Investors Lose Hope About Global Economic Recovery

(October 18, 2013) — Investors’ optimism about a global economic recovery is faltering but European equities and emerging markets are finding renewed favour, according to a survey.

Only 54% of investors responding to a monthly Bank of America Merrill Lynch survey believed the global recovery will strengthen, a 15% drop from last month. Almost three-quarters projected economic growth to stay “below trend” in the coming year, an increase of 10% from September.

The survey of more than 200 global managers with $643 billion of assets under management found the negative sentiment stemmed from the tail risk of the US economy.

“Events in Washington clearly caused investors to shift back towards their benchmarks, but asset price gains can still be driven by high cash levels,” Michael Hartnett, chief investment strategist at BofA Merrill Lynch, said.

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Managers expected similar results for corporate profits, the survey found. Only 28% of those surveyed said they expected global corporate profits to improve over the next 12 months.

Investors’ equity holdings have dropped—in correlation to the general negative outlook—with a growing shift back to fixed income.

Only half of those surveyed were overweight equities, a 20% drop from last month, according to the survey. US equities took the biggest hit, with no asset allocators being overweight in the sector.

European equities allocations, on the contrary, reached a six-year high of 46% of overweight investors. European corporate profits are also experiencing great optimism with 10% of those surveyed choosing the Eurozone as the “most favorable outlook.”

“Strong flows into Europe would call for a touch of near-term caution, but solid macro momentum in the region suggests that any dips in EU equity markets would be enthusiastically bought,” John Bilton, a European investment strategist at the bank, said.

BoA Merrill Lynch found favor for Japanese equities also resisting the negative global trend, recording a second successive month of improvement.

The report concluded emerging markets saw a relative upturn as well. Investors have largely increased allocations into the region—only 10% was underweight in October and 26% have been overweight.

However, only 5% of managers expected the Chinese economy to strengthen in the next year, pointing to the industry’s discrepancy in emerging markets outlook.

(October 17, 2013) — Hedge fund managers have put substantial resources into achieving regulatory compliance, according to a survey.

A survey by the Alternative Investment Management Association (AIMA) found that a majority of 200 managers representing $910 billion in assets invested heavily in this respect. The industry has spent more than $3 billion, or an average of 7% of total operating costs.

The hefty cost of compliance technology, headcount, and strategy has taken a toll on the industry, AIMA said, as managers were reportedly absorbing 76% to 100% of the costs.

“For established funds and managers, the rising cost of compliance is squeezing margins, and for some is influencing product and operating model decisions,” the report said.

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The burden was heavier for smaller firms, the survey found. Funds with less than $250 million in assets under management were spending more than their bigger peers. Over a third said compliance costs amounted to more than 10% of their total operating costs.

North American firms reported to have spent more on compliance than their European and Asian counterparts.

Managers also said regulatory requirements such as Form PF and Alternative Investment Fund Managers Directive (AIFMD) involved much time and legal counsel. A third of those surveyed said they’d spent between 50 and 100 hours preparing and filing for the US Securities and Exchange Commission (SEC) registration and a quarter dedicated between 100 and 500 hours.

“We’ve had to almost double the size of our legal and compliance teams to deal with these regulatory changes,” said one hedge fund manager. “It’s made it challenging to grow.”

Outsourcing the work has become necessary for some managers, the survey found.

“Form PF is hundreds of pages long,” said one US-based manager. “We had to outsource the heavy lifting to serve providers and pay technology providers for risk and data warehousing services.”

Increasing operational focus on compliance could have significant negative impacts on the hedge fund industry, some managers said.

“The entire nature of the alternative investment industry—particularly the hedge fund industry—is one of innovation and finding new ways to achieve alpha,” said one fund manager in Asia. “There’s no doubt that regulation is constricting this and making it harder for new players to enter the market.”

Andrew Baker, CEO of AIMA, agreed: “It is important that regulation does not raise barriers of entry to the industry. Next generation managers are an important source of new ideas and talent.”

Despite potential dangers, regulatory compliance is expected to grow over the next five years, AIMA said. Almost 90% of surveyed managers said they predict their compliance-focused technology spending to rise.

The continually changing regulatory schemes also led managers to more directly-operated products, the survey found. One in five managers already had a UCITS fund and one in ten are currently managing a “40 Act fund.”

But the hedge fund industry’s continuous effort to comply with regulations is good news, AMIA said. The data showed that manager are striving for improved transparency and investor protection.

“In supporting the goals of global financial reform, and reinforcing that support with these investments in compliance, the industry has acted as a willing partner with regulators and policy makers in creating a safer, more stable, and efficient markets for investors,” Richard Baker, president and CEO of Managed Funds Association, said.