endowments
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Who is Investing in Hedge Funds?
High Net Worth Investors
50% of households with a net worth of $25 million or
more own hedge funds in 2010
However, globally, the allocation of HNWI assets to
alternatives dipped to 5% of all holdings at end of 2010
from 6% a year earlier.
Spectrum Group’s “The $25 Million Plus Investor”
Merrill Lynch Capgemini 2001 World Wealth Report
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What’s the Outlook?
Recent Surveys Say
61% of hedge fund assets are held by institutional
investors – pensions, endowments, foundations and
others
38% of institutional investors will increase allocations
to hedge funds in 2012
More than half of these investors surveyed intend to
keep their allocations the same, while only 9% are
considering decreasing investments
Preqin Research 2011
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What’s the Outlook?
Recent Surveys Say
Investors want increased transparency and liquidity – and they
are getting it
Institutional investor asset under hedge fund management are
approaching pre-crisis 2006 record levels
The majority of investor surveyed say they will seek out new
managers with whom to invest
20% of investors say they will invest solely with existing
relationships
“Partnership” is key to receiving direct allocation
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What’s the Outlook?
Recent Surveys Say
Long/short equity remains the preferred strategy – with 38% of
investors look at that strategy
Global macro is second choice – with 26% looking at that strategy
CTAs are third choice – with 15% looking at that strategy
Preqin Research 2011
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What’s the Outlook?
Recent Surveys Say
95% of mid-sized hedge fund managers ($100 to $500 million
AUM) consider themselves prepared to meet demands of
institutional investors
However, there is a material difference in firm infrastructure
among these respondents
Importantly, two-thirds of funds see the informational
requirements of institutional investors as more burdensome that
those of high net worth individuals
McGladrey and Greenwich Associates 2010 Hedge Fund Industry Survey Report
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What’s the Outlook?
Recent Surveys Say
Key issues for hedge funds seeking allocations from institutional
investors:
Liquidity: One-third of respondents plan to allow liquidity on a
more frequent basis as a means of attracting investors
Tax efficiency: Two-thirds of respondents reviewed or are
reviewing partnership and operating agreements for tax
implications.
McGladrey and Greenwich Associates 2010 Hedge Fund Industry Survey Report
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What’s the Outlook?
Recent Surveys Say
Mid-sized hedge funds adapting to institutional demands
Even as hedge funds face increasing demands on resources:
- Nearly one-third of respondents allow liquidity more frequently
- Almost one-third have reduced their lock-up periods
- One-fourth have lowered management fees and/or incentive
fees
In 2010, 15% of hedge funds offered graduated fees
In 2011, 33% of hedge funds offered graduated fees
McGladrey and Greenwich Associates 2010 Hedge Fund Industry Survey Report
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What’s the Outlook?
Recent Surveys Say
Hedge funds and investors have different views of what is
most important before an allocation is made
72% of hedge funds believe performance is most important
43% of investors believe performance is most important
50% of hedge funds believe management team is most important
71% of investors believe management team is most important
45% of hedge funds believe clarity of investment philosophy is most
important
56% of investors believe clarity of investment philosophy is most important
Ernst & Young , Coming of Age, Global Hedge Fund Survey 2011
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Questions