6 Ways Hedge Funds Need to Adapt Now

The Sixth Annual Global Survey of Institutional Hedge Fund Investors + Insights from Industry Roundtables

The hedge fund industry is here to stay. Yet, the industry’s value proposition is being seriously questioned, and institutions continue to escalate their demands for transparency and intensify their due-diligence processes.  Some see the institutionalization of hedge funds as a double-edged trend that may hinder performance even as it brings more discipline and accountability to the industry.  No longer can managers simply “show and tell.”  Now investors want proof and need to judge for themselves.

To explore what directions the industry is taking now, and how hedge fund firms can better equip themselves to succeed, SEI & Minard Capital complemented a survey of institutional investors with wide-ranging roundtable discussions. The resulting study identifies several key challenges hedge fund firms must meet if they hope to succeed in the long term:

• Sustainable edge. Institutional investors are raising the bar for manager selection as “there are too many look-alike strategies in the industry,”

• Adaptability. Hedge fund managers need to rethink their business models and develop multi-faceted solutions that package their capabilities most effectively.   

• Clear value added. Investors are increasingly concerned with how much “true alpha” they are getting for the hedge fund fees they pay.

• The right fit. Today’s investors have complex needs and want hedge funds to serve multiple objectives within an overall portfolio mix. 

• Scale or sizzle. While large funds still attract the majority of institutional assets, small funds may be better equipped to offer competitive returns.  

• Business and marketing acumen.  Asset growth often depends more on effective marketing and sound business management than investment performance.

For further details on these challenges, visit SEI’s website to receive your copy of the white paper, “6 Ways Hedge Funds Need to Adapt Now.”


- SEI Knowledge Partnership

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Could a Virtual Currency be the Next ETF?

You may have heard a lot about Bitcoin in the past week. For one, the worth of the digital currency has skyrocketed, with values topping $250 today, up from $44 a month ago – and $4.93 a year ago. The staggering run-up has got the InAlternatives team excited – but there’s also talk of a potential bubble in the making, particularly in the wake of a “flash crash” last month that was eventually traced to a technological glitch in the Bitcoin exchange.

Of course, the mishap didn’t temper the appetite for the virtual currency, which is traded on a peer-to-peer network outside the control of central banks. This recent VF.com story on Bitcoin reiterates the old adage, the bigger the risk, the more lucrative the reward.

Despite its rock-n-roll beginnings, Bitcoin has claimed a legitimate spot at the table, thanks to global currencies on the verge of a valuation war, according to this story at ETF Trends.

The article poses an interesting question -- could Bitcoin be the backing currency of a ETF?  For now, it is unlikely. That is, until there are securities backed by Bitcoin – and the currency becomes regulated. Bitcoin doesn’t operate like other currencies, because it is in limited supply, making it more akin to a commodity. Bitcoins are also pretty hard to come by, with programmers releasing them at their own discretion.

So, you tell us: Have you ever used Bitcoin? What’s your take on the future of this virtual currency? Could Bitcoing be the backing currency for an ETF or another investment vehicle?

-    The IIR Alternatives team

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And the hits just keep on coming…

It is clear from all the news these last few weeks that insider trading indictments are not going away. The SEC has clearly targeted any and all who are suspected of doing this dirty deed. And if insider trading indictments aren’t bad enough, it seems now the press is focused on how hedge fund managers are spending their market winnings. 

Just as we all were settling to read about the recent indictments of SAC Capital Advisors LP personnel as well as additional indictments in the Galleon Group case, we got wind of a recent spending spree by SAC founder Steve Cohen. His purchase of a home in the Hamptons and Picasso’s “Le Rêve”  have made substantial headlines around world. For news junkies, these are the stories that keep on going.

It looks like insider trading indictments are going to remain high up on the SEC’s agenda for the time to come. As such investors and fund managers need to be prepared. Fund litigation and dispute resolution is something on the minds’ of all involved in the hedge fund industry these days.

At GAIM Ops Cayman, there will be sessions devoted to this topic and if you have not registered for this great event you can do so by clicking here . Separately, we are pleased to announce a New York-based Fund Governance and Litigation Summit in September. This new program is geared directly to managers, investors, and lawyers who want to know more about best practices in this area of the hedge fund industry.

In the meantime, settle in, the ride is far from over.

-    The IIR Alternatives team

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Preparing for Generation D

They are 75 million strong.  They hold nearly $27 trillion in assets.  When it comes to investing, they are active, with higher levels of income.  And they’re usually well-educated.  Accenture calls them “Generation D,” because what sets this group apart is their “deeply digital lifestyle.”

Theirs is a demographic based on behavior, not by age.  Accenture stumbled upon Generation D last summer while conducting a survey of current and future investors.  The group is a hybrid, made up of “Skeptical Millennials,” “Jaded Gen-Xers,” and “Trusting Boomers.”  The common thread is that “Gen D members typically use multiple devices in a given week to manage financial accounts, look up investment information, and pay bills.”  They use social media, and they do their own investment due diligence on the Internet.  Accenture says Generation D is a “vitally important group of investors.”

That’s the good news.  The bad news is the conclusion of another Accenture survey conducted at the same time – financial advisers aren’t reaching these investors.  They need to remedy this neglect by using online educational tools and resources to connect with Gen D, and integrate social media into their overall communications strategy.

But how important really is social media to building a financial advisory practice?  Just ask Chris Hughes, one of the co-founders of Facebook.  Hughes was the one who designed Barack Obama’s digital strategy for his first election campaign.  Obama’s use of social networking, podcasting, and mobile messaging helped win him the White House.

One of the worst casualties of the financial crisis was the erosion of trust between investors and their financial advisors.  Engaging Generation D on digital platforms is a golden opportunity for advisors to repair the rift, and reap the rewards.

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Is Regulation Keeping You Up At Night?

News outlets have been filled with articles on the settlement that hedge fund legend Steve Cohen recently reached with the SEC. The settlement which has been called historic by the likes of USA Today is just another example of the regulators push to go after “the bad guys” in wake of the Madoff fraud back in 2008.

Has Wall Street or better yet the hedge fund industry fallen off a cliff or is this just another example of things to come in this area of the capital markets?

It is clear that going after bad guys is something the SEC is focused on. There has not been a lack of headlines about funds that have done wrong by the markets.

Be that as it may, the irony is that the media never tries to find the “inside information” of what Hedge Funds have to do to comply with SEC guidelines. 

The hedge fund industry is constantly evolving both onshore and off, working to create and implement better systems, policies and procedures to comply with the ever changing regulation landscape. A recently published study by Credit Suisse found that hedge fund investors believe that constant regulatory constraints is one of the biggest threats to the industry.

In summary, the Hedge Fund industry is clearly listening to both the regulators and the investors but implementation and adoption of policies and procedures takes time. The question is… will it be fast enough for the regulators?



-The IIR Alternatives Team

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Is now the time to invest in Africa?

Africa seems to be the new darling of the emerging market managers who are looking for higher returns for their investment portfolio.

The demographics sound impressive:

• Africa's population has rapidly increased over the last 40 years, and consequently, it is relatively young. In some African states, half or more of the population is under 25 years of age.
• According to McKinsey & Associates, household consumption in Africa is now higher than India or Russia and is expected to continue to grow.
• Africa is vast- 54 countries and 29 stock exchanges and different regions present different opportunities.

Original Photo: www.freeworldmaps.net

 European investors have been investing in Africa with much success over the last decade and now it seems that US pensions, endowments and foundations are starting to pay attention as well. There are many ways to access this market including private equity, publicly traded stocks, as well as direct plays in natural resources and infrastructure. However, investing in Africa is not for the faint of heart. The news headlines are filled with negative stories about violence and political instability. Here are some recent articles about this opportunity:

Africa: the final investment frontier? March 4, 2013
http://www.fundweb.co.uk/fund-strategy/issues/4th-march-2013/africa-the-final-investment-frontier/1066776.article

Is Investing in Africa a good bet? January 24, 2013
http://www.voanews.com/content/world-econd-forum-africa-24jan13/1590036.html

Follow the Fixer February 22, 2013
http://www.economist.com/blogs/schumpeter/2013/02/investing-africa

Africa Ripe for Investment December 5, 2012
http://money.cnn.com/2012/12/05/investing/africa-funds-stocks-bonds/index.html



We are currently researching the African market. Please let us know your thoughts by emailing us at
inalternatives@iirusa.com

-The IIR Alternatives Team

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What Will Distinguish Top Asset Managers in 2013? Innovation, Researchers Say

As defined contribution plans continue “the quest for new innovative products” in the alternatives space, money managers are going to have to notch up their product creativity.  Pension plan managers are looking for managers with unbundled fund options and customized target-date funds that offer multiple manager inputs. This search trend has created some challenges for large money managers as their smaller competitors have been able to adapt quickly to the needs of the DC plan market.

Pension Plans are also seeking more options in real assets, real estate, and private equity, and customized target-date funds provided by nimble small managers are allowing plans the flexibility they need for these allocations. This is good news for smaller managers, as asset owners are “basically asking for investment strategies traditionally managed by smaller managers,” said Ben Olmstead of eVestment LLC.

So what; is a large asset manager to do? According to research from Casey, Quirk & Associates and Cogent Research LLC, large managers could create replication strategies, refocus on product development and differentiation, and “recognize the shift” away from traditional equity and fixed income. While the largest managers are still growing assets, the managers that find a way to focus on asset classes and build expertise or differentiation have a chance to stay in the game, said Gary Shub of Boston Consulting Group.

Another arena larger managers are competing with their smaller peers is in emerging markets, where equity and debt saw more than $50 billion in inflows last year. However, while “it’s not too late to get in (to emerging markets),” Benjamin Phillips of Casey, Quirk & Associates said, managers will “need a highly differentiated product” to find any opportunity.

The Road Less Traveled

Here are some recent articles from Pension and Investments we found that illustrate plan sponsors’ search for innovation:

Demand for innovation threatens biggest firm
(Pensions & Investments, Kevin Olsen, February 18th , 2013)

Pension funds are unlikely to be part of any big equity push
(Pensions & Investments, Thao Hua, February 4th, 2013)

To share your thoughts about what you are seeing in the pension industry please get in touch with Francoise Van Keuren via email: fvankeuren@iirusa.com. 


-The IIR Alternatives Team

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