3 Nov 2010
Bank of America Merrill Lynch’s annual European Hedge Fund Conference on Wednesday provided some interesting snapshots of industry trends. The event succeeded in attracting nearly 200 investors and several dozen hedge funds, including a number of new launches. All in all BAML expected some 1400 investor meetings to occur over the course of the day.
The timing of the conference corresponds with a general uplift in the mood of hedge fund managers occasioned by new evidence of net inflows returning. Recent data from Hedge Fund Research put the global figure for net third quarter inflows at $19 billion. Citing data from Hedge Fund Intelligence, BAML noted that the top five European fund launches in the first half of 2010 brought in $2.135 billion, only fractionally ahead of the $2.125 billion raised by the top UCITS launches. Overall, BAML estimate that $6.85 billion of new investment was committed to European on shore and off shore hedge funds in the first half.
However, the investment bank was keen to point out that while there is a definite pick up for hedge funds the future may not be as bright as it appeared five years ago. It noted that fully 44% of hedge funds remain below their high water marks so can’t yet charge lucrative performance fees, although nearly half of these funds are within 3% of the HWM. Perhaps the bigger challenge BAML sees is the tough regulatory environment.
Executives in prime brokerage with BAML noted the unprecedented regulatory change sweeping both the US and Europe. This follows observations from across the funds sector that many policy makers bring little knowledge or direct experience of the alternative investment industry to their regulatory deliberations. The result is that the bank is encouraging hedge funds to be proactive in engaging with policy makers on key issues. For its part, BAML has set up strategy and structuring teams to provide guidance to clients on tax and regulatory issues such as the Alternative Investment Fund Manager Directive.
As a pioneer in developing a UCTIS hedge fund platform BAML had some interesting takes on the emerging market for on shore products. Executives noted that UCITS could begin to gain adherents from US hedge fund managers since it could prove useful for attracting money that has traditionally gone into the long only bucket, helping managers to diversify their investor base. The bank has also found that private wealth managers, bank distributors and financial advisors account for the lion’s share of allocations to UCITS leaving funds of UCITS funds and institutions as relatively small allocators at present.
BAML executives also noted that pension fund allocations to hedge funds are bound to grow since they need 8% annual returns to keep pace with their liability profile. Though hedge funds have typically been capable of delivering such returns over long periods of time some leading managers now acknowledge that in an era of zero interest rates this may prove very tough. This raised the issue of how a bout of deflation might affect hedge funds. “I don’t think deflation is good for anyone,” remarked one observer. “If low growth continues it will be interesting to see how hedge fund returns fare in comparison with long only funds.”
The timing of the conference corresponds with a general uplift in the mood of hedge fund managers occasioned by new evidence of net inflows returning. Recent data from Hedge Fund Research put the global figure for net third quarter inflows at $19 billion. Citing data from Hedge Fund Intelligence, BAML noted that the top five European fund launches in the first half of 2010 brought in $2.135 billion, only fractionally ahead of the $2.125 billion raised by the top UCITS launches. Overall, BAML estimate that $6.85 billion of new investment was committed to European on shore and off shore hedge funds in the first half.
However, the investment bank was keen to point out that while there is a definite pick up for hedge funds the future may not be as bright as it appeared five years ago. It noted that fully 44% of hedge funds remain below their high water marks so can’t yet charge lucrative performance fees, although nearly half of these funds are within 3% of the HWM. Perhaps the bigger challenge BAML sees is the tough regulatory environment.
Executives in prime brokerage with BAML noted the unprecedented regulatory change sweeping both the US and Europe. This follows observations from across the funds sector that many policy makers bring little knowledge or direct experience of the alternative investment industry to their regulatory deliberations. The result is that the bank is encouraging hedge funds to be proactive in engaging with policy makers on key issues. For its part, BAML has set up strategy and structuring teams to provide guidance to clients on tax and regulatory issues such as the Alternative Investment Fund Manager Directive.
As a pioneer in developing a UCTIS hedge fund platform BAML had some interesting takes on the emerging market for on shore products. Executives noted that UCITS could begin to gain adherents from US hedge fund managers since it could prove useful for attracting money that has traditionally gone into the long only bucket, helping managers to diversify their investor base. The bank has also found that private wealth managers, bank distributors and financial advisors account for the lion’s share of allocations to UCITS leaving funds of UCITS funds and institutions as relatively small allocators at present.
BAML executives also noted that pension fund allocations to hedge funds are bound to grow since they need 8% annual returns to keep pace with their liability profile. Though hedge funds have typically been capable of delivering such returns over long periods of time some leading managers now acknowledge that in an era of zero interest rates this may prove very tough. This raised the issue of how a bout of deflation might affect hedge funds. “I don’t think deflation is good for anyone,” remarked one observer. “If low growth continues it will be interesting to see how hedge fund returns fare in comparison with long only funds.”
