A New Alternative Investment: Infrastructure

Institutional Investors are planning to invest directly in infrastructure projects such as fixing roads, bridges, water lines, sewage plants and dams.  Returns on these investments are above their benchmarks.  Ontario Teachers' Pension Plan was up 13% in 2010 versus 4% for their benchmark and Ontario Municipal Employees Retirement Systems was up 10.1% versus 8.5% for their benchmark.  Other investors looking at the $50 trillion market (over the next 25 years) include California Public Employees' Retirement Systems, California State Teachers' Retirement Systems, Abu Dhabi Investment Authority, China Investment Corporation and Government Investment Corporation of Singapore.

The source for this article can be accessed here.

Mutual Fund of Hedge Funds

Hatteras Funds manages $2.1 billion in the alternative investment space.  One of its products is mutual fund of hedge funds.  FINalternatives posted a recent interview with the President of Hatteras Funds, Bob Worthington. Their funds invests in five strategies:  long/short equity, equity market neutral, relative value long/short debt, event driven and managed futures.  The hedge funds have between $25 to $500 million in assets under management.  The mutual fund is diversified with 23 managers in a portfolio of $550 million.  Hatteras thinks that they can manage $5 billion in assets with 35 managers.  The managers have to meet compliance/risk control standards as well as being a good fit in the overall portfolio.

The mutual fund has daily liquidity.  This allows great flexibility in determining a tactical asset allocation.  Hatteras usually does not make adjustments on a daily or weekly basis but they can adjust if market conditions change dramatically.  The fund increases liquidity and transparency when compared to more illiquid fund of fund or hedge fund vehicles but has less risks and returns.  However, the fund gives the investor access to hedge fund strategies.

The article can be accessed here.

Regulated Hedge Funds: UCITS and Mutual Funds

SEI published a white paper on the growth of alternative investments called Regulated Alternative Funds: The New Conventional.  Because of the credit crisis of 2008 and the current Eurozone crisis, more and more investors have clamoring to be able to invest in alternative investments to lower downside volatility and offer returns uncorrelated with long-only mutual funds. In the first 8 months of 2011, $61 billion flowed into these investments. $22 billion (39% of all investment capital) were invested UCITS funds. There are now more than 1,500 UCITS funds managing $254 billion. $39 billion were invested through US mutual funds and ETFs. They now compose 4.4% of mutual fund assets and are growing at a 17% rate since 2007 when they were 2.2% of mutual fund assets. There are approximately 730 of them with 118 launched in 2011. Mutual fund families such as Ategris, BlackRock, PIMCO, Nuveen and First Eagle have funds that invest in traditional hedge fund strategies such as managed futures, long/short, credit, commodities, arbitrage and absolute return fixed income.

Internationally, they are constructed in an evolving vehicle known as Undertaking for Collective Investment in Transferable Securities (UCITS). Success has brought on investors. There are established funds with good returns, transparent investment and risk management strategies, and strong brands. The largest fund is the Standard Life Investments Global Absolute Return Strategies with $13.6 billion in assets under management. Other large funds include Julius Baer BF Absolute Return, Newton Real Return, JP Morgan Income Opportunity and PIMCO GIS Unconstrained Bond.

Within the US, they are launched within mutual fund families and ETFs. The largest are, in order of size, the SPR Gold Shares ETF, PIMCO Commodity Real Return Strategy, Ivy Asset Strategy, and iShares Silver and Gold Trusts. For investors, both structures offer more transparent risk management, liquidity, counter party diversification and limits on leverage. Investors are seeking better returns, lower volatility and to protect capital. Mutual fund families are aggressively marketing to and educating investors and registered investment advisors through white papers, instructional videos, fact sheets, regulatory filings and road shows.

Mutual funds are seeking to increase their fee structure. Alternative asset managers are seeking to have a more varied investor base.

When new products are launched, rules are reviewed. They are on the third iteration for UCITS. In the US, the SEC has stopped approving new funds and ETFs to review the effects of derivatives on portfolios. Within Europe, Luxembourg and Ireland are expecting to conform with UCITS regulations with the bonus of having additional flexibility. This may make them preferable to certain investment strategies and investors.

Demand is growing from sovereign wealth and national pension funds in Asia, Latin America and the Middle East and US institutional, high net worth and retail investors.

SEI's 2011 Private Equity Survey: Investor Demands Since 2008

411 private equity fund managers, investors and consultants participated in SEI's 2011 Private Equity Survey.  Due to underperformance in the years since the credit crisis, fund managers have been providing more transparency and liquidity.  Management and incentive fees have been lowered.  22% of investors are paying lower management fees and 38% are paying lower incentive fees.  37% of fund managers lowered management fees and 11% lowered incentive fees.  Size also matters.  The larger institutional investors were more likely to have their fees lowered while the larger private equity funds were more likely to lower them.  Managers were also trying to make their investors comfortable with their infrastructure, giving them solid performance data and educating them on the portfolio.

Factors to consider when raising capital:

• Have a clear investment philosophy
• More transparency
• Turn client service into asset growth

The source for this article can be accessed here.

Private Equity Firms During the Credit Crisis

Through Global Finance magazine, I was directed to a white paper on Merrill DataSite called Riding Out the Storm:  How Private Equity Firms Survive and Thrive During Tough Economic Times.  The global recession that began in 2007 change private equity investment conditions drastically.  Financing deals grew more expensive as banks tightened their loan procedures.  Company valuations declined as the equity markets tanked.  Deals fell apart.

The private equity firms that did well during the recession followed these basic practices:

• Apply sound business discipline to their investment practices
• Good personnel
• Portfolio diversification
• Have proprietary deals
• Overseas investments
• Stellar professional reputations

The firms that did not do well made these mistakes:

• Difficulties fund-raising
• Lack of due diligence on portfolio companies
• Pay too much for debt
• Did not add value to portfolio companies
• Disorderly change of management at portfolio companies

In the future, the paper concludes that private equity firms should concentrate on their core strengths, reduce their debt and practice honesty and fairness to weather the next economic crisis.

When Will Asset Correlation Break in 2012?

According to Ned Davis Research, the monthly returns of eight diverse asset classes has become correlated almost 50% of the time when compare against the Standard & Poor's 500 Index.  In the 1990's, they never had the same returns.  The assets are MSCI indices for international and emerging markets stocks, spot gold prices, copper futures, three and ten year US Treasuries, the Euro and the Reuters-Jefferies CRB commodities index.  The correlation of large cap US stocks to the S&P 500 is at 85%.

According to Jane Buchan, chief executive of Pacific Alternative Asset Management, at the 2012 Reuters Investment Outlook summit the correlation will break at some point.  The key question is when.  She thinks that healthcare and technology sector stocks should diverge. Investors should position their long/short investments to take advantage of this.

According to FX Concepts LLC, a foreign currency hedge fund, the high correlation in 2011 was caused by low interest rates globally, the increase in the money supply by the Federal Reserve Bank and central bank support for the Japanese Yen and Swiss Franc.  For the Group of 10 nations (Belgium, Canada, France, Italy, Japan, the Netherlands, United Kingdom, United States, Germany and Sweden), the trading range for their currencies is within 6%.  Historically, it has been 20%.

The source for this article can be accessed here.

Institutional Investors Favor Long/Short Equity, Macro and Special Situations in 2012

The following chart was published on Pensions & Investments Online website from Deutsche Bank's 2011 Institutional Survey.  1 in 4 institutional investors will be adding to its hedge fund investments in 2012.  Long/short equity, macro and special situations seem to be the most popular.  Distressed and long/short credit are the least.

The source for the article can be accessed here