--- MAY 18, 2007 ---
New Tiburon Research Report -- Hedge Funds
Tiburon is pleased to announce a new research report titled A Comprehensive Overview of the Hedge Funds Industry. This updated report provides a detailed summary of hedge fund business trends, the product's key distribution channels, and Tiburon’s expectation for the market's future
Please click the image above to view the table of contents for Tiburon's new Hedge Funds Research Report
Tiburon Strategic Advisors, a market research & strategy consulting firm serving a wide variety of financial institutions and investment managers, is pleased to release its latest research report addressing the hedge funds industry.
This is Tiburon's third draft of this report. It is 343 pages in length. Tiburon’s first draft of this report was published in 2000 before hedge funds caught the attention of many financial institutions and financial advisors; that version was actually a broad report addressing hedge funds, venture capital & private equity, real estate, & other alternative investments. Tiburon’s second draft of this report compiled just a month later in 2000, was its first stand-alone hedge funds report. Tiburon’s third draft of this report includes refinements to its table of contents to bring it into alignment with other Tiburon research reports, updates to some data in this fast growing business, significant new details throughout the report, additional information incorporated into many company profiles in the appendix, and substantial refinements of the underlying Power Point pages.
There are three core sections for this third draft. The first section aims to explain the evolution of the hedge funds industry, the second section outlines hedge fund markets & distribution channels, and the last section addresses Tiburon's predictions for hedge funds.
This report has a long list of interesting facts to share:
The Evolution of the Hedge Funds Business
This section of the report addresses the investment product polarization, the role of hedge funds in the investment spectrum, and the emergence of this fast growing product category:
- Hedge funds were invented by AW Jones in 1949 and developed through three phases, including diversifying their strategies from 1969-1985, seeking high returns from 1986-1997, and seeking risk management from 1998-2005
- There has been an explosion in both the number of hedge funds and their assets; there are now over 1,300 hedge fund managers, and 8,000 hedge funds with over $1.9 trillion in assets
- The four broad hedge fund categories are equity strategies, arbitrage or relative value strategies, event driven strategies, and global macro strategies
- Equity strategy hedge funds include hedged equities, non-hedge equities, international or global hedged equities, emerging markets hedged equities, equity market neutral, and dedicated short selling
- Equity strategies were hurt by poor stock performance in the early 2000s
- Arbitrage or relative value strategies include fixed income arbitrage, convertible bond arbitrage, and statistical arbitrage
- Fixed income arbitrage takes advantage of price differentials and statistical arbitrage takes advantage of pricing inefficiencies
- Event driven strategies include merger & acquisition arbitrage, and distressed securities & bankruptcies
- Global macro strategies place bets on shifting global economies; they have seen their assets taper off but may be making a comeback
- The leading strategies change annually with equity and global macro strategies having led the past decade
- Worldwide hedge funds are led by the Soros Quantam Fund and worldwide hedge fund-of-funds companies are led by UBS
- Six hedge fund product structures include hedge fund-of-funds, hedge fund index funds, registered hedge funds, mutual funds with hedge fund strategies, hedge funds in variable life wrappers, and offshore hedge funds
- Hedge funds-of-funds have been a hot model, but recently experienced negative flows; while hedge funds-of-funds can offer diversification, provide professional due diligence, and require lower minimums, they also can have double fees, poor name recognition, and poor transparency
- Hedge fund index funds are a low cost alternative to hedge funds-of-funds, but drawbacks include average performance, no track records, and no standards for index building
- Registered hedge funds are closed-end, 1940 Act funds; advantages include allowing an unlimited number of investors, lower investment minimums, increased transparency, and the ability to advertise
- Mutual funds with hedge fund strategies allow hedge fund strategies to be offered more broadly; mutual fund companies entering this market include Axa Rosenberg, The Charles Schwab Corporation, Potomac, Rydex, and UBS
- Hedge funds are also offered in variable life wrappers, which may be most appropriate for long-term investors as these products can help minimize taxes
- Offshore hedge funds assets are now over $200 billion
- There are twelve key characteristics of hedge funds: pooled investments structured as limited partnerships, employ various investment strategies, often hedge investments, often use leverage, usually have high investment minimums, usually have high management fees & performance fees, transparency is limited, allow limited liquidity, relatively new & small hedge funds with experienced management, limited data integrity and performance reporting, generally have management money invested, and are increasingly audited & regulated
- There are eight key hedge fund issues, including excessive leverage, extremely risky investments, corporate governance, excessively high fees, offer very limited liquidity, provide no transparency, poor data integrity, and performance reporting
- Hedge funds are pooled investments usually structured as limited partnerships with loose regulations; hedge funds are most often structured according to SEC Rule 3c1, which defines accredited investors and limits partners to 99 per pool
- Three-quarters of hedge funds can sell short and three-quarters use derivatives to hedge
- Hedge funds often use leverage, depending on strategies; use of extreme leveraging is actually rare
- Two-thirds of hedge funds use equity strategies and equity & global macro strategies control three-quarters of assets
- Hedge funds require high minimum investments; common requirements include a $250,000 minimum and $1.5 million net worth
- Hedge funds charge high management & performance fees; the largest funds charge 2.0% management fees and 80% also charge performance fees; two factors regulate incentive fee charges, including hurdle rates and high watermarks
- Hedge funds have limited liquidity, as monthly entry dates are typical and quarterly exit dates are typical
- Hedge funds typically are young and have low assets under management, are started by experienced managers; 75% of hedge funds have more than $500,000 of management money invested in their funds
- While hedge funds' failure rate has declined, it is still high at 35%, half of which are due to operational failures
- Hedge funds are increasingly audited & regulated; almost all provide audited statements; some reasons for registration include growing assets, hedge funds’ significance in markets, the rising number of fraud cases, and hedge funds’ increased exposure to small investors; but, hedge funds typically oppose regulation as many are secretive
Hedge Funds Markets & Distribution Channels
This section of the report addresses the market & distribution channels for hedge funds. Furthermore, this section will discuss traditional market opportunities, and emerging market opportunities, provide a market-by-market overview, and explain how to build a distribution strategy:
- Traditional markets for hedge funds are high net worth households, endowments & foundations, and international markets
- High net worth households account for 55% of hedge fund assets
- Endowments & foundations account for 80% of institutional hedge fund assets; with the average hedge fund gathering 12% of its assets from endowments & foundations
- Emerging market opportunities for the hedge funds industry include the emerging affluent, pension plans, and 401k plans
- Hedge fund companies are targeting the emerging affluent with lower minimums and products such as hedge funds-of-funds, separately managed accounts, and 1940 Act hedge funds
- Hedge fund products are distributed to the emerging affluent through family offices, bank trust departments, and brokers & financial advisors
- Pension plans have $60 billion in hedge fund assets, an amount which is growing; but, most pension plans still have less than 10% of their assets invested in hedge funds
- Pension plans have twelve needs in hedge funds, including unique investment opportunity, no blow-ups or headline risk, appropriate products & packaging, transparency in easy to understand format, risk & intermediation structures, ownership structures, financing functions, technology infrastructure, clear process, track record, fees, time horizon
- Two-thirds of independent advisors plan to increase usage of hedge funds; currently only 10% of the top 50 independent broker/dealers offer hedge funds
- Family offices’ allocation to hedge funds is increasing; one-third of all family offices use hedge funds
Finally, the last section of the report summarizes Tiburon's expectations around industry size, market growth, five key product trends, continual blow ups, the retailization of hedge fund products & the institutionalization of the business, and consolidation of the business:
- Assets in hedge funds should surpass $3 trillion by 2010
- Six key product trends include hedge fund-of-funds, hedge fund index funds, registered hedge funds, mutual funds with hedge fund strategies, hedge funds in variable life wrappers, and offshore hedge funds
- The institutionalization of the hedge funds business is driven by several factors, including intensified competition and the collapse of several high profile hedge funds; some industry features will evolve throughout the institutionalization process, including managers needing to choose established infrastructures, the decision about continuing as boutiques and hedge fund-of-funds managers being forced to upgrade tracking capabilities
- Merger & acquisition activity will continue, as larger companies may appeal to institutional investors; the concentration of assets will increase
- Some hedge fund characteristics will withstand institutionalization, including absolute return approaches, and the entrepreneurial character
To better understand the developments in the hedge funds industry, executives can purchase Tiburon's Hedge Fund research report where the key learnings highlighted above are covered in greater detail. Please contact Brian Cotter at BCotter@TiburonAdvisors.Com.
The following links will open specific pages on Tiburon's web site:
Tiburon Strategic Advisors
Tiburon Strategic Advisors, based in Tiburon, CA, was formed in 1998 to offer market research & strategy consulting services to all types of financial institutions and investment managers:
- The firm has served over 300 corporate clients and completed almost 1,000 projects since its founding, and today, its knowledge base includes mutual fund distribution, separately managed account programs, alternative investments, wealth management, insurance products, banking services, the fee-only financial advisor market, the CPA firm market, the family office market, and various international markets.
- Tiburon holds a series of CEO Summits semi-annually for its executive-level clients. The next CEO Summit is scheduled for October 9-10, 2007 at the Ritz Carlton Hotel in San Francisco, CA. 2008-2009 dates are April 10-11, 2008 (New York, NY), October 14-15, 2008 (San Francisco, CA), April 9-10, 2009 (New York, NY), and October 7-8, 2009 (San Francisco, CA). Attendance is by invitation only and attendance at each Summit is limited to 100 senior industry executives. Visit the CEO Summits section of Tiburon's web site for details on current and past CEO Summits, including attendee lists, meeting agendas, and highlights. Please contact Tiburon’s Managing Principal Chip Roame at CRoame@TiburonAdvisors.Com or (415) 789-2541 if you are a Tiburon client and have an interest in attending a future Tiburon CEO Summit.
- Tiburon offers thirteen online business benchmarking tools that are available to all types of financial advisors in an effort to help them benchmark their business practices and build more successful businesses. The sites include www.BrokerBestPractice.Com for wirehouse & regional brokers, www.FABestPractices.Com for fee-only financial advisors, www.IndependentRepBestPractices.Com for independent reps, and www.PrivateBankerBestPractices.Com for private bankers. Almost 5,000 advisors have used these tools. By completing one of the online surveys, financial advisors can access a FREE copy of the relevant comprehensive Tiburon research report, which summarizes and analyzes the collective results.
- Tiburon has published twenty-six ~300-400+ page research reports, which offer detailed analyses of growing business segments; each is available for $5,000; these reports can be ordered by contacting Brian Cotter at BCotter@TiburonAdvisors.Com or (415) 789-2546.
- Tiburon’s weekly research releases, like this one, are emailed for free to interested industry executives, media representatives, conference planners, and individual financial advisors. Over 40,000 industry executives now receive these releases. Feel free to sign up to receive future research releases at Tiburon’s web site (www.TiburonAdvisors.Com) if this release was passed to you by a colleague and you would like to receive them directly in the future.
- Tiburon recently added a president of its research, tools, & database business, and the firm plans to expand its workforce in 2007 and 2008. New research managers will develop proprietary research content for Tiburon research reports and client projects and new marketing managers will enhance the firm's web site, weekly research releases program, and the firm's relationships with media representatives, conference planners, and its clients & executive program members. The firm is also seeking to add principal candidates and possibly a chief consulting officer in 2007 or 2008.
- Tiburon has built three executive programs (CEOs-in-Residence, Financial Advisor Roundtable, and Consulting Fellows) in an effort to bring the experiences of additional senior level industry executives to Tiburon clients. Feel free to contact any of the members of Tiburon’s executive programs directly or ask that they be included in any ongoing Tiburon project.