From our vantage point as advisers to many of the world's top investment fund managers and financial institutions, broad market forces flow through to our instructions, and ultimately drive many of the terms of the funds we advise.
In this four-part series we look at the current themes we have noticed in the investment funds market. Parts one and two focus on Hedge Funds and parts three and four explore Private Equity.
All data, unless referenced, is taken from Walkers' in-house investment funds survey.
TRENDS
In last year's trends survey of November 2018, we noted that the optimism stemming from positive returns could only be sustained if the returns were sustained. Our evidence suggested that managers were starting to see a little relief from downward fee pressures and that other signs of investor confidence, such as agreeing to longer or more restrictive lock-ups, were slowly revealing themselves.
The performance headwinds faced by the hedge fund industry in late 2018 are well-documented, with the industry suffering its biggest annual loss since 2011. While hedge funds responded in 2019 by recording their best start to a year since 2009, investor sentiment following 2018's underperformance drove significant outflows in the first half of the year. While these outflows were not universal across strategies, it has nonetheless been a challenging year.
As ever, performance history remains vital to a manager's ability to attract investment and drives investor discussions with managers at the inception of investment funds. In turn, this feeds the terms of fund documents, reflecting both investor concerns and manager priorities. As in prior years, we have surveyed the terms of all of the registered hedge funds we launched this year to see what trends emerge.
As regular attendees of our Fundamentals seminar will know, one of our key trends of recent years has been managers positioning their funds for a long-predicted slowdown in global economic activity. This year provided an opportunity to review these provisions in detail, as we helped clients navigate events in their funds that tested some of this forward planning.
EQUITY AND CREDIT STRATEGIES RETAIN THEIR LEADERSHIP
Among newly launched funds, equity and credit strategies
remained the most common strategies, as in prior years. While
industry commentary suggests equity funds (as the largest component
within the industry) have suffered greater outflows than any other
sector, this does not yet appear to have dampened enthusiasm for
new launches in this area.
In other areas, particularly those popular with start-up managers, we have helped managers structure their funds to defer registration as a mutual fund, at least in the early stages of the fund's life. While these exemptions are not new, the increase in digital asset/ cryptocurrency funds in the last few years has brought a renewed focus on setup costs and early stage regulatory compliance matters. In future, such exemptions may be more limited and accordingly, we anticipate the costs of establishing and operating an investment fund product will continue to rise.
FEES
Although investor concerns around fees are now ranked by Preqin as only third behind performance concerns and market volatility1, pressures on fees continue. In March 2019, J.P. Morgan published their annual institutional investor survey, which suggested the average respondent was paying less than 1.5% in management fees, and performance fees above 17.5%2.
This is borne out in our data too: 80% of funds surveyed launched with a management fee of less than 2%, and 44% of funds carried a 20% performance fee. There has also been an increase in funds charging performance fees of greater than 20%, though typically these funds have a reduced management fee. As noted in our previous analysis of fee structures, these figures, although indicative, may not represent the full picture as managers continue to make innovative fee arrangements with investors including in side letters and special founders classes.
Footnotes
1 Preqin: 2019 Global Hedge Fund Report
2 J.P. Morgan's Americas Capital Advisory Group: 2019 Institutional Investor Survey
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