Managed Futures/CTAs Viewed as Most Liquid Hedge Fund Strategy, Preqin Says

Many investors that target more liquid hedge fund investments, such as CTAs, may be sacrificing greater returns in the process, according to a study by Preqin.

(December 17, 2012) — Hedge fund investors targeting a higher degree of liquidity could be sacrificing greater returns, research firm Preqin has found.

According to Preqin’s study, managed futures/Commodity Trading Advisor (CTA) funds, which commonly advise investors on the use of future contracts, are viewed as the most liquid hedge fund strategy, with event-driven (and in particular distressed) funds exhibiting the least liquid characteristics.

While liquidity is still important to investors, the proportion that appear dissatisfied with the liquidity profile of their hedge fund portfolios seems to be declining: 39% now state that they look for more liquidity in their hedge fund portfolios than in the past, compared to 75% that stated the same in 2011.

“Hedge fund investor appetite for liquidity has decreased since last year,” Amy Bensted, Preqin’s head of hedge fund products, said in a statement. “This may be because institutions have adjusted their portfolios over the past four years and have reached a satisfactory level of liquidity, or because stronger performance of more illiquid funds has proved appealing to some groups. Notably, those investors with long-term investment horizons such as endowments, foundations, and family offices are even willing to accept funds with longer lockups than last year. Despite this, liquidity remains an issue for many investors, with 31% of investors seeking more liquidity from hedge funds in 2013.”

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The study showed that 28% of investors surveyed indicated they would accept less liquidity in exchange for higher returns. A total of 79% of investors interviewed stated they would accept longer lockups for funds with an event driven strategy.

In November, another study by Preqin highlighted investor demand for liquidity, showing that institutional investors active in CTA funds have more than doubled since 2008. “CTA/managed futures have often been regarded as an ‘all-weather’ investment choice, with historical performance characteristics that make the strategy highly relevant during periods of relatively low returns and generally rising asset class correlations,” Preqin’s Bensted said at the time. “Year on year, more investors are adding CTAs to their portfolios of alternative asset funds in order to tap into this diversified liquid source of alpha. Correspondingly, more managed futures vehicles are being launched in order to cater to the growing interest in the strategy. Despite recent disappointing performance by CTA vehicles, investor interest in the strategy continues unabated with 14% of fund searches initiated in October 2012 including a managed future mandate.”

The uptick in CTA popularity among institutional investors jibes with comments made by Agecroft Partners’ Don Steinbrugge, who has noted that the number of pension plans allocating to hedge funds has increased over the past decade, along with the percent of their average portfolio allocation. CTAs have only recently been accepted as a core hedge fund allocation among schemes to lower volatility, he said. While he found Preqin’s expectations about CTA popularity “a little high,” he noted that more assets have gone to CTAs than any other hedge fund strategies since 2008. According to Steinbrugge, over $300 billion, or 15% of the hedge fund market, has been allocated to CTAs. “Public pensions like CTAs because they’re not correlated with other asset classes, and also because of their transparency and liquidity.”

During a time when Eurozone stability and global systemic risk are top concerns for C-level execs, companies are increasingly finding opportunity in sovereign wealth funds, a survey by BNY Mellon has found.

BNY_SWF

(December 17, 2012) — The Government of Singapore Investment Corporation, Norges Bank Investment Management, and Abu Dhabi Investment Authority–what do they have in common?

Yes, they are three of the world’s largest sovereign wealth funds. But, of all the SWFs globally, they are also the most sought after as companies worldwide are continuing to increase their focus on such asset owners as prospective investors, according to a survey by BNY Mellon’s Depositary Receipts business.

The survey–which analyzed 800 public companies globally and studied their engagement with SWFs–showed that 62% of respondents reported contacting SWFs in 2012, up from 59% in 2011 and 47% in 2010. Western Europe had the highest rate of engagement (79%), North America the lowest (49%).

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Energy (76%), consumer staples (74%), utilities (68%) were shown to be the top three types of global firms surveyed by BNY to be engaging most actively with SWFs. In terms of size, BNY noted SWF engagement with 86% of mega-cap firms, large-cap (83%), mid-cap (61%).

“The basis for why SWFs are increasing in prominence is their longer term approach in investment horizon,” BNY Mellon’s Guy Gresham told aiCIO. “The majority of the asset management industry is taking a more conservative approach and staying on the sidelines with this economic environment. Corporations want stability in terms of longer term investment.”

“Uncertainty is the underlying theme of this year’s survey, so it’s no surprise company executives are devoting more of their outreach to retaining current institutional investors,” added Christopher M. Kearns, deputy CEO of BNY Mellon’s Depositary Receipts business, in a statement. “Issues like the Eurozone and ‘fiscal cliff’ continue to weigh heavily on markets globally. In response to these challenges, we’re seeing more firms seeking to boost their international shareholders. Depositary receipts remain a key tool for companies in both traditional and emerging markets to source new pools of capital.”

BNY Mellon’s study highlighted that companies are continuing to voice their uncertainties over that stability of the Eurozone and global systemic market risk, along with the prospect of increased regulatory oversight.

Latin American companies point to global systemic risk and the sustainability of emerging market growth as their chief worries. The survey noted that in Asia-Pacific region, while most of those surveyed consider Eurozone stability important to market confidence, a higher percentage of firms are concerned by currency exchange rates than in other regions. “Regulatory concerns are pervasive; half of respondents are uncertain about how additional regulatory oversight will affect liquidity, with over a third saying it will be negatively impacted,” BNY Mellon said.

The growing influence of SWFs amid a shaky global economy can be seen as their assets under management boom. In April, research firm Preqin reported that assets held by SWFs rose by over 16% last year to hit $4.62 trillion.

“Sovereign wealth funds have a continued interest in private equity and many believe the asset class offers favorable long-term investment opportunities,” Alex Jones, managing editor of 2012 Preqin Sovereign Wealth Fund Review, said at the time. “Over recent years, the number of sovereign wealth funds seeking to hold more diverse portfolios of investments, by both strategy and geography, has risen. Although financial markets remain turbulent, such institutions represent a significant amount of the capital invested in private equity and are likely to continue to allocate increasing amounts to the asset class going forwards.”