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					Institutional Demand for Hedge Funds 2:
A Global Perspective
Four Key Reasons To Revisit Our 2004 Study
                                                                                  Why revisit our 2004 study?
                                                                                    Accuracy – were we right?
                                                                                    Global scope
                                                                                    Hedge funds - fad or here
                                                                                     to stay?
                                                                                    Further insights on the future




    Source: The Bank of New York and Casey, Quirk and Associates analysis 2006.

1
Over 100 Interviews With Professionals
Around The World
                       Interviewees by                                            Sample Interview Questions:
                      Organization Type
                                                                                    Where do hedge funds fit in
       Institutional Investors                                  50                   the portfolio?
                                                                                    What do institutions expect
       Consultants                                              14                   of hedge funds?
                                                                                    How have hedge funds performed
       Hedge Funds                                              15                   versus expectations?
                                                                                    How do/will institutional
       Fund of Hedge Funds                                      13                   investors invest?
                                                                                    How much will institutions invest?
       Industry Experts                                          9


                                            Total              101
    Source: The Bank of New York and Casey, Quirk and Associates analysis 2006.


2
Institutions Require Higher Returns Than Many
Of Their Current Portfolios Will Provide

                                                      The Capital Market Challenge


                                      Expected 5-yr return of 60/40 portfolio1                                  5.70%


                                      Long-term return assumptions²                                             8.47%


                                      Difference                                                                (2.77%)




    1   Forecast return of a portfolio composed of 60% U.S. equities returning 8.0% and 40% U.S. fixed income
        instruments returning 4.5% for the 5-year period ending December 31, 2010
        Sources: Congressional Budget Office (The Budget & Economic Outlook: 2004-2013)
    2   JPMorgan (“Global Gambits,” 2006), Bloomberg Average long-term return assumptions of 100 largest
        corporate defined benefit plans as of fiscal year ended 2005
        Source: S&P Money Markets Directory, 2006
        Source: The Bank of New York and Casey, Quirk & Associates analysis


3
Lower Expected Returns Forcing An
Investing Mindset Paradigm Shift

Prior Dominant                     Emerging
Paradigm                           Paradigm
     Benchmark-oriented            Absolute return-oriented

     Long-only management          Alpha/beta separation is the
                                     portfolio building block
     No derivatives,
      shorting, leverage            Increased understanding and
                                     use of “alternative” tools
     Only marketable securities
                                    Increasing incorporation of
                                     “financial engineering”




4
Institutional Investment Globally
In Hedge Funds About $360B
    Global Institutional Hedge Fund Investment
                 December 31, 2005
                                                                                                30% of overall hedge fund
                      Other
                                      Australia                                                  assets are held by institutions
                                        2%
                       5%
                                                                                                Only 15% of institutions are
                                                                                                 currently invested in
                              UK
                              8%
                                                                                                 hedge funds
    Middle East
       8%
                                                                                                Hedge funds represent about
                                                         USA
                                                         41%
                                                                                                 2% of institutional assets today
                   Europe-ex
                      UK
                     11%

                                      Japan
                                       25%




                                Total: $361B
       Source: The Bank of New York and Casey, Quirk and Associates analysis 2006. For purposes of this report “institutions” refer to retirement plans,
       endowments, foundations and hospitals, government-affiliated organizations with at least $100MM in assets, as well as insurance companies and
       banks with at least $100MM in externally-managed proprietary assets.

5
 Institutional Investors Are
 Seeking 8-10% Returns
                                                                                             Institutional Objectives
                                                                                               Absolute returns of 8-10%
                    Institutions’ Hedge Fund                                                    with “bond-like” volatility
                Program Net Return Expectations
                                                                                               Diversification: lower
50%
                                                                                                correlation with other
40%                                                                                             portfolio assets
30%                                                                                            Portable alpha (emerging):
                                                                                                hedge funds supply the alpha
20%
                                                                                               Select institutions: high
10%
                                                                                                (strong double digit)
0%                                                                                              absolute returns
        Less than 7%       7–7.99%         8–8.99%          9–9.99%      Great er than 10%

      Source: The Bank of New York and Casey, Quirk and Associates survey 2006.




 6
To Date, Institutions’ Hedge Fund Programs
Have Overwhelmingly Met Expectations


        How Has Your Hedge Fund Program Performed v. Your Target?
                                                Percentage of Institutions Surveyed



                                                                                 Respondents
                          Within 1% of Target                                         72%
                          Exceeded Target by 1% to 5%                                 19%
                          Exceeded Target by at least 5%                              6%
                          Underperformed                                              3%


    Source: The Bank of New York and Casey, Quirk and Associates survey 2006.




7
Still, The Vast Majority Of Institutional Investors
Do Not Currently Invest In Hedge Funds
Greatest Impediments to Investing in Hedge Funds*
     Headline Risk
     Lack of familiarity
     Transparency
     Fees




* Source: The Bank of New York and Casey, Quirk and Associates survey 2006.
  Most mentioned criteria by institutional investors and consultants in our survey.


8
    Global Institutional Investment In Hedge
    Funds Will Exceed $1 Trillion by 2010
                                  Projected Global Institutional Hedge Fund Assets, Net Flows and Institutional
                                              Net Flows as a Percentage of Total Hedge Fund Flows
                                                                   2005 - 2010

                                   1,100                                                                                             70.0%
                                   1,000
                                    900                                                                                              65.0%




                                                                                                                                                 Institutional Share of Total Flows
                                    800
Assets & Net Flows




                                                                                                                                     60.0%
                                    700
                     $ billions




                                                                                                                                             %
                                    600
                                                                                                                                     55.0%
                                    500
                                    400
                                                                                                                                     50.0%
                                    300
                                    200                                                                                              45.0%
                                    100
                                      0                                                                                              40.0%
                                            2006E             2007E                   2008E              2009E               2010E
                                                           Assets           Net Flow          Institutional Share of Flows
             Source: The Bank of New York and Casey, Quirk and Associates analysis 2006.


    9
Non-US investors & retirement plans will drive flows
     Projected Cumulative Institutional                                              Projected Cumulative Institutional
             Hedge Fund Flows                                                                Hedge Fund Flows
             By Region – 2006 - 2010                                                 By Institution Type – 2006 - 2010
                           Australia
            Other            4%                                                      Endowments &
             7%                                                                      Foundations
                                                                               Bank &
                                                                                                   E&F
                                                                              Insurance
                                                                                                   15%
               UK                                                                5%
               9%
                                               USA
                                               36%
          Middle East                                                                     Govt's         Retirement
             14%                                                                           15%              Plans
                                                                                                            65%
                Europe-ex-            Japan
                    UK                 16%
                   14%



        Cumulative Net Flow: $510B                                                        Cumulative Net Flow: $510B

Source: The Bank of New York and Casey, Quirk and Associates analysis 2006.


10
Institutional Investors Will Gravitate Toward
The “Dual Approach” Investing Model

             Survey Participants Current
             Hedge Fund Investing Model                                      Today: FoHF’s and dual
                                                                              approach dominate

                          Direct                                             Most institutions not
                          13%
                                                                              appropriately resourced
                                                                              for direct investing
                                                 FoHF
                                                 45%
                                                                             Future: FoHF’s remain primary
                       Dual
                       42%                                                    approach for new investors and
                                                                              the dual approach proliferates

                                                                             Future flows will be split almost
                                                                              evenly between FoHF’s and
                                                                              direct
Source: The Bank of New York and Casey, Quirk and Associates survey 2006.


11
The hedge fund industry in 2010…

      Today’s hedge fund techniques will be tomorrow’s
       mainstream active investing
      Institutional quality managers will dominate
      Fees will be better aligned with investors’ interests
      Industry’s biggest challenge: continuing to deliver required
       net returns




12
                                                                                   Conclusion
                                                                                     Institutional investment in
                                                                                      hedge funds reaches
                                                                                      $1 trillion by 2010
                                                                                     Hedge fund techniques become
                                                                                      mainstream
                                                                                     Quality competitors dominate
                                                                                     Biggest challenge: Meeting
                                                                                      investors’ overall return
                                                                                      requirements




     Source: The Bank of New York and Casey, Quirk and Associates analysis 2006.


13
Contacts




     The Bank of New York   Casey, Quirk & Associates LLC
     One Wall Street        19 Old King’s Highway South
     New York , NY 10286    Darien, CT 06820
     www.bankofny.com       www.cqallc.com




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