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Easing spreads supported fixed income funds, though with dispersion. Convertible bond arbitrage funds were up 1.5%. The bulk of their returns was generated through gamma trading and positive delta to equity. They also enjoyed strong primary markets with attractive pricings. Their market value exposure at 175% remained unchanged. Long/short credit funds were up 1.7%. They benefited from spread compression, with high- yield outperforming investment-grade, consistent with most funds' positioning. The stabilisation in EM spreads also contributed to returns (in particular positions on Argentina, Venezuela and Greece). They continue to be nimble in their positioning. They end the month with a dominant net exposure on financials, and hold significant stakes in long EU periphery versus short Europe.
Strategies sensitive to equity and playing corporate action themes on the one hand, and the ones focusing on the relative change in momentum across markets outperformed in February. Large market swings have occured since the beginning of the year, but "the volatility YTD is a perfect example of why alternative strategies offer great value versus long-only strategies," says Rob Koyfman, senior cross-asset strategist at Lyxor AM.
Direct ownership increasing A new study reveals that institutional investors are set to increase their direct ownership of real assets as their current exposure lags their preferred level by 14%. The research, commissioned by Aquila Capital, shows that more than half (57%) of institutional investors in Europe believe direct ownership is the best way to exploit opportunities in real assets – yet currently this approach is adopted by 43%. The findings reveal that specialised investment funds are used by 38%, closed-ended funds by 32%; and both club deal/ co-investments and managed accounts by 16% of institutional investors.
Nine out of 10 investors (90%) said they had some exposure to real assets and 44% had more than 10% exposure. Property was the most popular asset, with 74% of investors having exposure to it, followed by infrastructure (37%); commodities (26%); renewable energy (21%); timber (18%); shipping (7.9%) and farmland (2.6%).
The study shows that the most significant deterrent to investing in real assets is the lack of liquidity, which was cited by 55% of respondents. Other reasons cited include institutions’ lack of understanding of real assets (33%); limited long-term performance history (30%); a lack of suitable investment products (25%); fear of poor returns (23%) and unwillingness to diversify into ‘untested’ investment sectors (20%).
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For real assets to be more compelling, institutional investors say product providers must demonstrate greater transparency (60%); assets should be run by managers with experience of managing them (41%); fees should be lower (32%); due diligence should be clearer (30%); and products need better scalability (14%). They also say investors need to have a clearer understanding of the risk/return profile of real assets (41%).
Stuart MacDonald, managing director at Aquila Capital, commented: “There is a growing appreciation among institutional investors of the benefits of direct ownership of real assets and over the coming years we can expect to see a narrowing of the gap between actual and desired levels of this approach. These findings show that institutional investors are fully aware of the opportunities in real assets but to attract their capital, managers have to demonstrate a strong and long-established performance track record.
“Real assets are supported by long-term macro trends and can deliver strong, inflation-protected income with high investment security, manageable risk and inflation protection with limited correlation to the traditional asset classes of equities and fixed income.”
Institutional interest in event driven grows Institutional investors are showing an increased interest in event driven strategies, according to a survey of institutional investors by the Credit Suisse Capital Services Group. The survey is one of the most comprehensive in the industry, with over 500 respondents, including pension funds, endowments, consultants, family offices and funds of hedge funds, and with respondents diversified across all regions. Key highlights from the Credit Suisse annual Hedge Fund Investor Survey:
• Interest in event-driven strategies reflected the greatest year-on-year increase in demand, nearly doubling from the prior year. More strikingly, none of the survey's respondents expect to decrease their allocations to the strategy, reflecting a unanimous vote of confidence. This level of increased interest was matched in magnitude only by the drop in appetite for emerging markets, which fell precipitously.
• The notably positive momentum for equity long/ short continued for a second year as investors cite significant ongoing interest, pointing to an environment ripe for stock selection with decreased correlations and higher dispersions of returns.
• Despite modest returns for the past two years, global macro continues to remain relevant. It was forecast to be among the top three best performing strategies in 2014 and demand for
discretionary macro stood out in particular as an area of focus for investors this year.
• When asked about the impact of fee reductions, investors cited a strong preference for management fee discounts to incentive fee discounts by a magnitude of 3:1. The inclusion of hurdle rates was also highlighted by a third of investors as their preferred fee structure incentive.
• In terms of regional preferences, developed Europe (43%) and Japan (33%) were the clear winners, with the largest net demand from investors going into this year. North American strategies also enjoyed a positive view from investors with 15% net demand, up marginally from the 2013 survey. The view on emerging markets was less positive, with only 10% net demand, reflecting a notable decline from the 42% demand cited in last year’s survey.
• Additionally, equity long/short sector funds made a strong showing in this year’s survey. In particular, both TMT and financials appeared in the top 10 strategies ranked by net demand. Other sectors showing positive, though lesser, net demand included consumer/retail, real estate and utilities.
• Investors continue to show strong, though selective, appetite for those new hedge fund launches deemed to be of institutional quality. Terms appear to be real game-changers in this space as 40% of investors are open to investing in a new fund with a Founder’s Share class, while only 11% indicated interest in a seed investment with economic interests and a smaller 6% would be a day-one investor without any economic concessions.
• Investors anticipate potential capacity constraints to develop, as some fund managers return money and/or close to new capital, while others decide to leave the business completely. Some respondents also indicated that this could be an opportunity for newer and mid-sized funds to raise additional capital this year.
• There has also been a shift in investors’ top concerns – regulation dropped from a top two concern last year to fifth this year, perhaps in part because investors feel managers have incorporated many of the recent regulations into their business models.
• Taking its place this year, investors cited: crowded trades/herd behaviour, risk complacency and funds chasing equity markets as being their top three concerns. Crowded trades retained its place as the top concern of investors from last year, and investors appear to be indicating that market measures of risk may not reflect true risk, having added risk complacency this year.
• The size of funds continues to be a factor in allocations, with the percentage that can invest
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