Dominique Grandchamp: Gauging Institutional Interests and the Role of Regulated Investment Funds in a Post Crisis World

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Gauging Institutional Interests and the Role of Regulated Investment Funds in a Post Crisis World

Dominique Grandchamp Senior Investment Consultant, Mercer

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Dominique Grandchamp: Gauging Institutional Interests and the Role of Regulated Investment Funds in a Post Crisis World

  1. 1. 04 October 2011Gauging Institutional Interest and the Role ofRegulated Investment Funds in a Post Crisis WorldDominique Grandchamp, CFASenior Investment ConsultantMercer (Switzerland) SAdominique.grandchamp@mercer.com+41 22 918 10 15 www.mercer.com
  2. 2. Agenda 1) The Past - Hedge Funds in a Less Regulated World 2) The Present - Where is the Performance? 3) The Future - How to invest in Hedge Funds? 4) Ucits Hedge Funds Growth 5) ConclusionsMercer 1
  3. 3. 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 expectedMercer 2
  4. 4. Agenda 1) The Past - Hedge Funds in a Less Regulated World 2) The Present - Where is the Performance? 3) The Future - How to invest in Hedge Funds? 4) Ucits Hedge Funds Growth 5) ConclusionsMercer 3
  5. 5. The Present – Where is the Performance?Example: Switzerland’s Pension Fund System Commodities, HFs, PE Cash 8% 7% Real Estate 20% Bonds 35% 30% EquitiesMercer 4
  6. 6. The Present – Where is the Performance?Example: Performance last 10 years Cash 1% Bonds 4% Liabilities Equities 0% Real Estate 5% 3.5% Alternatives 3%Mercer 5
  7. 7. The Present – Where is the Performance?Example: Low Yield on Bonds SBI AAA-BBB Global Agg Global Agg Corp Global EM 14 13 12 11 10 9 8 YTM (%) 7 6 5.67 5 4 3.79 3 2.43 2 1 1.50 0 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10Mercer 6
  8. 8. 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 strategiesMercer 7
  9. 9. Agenda 1) The Past - Hedge Funds in a Less Regulated World 2) The Present – Where is the Performance? 3) The Future – How to Invest in Hedge Funds? 4) Ucits Hedge Funds Growth 5) ConclusionsMercer 8
  10. 10. 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)Mercer 9
  11. 11. The Future – How to invest in Hedge Funds?Hedge Funds increase DefensivenessEmbed defensiveness in the equity bucket… Performance Drivers Indexed Broad Defensive Low market Equities strategies Small Small Emerging Emerging Strategies Volatility Cap Cap Markets Markets… so as to reduce the overall riskMercer 10
  12. 12. The Future – How to invest in Hedge Funds?Hedge Funds increase Defensiveness • Minimum • Small Caps Variance- Index- • Emerging Strategies Strategies Markets • Quality +Yield (MSCI World) Beta > 1 Strategies Equity Strategies • Absolute Return Strategies Beta =1 Beta < 1 0 0.25 0.5 0.75 1 1.25 1.5 BetaMercer 11
  13. 13. The Future – How to invest in Hedge Funds?Hedge Funds increase Defensiveness Indexed Active Strategies Managers Heuristic (Fundamental Indexing) Quality Strategies Defensive Strategies Optimized Absolute Return (Minimum Volatility) Variable BiasMercer 12
  14. 14. The Future – How to invest in Hedge Funds?Hedge Funds increase Defensiveness CTAs Global Macro Relative Value Long/Short Equity EquitiesMercer 13
  15. 15. The Future – How to invest in Hedge Funds?Old and New Access Points Long-only Offshore Hedge Funds Funds + FoFs 1 2 Onshore Hedge Indices+ 6 3 Funds Replication (SIFs) 5 4 Mandates+ Ucits Managed Account Hedge Platforms FundsMercer 14
  16. 16. The Future – How to invest in Hedge Funds?The Great ConvergenceTrend towards absolute return Trend towards “onshorisation”Increasingly benchmark-agnostic Preference for liquidity and transparency Mandates Managed Onshore HFs Long-only Ucits III Onshore HFs Offshore HFs Accounts + Macs (XIFs)Liquidity High High High Medium LowTransparency Medium Medium High Medium MediumAsset Control Medium Medium High Low LowTax Efficiency High High Low Medium LowLow Beta Low Medium High High HighRegulatory oversight High High Low High LowBenchmark awareness High Medium Low Low LowMercer 15
  17. 17. The Future – How to invest in Hedge Funds?Which Access Point for Whom? Family Office Banks Insurance Pension PlansMercer 16
  18. 18. 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 ☺Mercer 17
  19. 19. 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)Mercer 18
  20. 20. The Future – How to invest in Hedge Funds?EU goes UCITS….Mercer 19
  21. 21. The Future – How to invest in Hedge Funds?Who does not love UCITS???Mercer 20
  22. 22. The Future – How to invest in Hedge Funds?Who loves UCITS???Mercer 21
  23. 23. Agenda 1) The Past - Hedge Funds in a Less Regulated World 2) The Present – Where is the Performance? 3) The Future – How to invest in Hedge Funds? 4) Ucits Hedge Funds Growth 5) ConclusionsMercer 22
  24. 24. Ucits Hedge Funds Growth 750+ Ucits Hedge Funds Up and Running # Funds # New LaunchesSource: Absolute Return Mercer 23
  25. 25. Ucits Hedge Funds Growth 120 Billion EUR AuM reachedSource: Absolute Return Mercer 24
  26. 26. Ucits Hedge Funds GrowthLength of Track Record Length of track record (years) Long (>5y) 15% Medium (2-5y) 30% Short (< 2y) 55%Mercer 25
  27. 27. Ucits Hedge Funds GrowthFund AuM (EUR) > 200 MM 20% < 50 MM 50% 50-200 MM 30%Mercer 26
  28. 28. 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 investorsMercer 27
  29. 29. Agenda 1) The Past - Hedge Funds in a Less Regulated World 2) The Present – Where is the Performance? 3) The Future – How to invest in Hedge Funds? 4) Ucits Hedge Funds Growth 5) ConclusionsMercer 28
  30. 30. Conclusions Ucits and onshore Hedge Funds will continue to grow Traditional Hedge Funds remain to capture illiquidity premium Lower performance than in the past, defensiveness is welcome Fund of Hedge Funds model challenged and struggling Convergence with long-only products Institutional interest is taking off in selected jurisdictions Stick to a robust due diligence processMercer 29
  31. 31. Dominique Grandchamp Mercer (Switzerland) SA Avenue Reverdil 8-10 1260 Nyon Switzerland +41 22 918 10 15dominique.grandchamp@mercer.com www.mercer.com www.mercer.com

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