From alternatives to mainstream:

Transcription

1 Deutsche Bank Markets Prime Finance From alternatives to mainstream: Hedge funds changing role in the asset management industry Deutsche Bank Survey November 2013

2 Disclaimer: This material is for discussion purposes only and is not an offer, or solicitation of an offer, to buy or sell any security or financial instrument or to participate in any trading strategy. The information contained herein is the Deutsche Bank Hedge Fund Capital Group s summary, interpretation and analysis of the assumptions, estimates, views, predictions and opinions of the investors that participated in the Deutsche Bank 2013 Autumn Survey as of the date of this publication. No representation is made by Deutsche Bank that the information contained herein is accurate or complete. Any projections are based on a number of assumptions as to market conditions and there can be no guarantee that any projected results will be achieved. Past performance is not a guarantee of future results. This material was not produced, reviewed or edited by Deutsche Bank s Research Department. 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3 Deutsche Bank Survey November Acknowledgement The Hedge Fund Capital Group would like to thank all hedge fund managers and investors that have participated in this survey. We appreciate the time that they spent providing us with valuable insights into their participation in the marketplace for non-traditional hedge fund products. This survey is a complement to the annual Deutsche Bank Alternative Investment Survey, one of the most extensive and longest-running global hedge fund investor surveys in the industry. We hope you find this survey of interest and we look forward to working with you. Barry Bausano President, Deutsche Bank Securities, Inc. Co-Global Head of Markets Prime Finance Murray Roos Co-Global Head of Markets Prime Finance Co-Head of EMEA Equities Anita Nemes Global Head, Hedge Fund Capital Group

4 4 Deutsche Bank Survey November 2013 Contents Executive summary... 1 Methodology & respondent profile... 5 Current market overview Asset growth & product proliferation Pricing... 41

5 Deutsche Bank Survey November Executive summary

6 2 Deutsche Bank Survey November 2013 Executive summary In Deutsche Bank s 2012 Alternative Investment Survey, over of investor respondents expected the convergence of traditional asset management and alternative managers to be the most significant development over the next few years. 1 The confluence of these two industries has been underway for the last quarter of a century, with traditional asset managers launching the first wave of alternative mutual funds in the late 1980s. While a few leading hedge fund managers pioneered the way into hedge fund-run long only in the early 2000s, the hedge fund industry has been slower to embrace the convergence trend. However, as the investment management industry continues to undergo profound changes and global investor demand further evolves, hedge fund managers are increasingly seeing impetus for change. The financial crisis, coupled with ongoing regulatory change, has reinvigorated the market for liquid alternatives, which largely consists of alternative 40 Act mutual funds and alternative UCITS vehicles. Significant market losses, high correlations and unforeseen illiquidity issues have led retail investors and private wealth managers to increasingly seek liquid, non-correlated assets with lower portfolio volatility within a regulated investment framework. It is evident that they are turning to liquid alternatives as a solution. Assets in alternative mutual funds have experienced a CAGR of 38% over the past five years, growing from $47bn in 2008 to $238bn by Q While assets represent only 2% of the US mutual fund industry, continued flows are expected to result in increased market share over the coming years. 3 Meanwhile assets residing in alternative UCITS have increased over 300% since the crisis to 163bn. Alternative UCITS now account for approximately 2.5% of the 6.6tn UCITS industry, compared to 0.5% five years ago. 4 Concurrently, a fundamental shift is occurring within institutional portfolios: investors are moving away from traditional asset allocation in favour of a risk-based approach. Investors are incorporating alternatives, including hedge funds, into their core portfolios rather than into a separate alternatives allocation, effectively removing any constraints on the percentage allocation to alternative investments. By the end of 2012, institutional investment accounted for over half (53%) of total alternative assets managed by the top 100 alternative managers globally, with demand expected to increase in the coming years. 5 The hypothesis is that as institutional investors become ever more comfortable with hedge funds and other alternative investment managers, they will increasingly seek out trusted hedge fund partners to help run not only their alternatives exposure, but their long only portfolios as well. The hedge fund business model has changed considerably since 2008, and those managers that have focused on developing true partnerships with clients are seeing new opportunities to service those investors across the portfolio. In this survey, we examine the evolving marketplace for non-traditional hedge fund products, with a particular focus on asset growth, product proliferation and pricing. The universe of hedge fund managers diversifying their product lines is growing at a significant pace as managers seek to provide differentiated solutions to investors globally. 1 Deutsche Bank 2012 Alternative Investment Survey 2 Morningstar October 2013; Deutsche Bank analysis 3 Morningstar October 2013; Deutsche Bank analysis 4 Bloomberg October 2013; ESMA July 2013; EFAMA September 2013; Deutsche Bank analysis 5 Financial Times, Pension funds press forward on alternative route July 2013

7 Deutsche Bank Survey November Key trends to watch: Growth in non-traditional hedge fund products to be driven by changing investor demand. Over half of investor respondents allocate to non-traditional hedge fund products, including 36% who invest in hedge fund-run long only, and one third investing in liquid alternatives operated by hedge fund managers. One third of all investors increased their allocations to non-traditional hedge fund products last year, and another 43% on average plan to increase their allocations over the next 12 months. Institutional investors and private wealth allocators continue to diverge in their investment preferences: 55% of long only assets managed by hedge fund manager respondents are from institutional investors, whereas retail capital accounts for 54% of assets in alternative 40 Act mutual fund run by responding managers. Funds of funds and private wealth represent nearly 60% of assets residing in alternative UCITS funds managed by respondents. Large, well-established hedge fund managers continue to capitalise on emerging business opportunities outside their core hedge fund offering. The trend towards product diversification is most pronounced among the large, well-established firms: 81% of managers with more than $5bn in hedge fund assets under management ( AUM ) have launched at least one non-traditional hedge fund product. 77% of managers running a diversified product offering have been managing non-traditional hedge fund products for more than 3 years, including 40% with more than 10 years experience. Managers with extensive resources, experience and brand loyalty are well-placed to respond to growing client demand for bespoke products. Hedge fund managers to become solution providers for institutional investors. Hedge fund managers are crossing over into non-traditional products because clients are asking them to 67% of responding managers say that demand from existing clients is one of the top 3 reasons for diversifying the product line. Well-established hedge fund managers who have a proven record of alpha generation are being approached by their existing investors to run bespoke long only mandates or, in some cases, liquid alternatives: 28% of investors have asked a hedge fund to set up a separately managed long only or liquid alternatives vehicle on their behalf, and a further 30% are considering it. Hedge fund managers to become an even larger part of the wider asset management industry. The $2.51tn hedge fund industry has rebounded significantly since the crisis, growing 12% annually over the past five years. 6 The US mutual fund industry and the UCITS market in Europe have experienced CAGRs of and 3% over the same time period. 7 While assets residing in liquid alternatives and hedge fund-run long only products currently represent a small portion of these markets, recent growth rates in each of these arenas suggest that the gap will narrow in the coming years, and that it will be driven by hedge fund managers. Half of manager respondents in this survey currently run nontraditional hedge fund products, and 48% of those managers have seen more than half of new business since 2008 directed towards their non-traditional hedge fund products. One fifth of all responding managers have plans to launch at least one non-traditional hedge fund product over the next 12 months, and another 42% are considering it. With a variety of new growth channels, we expect hedge funds to become an ever more formidable part of the wider asset management industry in the years to come. 6 HFR Industry Reports HFR, Inc., Deutsche Bank analysis 7 Bloomberg October 2013; Morningstar October 2013; EFAMA October 2013; Deutsche Bank analysis

8 4 Deutsche Bank Survey November 2013

9 Deutsche Bank Survey November Methodology & respondent profile

10 6 Deutsche Bank Survey November 2013 Methodology Deutsche Bank s Autumn 2013 survey examines the evolving marketplace for nontraditional hedge fund products. In October 2013, we asked the Deutsche Bank hedge fund client base and global investor network to participate in this survey and we gathered the data over the subsequent month. In this survey, 60 global hedge fund managers, representing $528bn in firm wide assets, share their experience in launching and running products outside their core hedge fund offering, with a particular focus on traditional long only and liquid alternatives investor entities, that collectively manage and/or advise on more than $625bn in hedge fund assets, have also answered a separate survey, offering insight into their allocation plans and preferences for non-traditional hedge fund products run by hedge fund managers. While many more managers and investors took part in this year s survey, we have only included in our analysis those that completed the survey. Respondents comprise a wide variety of managers and hedge fund investors from across the globe. The information that follows explores their views on the evolving marketplace for hedge fund-run long only and liquid alternatives, as well as the trends they foresee for the industry. The purpose of this survey is not to provide an introduction and overview of hedge fund-run liquid alternatives and long only, but rather to offer a detailed analysis of the changing supply and demand of the market. For the purposes of this survey, non-traditional hedge fund products refers to alternative UCITS, alternative 40 Act mutual funds, long only, long only UCITS, 130/30, drawdown funds, and any other products outside a traditional hedge fund offering. Liquid alternatives refers to alternative UCITS and alternative US-registered mutual funds ( 40 Act). 8 Three of these managers have large long only asset management businesses, and have been active in building out their hedge fund offering. In order to avoid skewing the data, we have removed their long only assets from the combined firm-wide AUM number.

11 Deutsche Bank Survey November Profile of survey respondents: Manager profile: 65% of hedge fund managers responding to this survey are based in the US. 23% are headquartered in Europe and the remaining 12% are in Asia Pac. 40% of managers employ equity hedge as a primary strategy, making this the largest contributing strategy in the sample set. One quarter of manager respondents employ credit strategies and another quarter define themselves as multi-strategy. 63% of manager respondents have more than $1bn in assets under management, including 27% who manage more than $10bn. Primary strategies employed by manager respondents Equity hedge 40% Credit Multi strategy 25% 25% Event driven Other 17% Macro Quant 13% 12% 0% 30% 40% 50% % of manager respondents Note: Respondents were allowed to select more than one strategy Manager breakdown by location of headquarters (by number) 12% North America Europe 23% Asia Pac 65%

12 8 Deutsche Bank Survey November 2013 Manager breakdown by firm size (by number) 30% % of manager respondents 25% 15% 5% 18% 7% 12% 28% 8% 27% 0% <$250m $250-$500m $500m-$1bn $1-$5bn $5-$10bn $10bn+

13 Deutsche Bank Survey November Investor profile: Investors from 25 different countries responded to the survey. As anticipated, the vast majority of investors are based in either North America or EMEA, both when calculated by number and by hedge fund assets under management ( HF AUM ). Funds of funds are the largest contributing investor group to the survey, representing 34% by number and 47% by HF AUM. The investment consultants are significant contributors, representing of total HF AUM. These consultants have a client base consisting of a significant number of institutional end-allocators, such as pension plans (public and private), endowments, foundations and government funds. Institutional investor respondents collectively managed $1.9tn in total assets. These respondents have over $180bn allocated to alternatives, and almost $90bn invested in hedge funds. Institutional investors account for 28% of the investor respondents by number, and 15% by HF AUM. 43% of responding investors manage $1bn+ in HF AUM, and 13% manage $5bn or more. Investor breakdown by type (by number and AUM) Fund of hedge fund 34% 47% Family office 3% 15% Investment consultant Private bank / Wealth Manager 14% Pension fund Asset manager Endowment & foundation Insurance company 9% 5% 8% 7% 7% 1% 3% 1% Number HF AUM SWF Other 1% 1% 5% 2% 0% 30% 40% 50% % of investor respondents Note: Percentages do not add up to 100% due to rounding.

14 10 Deutsche Bank Survey November 2013 Investor breakdown by region (by number and AUM) North America 56% 64% Europe 33% 34% Asia Pac Middle East 3% 8% 1% HF AUM Number Other 2% 9% 0% 40% 60% % of investor respondents 80% Investor breakdown by hedge fund AUM (by number) 50% % of investor respondents 45% 40% 35% 30% 25% 15% 5% 44% 14% 29% 6% 7% 0% <$500m $500m-$1bn $1-$5bn $5-$10bn $10bn+

15 Deutsche Bank Survey November Current market overview

16 12 Deutsche Bank Survey November 2013 Current market overview Hedge funds continue to increase their share of the wider asset management industry, as they grow and expand their businesses beyond traditional hedge funds. The market for liquid alternatives and hedge fund-run long only products remains small relative to the size of the hedge fund, US mutual fund and European UCITS industries; however, it is growing at a significant pace. Assets in alternative mutual funds have experienced a CAGR of 38% since Q3 2008, and now total an estimated $238bn, approximately 2% of the total US mutual fund industry. 9 Assets residing in alternative UCITS products currently stand at an estimated 163bn under management (2% of total UCITS industry), having grown over 30% annually since Q Meanwhile, assets in pure long only vehicles managed by firms identifying themselves as hedge funds total $177bn as of Q3 2013, having grown 16% in 2012 and 6% year to date. 11 It is against this backdrop that we surveyed hedge fund managers and investors on their participation in the marketplace for non-traditional hedge fund products. Section highlights: Current supply The number of hedge fund managers currently running non-traditional hedge fund products is substantial: half of manager respondents currently offer at least one product outside their traditional hedge fund offering, and another would consider it. Over a third of manager respondents currently run long only vehicles, 17% run alternative mutual funds, and 13% run alternative UCITS products. The trend is most pronounced among the large, more established managers: 81% of managers with more than $5bn in HF AUM have launched a non-traditional product. 77% of these managers have been running such products for more than 3 years, including 40% with over 10 years of experience. Managers with an extended suite of products have been rewarded with new business. 48% have seen over half of new business since 2008 directed towards their non-traditional hedge fund products. Managers cite diversifying the business and demand from existing clients as the top two reasons for launching and running a product outside their core hedge fund business. While managers are seeing demand from existing investors, they consider asset raising for non-traditional products a considerable challenge. Managers also cite cannibalization of existing product as a top concern when crossing into mainstream products. Current demand Over half of all investor respondents by number, and 67% by HF AUM, allocate to non-traditional hedge fund products. 36% of investors allocate to hedge fund-run long only, 21% to alternative UCITS, and 12% to alternative 40 Act mutual funds. The single most attractive benefit of investing in alternative UCITS or alternative 40 Act mutual funds is increased liquidity. Interestingly, lower fees were not among the top two reasons for investing in liquid alternatives. Concurrently, two key factors constraining investment in such products are a limited supply of high quality managers and performance concerns. Investors cite manager skill and expertise as the single most attractive benefit of allocating to long only via a hedge fund. The percentage of investor respondents who say fees are a key impediment to growing their allocation to hedge fund-run long only is nearly matched by the percentage who have no concerns around investing in such products. 9 Morningstar October 2013; Deutsche Bank analysis 10 Bloomberg October 2013; ESMA July 2013; EFAMA September 2013; Deutsche Bank analysis 11 Institutional Alpha October 2013

17 Deutsche Bank Survey November Current Supply Managers: Do you offer products outside your traditional hedge fund offering? % of manager respondents 100% 30% 33% 75% 50% 47% 25% 50% 0% All respondents <$500m 43% 41% 14% 18% 43% 41% $500m-$1bn $1bn-$5bn 14% 5% 81% $5bn+ No Not to date, but would consider it Yes Results show that half of manager respondents currently offer at least one product outside their core hedge fund offering. Furthermore of managers who have not yet launched a non-traditional hedge fund product would consider doing so in the future. Perhaps unsurprisingly this trend has been most pronounced among large, wellestablished firms who have significant AUM and successful hedge fund businesses. Indeed 81% of $5bn+ managers have a product suite whose range extends beyond traditional hedge funds. It is interesting to note that the group most willing to consider expanding their product range are those with less than $500mn in AUM. Managers: What type of products do you run outside your traditional offering? Long only 35% Alternative 40 Act 17% Alternative UCITS 13% Other 23% Note: Respondents were allowed to select more than one product. Other primarily consists of private equity and distressed credit AUM. By location of manager 70% 60% 50% 40% 30% 0% 38% 0% 30% 23% US-based managers 64% 7% 29% EU-based managers Long only Alternative 40 Act Alternative UCITS 29% Asia-based managers 40%

18 14 Deutsche Bank Survey November 2013 Over a third of manager respondents currently run a long only vehicle, making this the most prevalent non-traditional hedge fund product offered. Again, this trend is most pronounced among the brand name hedge funds with successful long short offerings: over 60% of those who run long only vehicles manage more than $5bn in firm wide assets; over half have successful equity hedge businesses. Regionally, this trend is most common among the European managers in this sample set. Almost two thirds run a long only vehicle, compared to 38% of US-based managers. 17% of manager respondents, 10 firms in total, operate alternative 40 Act mutual funds, representing more than half of the total estimated number of hedge fund managers running alternative 40 Act programs % of these respondents act in the capacity of a sub-advisor to a multi-manager alternative fund run by an independent investment manager. The remaining 40% run their own single funds as both the investment manager and advisor. The open end fund structure is the most prevalent among our sample set, with 9 out of the 10 manager respondents operating their alternative mutual funds in such format Key characteristics associated with open end structures (versus closed end) include daily liquidity and pricing requirements, restrictions on leverage and short selling, and rules against performance fees. These make the format suitable for investors and liquidity sensitivities, as well as the asset management firms that service them. Managers operating alternative 40 Act mutual funds represent a diverse mix of strategies, including equity hedge, credit, quant, macro and multi-strategy. It is important to note, however, that not all hedge fund strategies can be easily translated into an alternative mutual fund format, given the restrictions stated above. As such, alternative mutual funds are expected to remain limited to a certain subset of the hedge fund market. We also surveyed funds of funds on their participation in the multi-manager alternative 40 Act space. A small percentage (9%) currently operate multi-manager alternative 40 Act products, with these respondents representing some of the leading global asset managers. 15% of manager respondents offer alternative UCITS products. As expected, the majority of managers running UCITS products employ equity strategies, which can be easily translated into a UCITS format. While UCITS are typically associated with both European managers and investors, it is interesting to note that of US respondents state that they run a UCITS product. Breakdown of firm wide assets by product AUM: 1% 3% 11% Traditional hedge funds Long only Alternative 40 Act Alternative UCITS 18% Other 66% Note: Other primarily consists of private equity and distressed credit AUM. 12 Hedge fund Alert, Hedge funds plodding into mutual funds October 2013

19 Deutsche Bank Survey November Breakdown of non-traditional hedge fund offering by product AUM Manager respondents product AUM (USD) $96.8bn Long only Total non-traditional hedge fund AUM = $179bn $57.8bn $17.5bn $6.9bn Alternative 40 Act Alternative UCITS Other Note: Other primarily consists of private equity and distressed credit AUM. Responding hedge fund managers have a combined $179bn in non-traditional hedge fund AUM. Combined non-traditional AUM accounts for one third of the $528bn in total firm-wide assets managed by hedge fund respondents. We have removed three responding managers who classify themselves as traditional asset managers as their total long only AUM is not an accurate representation of the sample set. Managers: How long have you been running products outside your traditional offering? 45% 40% 37% 40% % of manager respondents 35% 30% 25% 15% 5% 7% 17% 0% Less than 1 year 1-3 years 3-10 years More than 10 years Note: Only managers that run non-traditional products answered this question. Percentages do not add to 100% due to rounding.

20 16 Deutsche Bank Survey November 2013 The convergence of hedge funds and mainstream asset managers has gained attention over the past year following a wave of high profile alternative 40 Act and long only product launches. That said, this trend towards long only is not a new phenomenon. Indeed the vast majority (77%) of managers who currently run non-traditional hedge fund products have been running such products for over 3 years, including 40% who boast more than 10 years experience. Our findings suggest that the universe of hedge fund managers offering non-traditional hedge fund products remains concentrated among established firms who have built credible brands around their core hedge fund businesses. Supply, however, is expanding, as new managers enter the market and incumbent players continue to launch new products (see pages 38-39). Managers: What is the firm s growth strategy? Grow existing fund strategies 92% Develop new strategy separate from existing capabilities 33% Translate selected hedge fund strategies into regulated alternative vehicles Carve out long only sleeve of existing flagship L/S product 23% Acquire another business with expertise in target capabilities 7% Other 8% 0% 40% 60% 80% 100% Note: Respondents were allowed to select more than one strategy. Other includes co-investment opportunities and launching private equity style vehicles. The move beyond traditional hedge fund products has been accepted as a viable growth strategy for many hedge fund managers. While 90% of hedge fund managers continue to grow their existing hedge fund strategies, 23% of managers have also translated, or intend to translate, their existing hedge fund strategies into regulated alternative vehicles. Further, another currently run, or plan to run, a long only product that mimics the long book of their successful hedge strategy. One third have a growth strategy that involves developing new strategies that are separate from their existing capabilities.

21 Deutsche Bank Survey November Managers: What percentage of new business since 2008 has been for non-traditional hedge fund products (versus hedge fund products)? 50% 45% % of manager respondents 40% 35% 30% 25% 15% 28% 21% 17% 31% 5% 3% 0% Less than 10-25% 26-50% 51-75% More than 75% Note: Only managers that run non-traditional products answered this question Those managers who have embraced non-traditional hedge funds as a way to grow and expand their businesses have been rewarded with new asset flows. For 48% of managers running an extended suite of products, almost half of new business since 2008 has been for non-traditional hedge fund products. Managers: Average breakdown of non-traditional hedge fund product AUM by investor type 100% 16% 14% 75% 6% 8% 19% Other 50% 55% 54% 28% Retail Institutional Asset manager 25% 0% 5% 15% 4% Long only 5% 21% Alternative 40 Act 31% Alternative UCITS Private wealth Fund of hedge fund

22 18 Deutsche Bank Survey November 2013 It is important to note that hedge fund-run long only, alternative UCITS and alternative 40 Act mutual funds attract very different clientele. Since 2008, hedge fund managers have dedicated a significant amount of time and resource to developing their marketing and investor relations efforts, with a view to understanding better the diverse needs and objectives of their existing clients and prospective investors. With a greater appreciation of the key drivers of investors asset allocation plans, hedge fund managers have been increasingly focused on offering clients a broader and more diversified suite of investment products. As such, hedge fund marketing has been increasingly geared towards providing solutions as opposed to selling products. Responding managers running long only products have seen demand primarily from institutional investors, who are increasingly recognizing the benefits that an experienced hedge fund manager can bring to a long only portfolio (see page 29). On average these investors account for more than half of respondents long only product AUM. By contrast, more than half of alternative 40 Act mutual fund assets under management in our sample set is comprised of retail capital. Private wealth firms and funds of funds make up half of all UCITS assets run by hedge fund manager respondents on average. Liquid alternatives offer absolute return products within a regulated framework and with a high level of liquidity a compelling proposition for retail investors and high net worth individuals who tend to have liquidity sensitivities, investment restrictions and a preference for onshore regulated vehicles. Managers: Average breakdown of non-traditional hedge fund product AUM by investor location % of manager respondents 100% 75% 50% 25% 17% 3% 21% 58% 80% 13% 3% 14% 30% 34% Asia Pac Middle East Europe Scandinavia Switzerland Continental Europe UK North America 0% Long only Alternative 40 Act 6% Alternative UCITS Alternative 40 Act mutual funds are largely dominated by US investors, who represent 80% of AUM on average. This is in contrast to alternative UCITS where European investors comprise an average of 81% of AUM. When analyzed further, the UK and continental Europe are the two primary sources of alternative UCITS capital, accounting for 34% and 30% of managers alternative UCITS AUM, respectively. On average, hedge fund manager respondents with long only products have 58% of product AUM from North America and 21% from Europe.

23 Deutsche Bank Survey November Managers: What are the primary reasons for expanding your product range beyond traditional hedge funds? Diversify the business model 36% 76% Demand from existing clients 29% 67% Expand the client base 5% 50% Scalability 31% Top 3 choices Capture first mover market share into a new product 24% First choice Expand investment horizon 7% 24% Capacity constraints on existing hedge strategy Other 2% 2% 19% 0% 40% 60% % of manager respondents 80% There are a number of key factors influencing managers to move beyond traditional hedge fund products. Managers who have launched, or are thinking about launching, a non-traditional hedge fund product indicate that diversifying the business model and demand from existing clients are the foremost reasons for expanding their product suites. Many large, successful hedge fund managers on both sides of the Atlantic recognise that diversifying away from their traditional business model may allow access to a much wider and diverse market opportunity. In the wake of the financial crisis, and amid ongoing regulatory change, several investor types, including private wealth asset managers and the emerging retail market, are increasingly seeking liquid, non-correlated assets, or alpha generating long only vehicles. While this may require hedge fund managers to offer lower priced, lower margin products (see pages 41-46), the size and scale of potential mandates may produce substantial revenues for the business. Further, for many large hedge fund firms with a solid infrastructure and robust resources, the costs of launching and operating liquid alternatives and long only vehicles may be lower than they are for emerging or younger managers. Nearly 70% of responding managers say that demand from their clients is one of the top 3 reasons for expanding their product suite beyond traditional hedge funds. When we analyzed the data further, 60% of responding managers who are planning or considering plans to launch a non-traditional hedge fund product over the next 12 months are doing so due to demand from existing clients. Within this group over half have received requests for long only products, and approximately 40% for alternative 40 Act mutual funds. Since 2008, investors have placed a strong emphasis on finding trusted partners who provide transparency and prioritize a strong alignment of interest with their clients. Those managers who have recognized this and who have focused on developing true partnerships with their clients are finding themselves as more broad-based solution providers to their clients. Results from this survey suggest that investors are increasingly turning to their hedge fund partners for help in creating investment products that are most appropriate for their portfolios and best aligned with their interests.

24 20 Deutsche Bank Survey November 2013 Managers: What percentage of your non-traditional AUM has come from existing investors in the firm s hedge fund products (versus new investors)? 60% % of responding managers 50% 40% 30% 38% 50% 50% 29% 25% 13% Long only Alternative 40 Act Alternative UCITS 34% 13% 0% 0% % More than 40% Note: Only managers that run non-traditional products answered this question. Percentages may not add to 100% due to rounding. For 34% of manager respondents running long only vehicles, more than 40% of their long only AUM has come from existing investors. This includes 22% of managers who have more than 60% of their long only AUM from existing clients. Half of those managers running alternative 40 Act mutual funds have raised some portion of their assets from existing clients, although to a lesser degree than those managers running long only products. The same can be said for managers running alternative UCITS funds. This is not surprising given that the majority of managers hedge fund-run long only AUM is institutional capital. A key theme that has emerged from the survey is that institutional investors are increasingly turning to hedge fund managers to act as solution providers for their portfolios. Well-established hedge fund managers who have proven their ability to generate alpha are being approached by their existing investors to run bespoke long only mandates (in some cases alternative 40 Act mandates). Those institutional allocators who are moving away from their traditional portfolio allocation models (see page 31), and who believe in the value that hedge fund managers can offer their core portfolio, are employing these hedge fund managers not only for their absolute return products, but for their expertise and skill on the long side of the portfolio. With this in mind we asked investors:

25 Deutsche Bank Survey November Investors: Have you/your clients asked a hedge fund manager to set up a long only or liquid alternatives vehicle on your behalf via a separately managed account or single investment fund? By number of investors 41% 28% Yes Not to date, but would consider it No 30% Nearly half of those investors who have already asked a manager to set up a nontraditional hedge product on their behalf were funds of funds. These funds of funds presumably represent top tier asset managers that have been successful in winning bespoke institutional mandates, or have secured an attractive distribution partner for their alternative 40 Act multi-manager fund. Indeed, 90% of these funds of funds manage over $1bn in assets, including 45% who manage over $5bn. The second largest category were the institutional investors (including investment consultants), who made up 34%. Not surprisingly, approximately 78% of these respondents have more than $1bn invested in alternatives. 63% of those who would consider the proposition are US-based investors. There is no significant pattern by investor type within any region, which indicates that continued demand for such products will originate from a diverse client base. We also asked managers whether they would accept a separately managed account or single investment fund (fund of one) on such products, and an overwhelmingly majority (89%) said yes. Presumably their response would depend on the size and quality of capital that the investor is willing to allocate.

26 22 Deutsche Bank Survey November 2013 Managers: What are the biggest challenges to expanding your product range beyond traditional hedge funds? Asset raising 38% 75% Cannibalization of existing product 25% 55% Set up costs Performance 3% 5% 35% 35% Regulatory restrictions on portfolio composition 23% Monitoring regulatory compliance 5% 18% Top 3 choices Disclosure reqirements 3% 15% First choice Access to high quality managers 5% 0% Limited product knowledge 5% 3% Other 35% 0% 40% 60% % of manager respondents Note: Percentages may not add to 100% due to rounding. 80% While managers are seeing considerable demand for non-traditional products from their existing clients, raising assets for such products remains a challenge. Three quarters of managers consider asset raising to be one of the top 3 challenges around expanding into non-traditional products. The current capital raising environment for hedge funds remains challenging, not least for those managers who are marketing new products outside their core competency to a new and unfamiliar audience. Raising assets for non-traditional hedge fund products requires tapping into a pool of capital that is less well-known to hedge fund marketers. A successful capital raising effort for liquid alternatives, and in particular for alternative 40 Act mutual funds, depends on a managers ability to access large retail distribution networks. Finding and establishing the right distribution partnerships is critical. Meanwhile, when marketing hedge fund-run long only, the process of navigating through large institutional organizations to connect with the right people can be challenging unless you have a pre-existing relationship. Capital Introduction teams serve as a useful intermediary between hedge fund managers and global allocators, and are well-placed to connect managers with the right people responsible for alternatives and/or hedge funds. That type of intermediary, however, does not exist in the long only world. Managers who have pre-existing institutional relationships are more likely to receive demand from those clients, effectively allowing them to build a track record and brand awareness around new long only products. As a result, these managers may be in a stronger position to raise additional capital from new investors down the road.

27 Deutsche Bank Survey November The second most prevalent concern among manager respondents is the risk of cannibalizing existing products. Results suggest that managers are taking into consideration the potential impact that new non-traditional hedge fund products might have on their existing hedge fund business. While there are obvious benefits of tapping into a large and more diverse client base, there is also the concern among managers that capital invested in the core hedge fund product may be reallocated to the lower priced, lower margin products. Further, managers feel that lower priced products may also jeopardise future business for existing hedge fund products, particularly as they market to an increasingly fee sensitive investor base. Product cannibalization, however, largely depends on the quality of the new product relative to the existing one. With this in mind, we asked managers how their flagship long only and liquid alternative products have performed YTD relative to their benchmark and the corresponding flagship hedge fund strategy. Managers: How has performance been on your non-traditional hedge fund products? Long only: 100% 75% 39% 38% Outperforming by more than 5 percentage points 50% 25% 0% 44% 6% 11% Performance relative to benchmark 29% 14% Performance relative to corresponding hedge fund strategy Outperforming by 0-5 percentage points In line with performance Underperforming by 0-5 percentage points Underperforming by more than 5 percentage points As will be discussed, the top two benefits for investors allocating to hedge fund run long only funds are stated to be manager skill and expertise, and better expected performance in the long only product relative to the corresponding hedge fund strategy (see page 29). Results from the survey suggest that hedge fund managers running long only are delivering both this year: 83% of managers say that their flagship long only fund has outperformed their benchmark YTD, including the 39% that have outperformed their benchmark by more than 5 percentage points. The percentage of managers (48%) whose flagship long only fund is outperforming their flagship hedge fund strategy is less, but still substantial, which would suggest some degree of product cannibalization. That said, long only strategies will likely outperform their corresponding hedge fund strategy in strong yielding markets, but they may be less effective in offering downside protection in periods of heightened market volatility.

28 24 Deutsche Bank Survey November 2013 Alternative 40 Act: 100% 13% 75% 50% 13% 25% 50% Outperforming by more than 5 percentage points Outperforming by 0-5 percentage points In line with performance 25% 50% 50% Underperforming by 0-5 percentage points 0% Performance relative to benchmark Performance relative to corresponding hedge fund strategy Alternative UCITS: 100% 25% 13% 75% 25% 50% 88% Outperforming by more than 5 percentage points In line with performance 25% 50% Underperforming by 0-5 percentage points 0% Performance relative to benchmark Performance relative to corresponding hedge fund strategy Alternative UCITS and alternative 40 Act mutual funds can provide investors with important diversification and risk management benefits, however constraints on leverage and liquidity, and in effect the managers investment universe, may hinder performance. YTD performance on liquid alternatives run by hedge fund manager respondents has been mixed. Half of managers running alternative 40 Act mutual funds have seen their flagship product underperform the benchmark. Managers running alternative UCITS reported similar returns relative to their respective benchmarks. When responding managers comment upon YTD performance on their flagship alternative 40 Act fund relative to the comparable hedge fund strategy, half report an underperformance and half say that returns have been in line with the corresponding hedge fund strategy. Almost 90% of managers with alternative UCITS funds say that their flagship UCITS funds has performed in line with the corresponding hedge fund strategy, which potentially dispels concerns about tracking error. Investors who allocate to liquid alternatives are presumably willing to give up some alpha in exchange for other benefits, including liquidity, transparency, and reduced fees.

29 Deutsche Bank Survey November Current demand It is evident from our findings that strong investor demand for non-traditional hedge fund products will continue to drive future asset growth and product proliferation. Investors: Do you/your clients invest in non-traditional hedge fund products? 70% 60% 67% % of investor respondents 50% 40% 30% 38% 50% 15% 52% Number HF AUM 0% No Not to date, but would consider it Yes By number, over half of hedge fund investor respondents allocate to in non-traditional hedge fund products. Further, when we analyze the data by AUM rather than number, this percentage increases to just over two thirds. This suggests that the larger allocators are driving the demand for non-traditional hedge fund products. Breakdown by investor type 100% 22% 36% 22% % of investor respondents 75% 50% 25% 25% 65% 58% 35% 15% 50% 19% 45% 33% 44% No Not to date, but would consider it Yes 0% Investment consultant Private wealth Institutional Investor Fund of hedge fund Other Investment consultants exhibit strong appetite for non-traditional hedge fund products, with nearly two thirds saying that their clients invest in such products. 58% of private wealth respondents and half of institutional allocators also invest with hedge fund managers for their long only, liquid alternatives and other non-traditional hedge fund products.

30 26 Deutsche Bank Survey November 2013 Types of investors who currently invest in long only or liquid alternatives run by hedge fund managers 50% Long only Alternative UCITS % of investor respondent type 40% 30% 36% 21% 12% 44% 11% 7% 40% 30% 36% 32% 36% Alternative 40 Act 28% 16% 12% 0% All investors Institutional Investor Investment consultant Private wealth Fund of hedge fund Note: Respondents were allowed to select more than one product. When we analyze the type of non-hedge fund products that investors allocate to, we see that 36% of respondents are invested in hedge fund-run long only. When analyzed by investor type, we find that 44% of all institutional investors and 40% of all investment consultants allocate to hedge fund-run long only. 11% of institutional investor respondents allocate to alternative UCITS, and only 7% allocate to alternative 40 Act products. 21% of all investor respondents allocate to alternative UCITS, with the majority of these investors (61%) utilizing both independent funds and bank platform products. Almost half of investor respondents allocating to UCITS say they require at least weekly liquidity. As previously discussed, private wealth investors and asset managers are driving demand for alternative UCITS almost a third of private wealth respondents and 16% of all funds of funds in our sample set allocate to such products. This can be primarily explained by the liquidity, transparency and tax benefits that they can provide. Interestingly, 30% of investment consultants say that they recommend alternative UCITS for their clients. It is not surprising to see that these consultants are smaller, boutique firms that are based in Germany, Italy and the UK. One of these respondents was based in Hong Kong. 12% of all investor respondents allocate to alternative 40 Act mutual funds, with more than half favouring open end single manager or multi-manager structures with daily liquidity versus closed end structures. Private wealth asset managers are again the primary source of capital for alternative 40 Act mutual funds, with 36% of private wealth respondents in the survey indicating they invest in the US-registered products.

31 Deutsche Bank Survey November While the percentage of investors allocating to alternative 40 Act (12%) represents a small portion of the investor respondent base, it is interesting to note that two thirds of these investors plan to increase their allocations to alternative 40 Act mutual funds, including a large US-based private bank and a fund of funds who are planning to increase their allocations by more than $500m. It is estimated that investor respondents have a combined allocation of $19.3bn to hedge fund-run long only (11% of total long only AUM managed by hedge funds), $10.1bn to UCITS (5% of total alternative UCITS AUM), and $15bn to alternative 40 Act mutual funds (15% of total alternative 40 Act mutual fund AUM). Investors: What are the main benefits of investing in liquid alternatives run by hedge fund managers? Increased liquidity 53% 94% Improved transparency 16% 53% Lower fees 16% 48% Top 3 choices First choice Regulatory oversight 6% 41% Other 11% 8% 0% 40% 60% % of investor respondents 80% 100% The single most attractive benefit of investing in alternative UCITS or alternative 40 Act mutual funds as reported by our investor respondents is increased liquidity. Improved transparency, lower fees and regulatory oversight follow closely behind liquidity in 2nd, 3rd, and 4th place respectively. Funds of funds, private banks and wealth management firms are driving demand for liquid alternatives, largely due to their clients liquidity sensitivities, transparency requirements, and growing preference for onshore regulated vehicles. Overview of key benefits that liquid alternatives provide: Regulatory oversight gives investors confidence Daily liquidity (and also weekly and bi-monthly in the case of alternative UCITS) allows investors to be able to withdraw their cash Greater transparency and more frequent reporting offered to investors Tax benefits for European regulated vehicles in some jurisdictions Smaller minimum requirements enable investors to access alternative strategies that were previously inaccessible due to high minimum investment thresholds Interestingly, contrary to what is often publicized in the media, managers did not cite lower fees as the foremost reason for investing in alternative 40 Act mutual funds or alternative UCITS.

32 28 Deutsche Bank Survey November 2013 Investors: What are the main challenges and/or concerns around investing in liquid alternatives run by hedge funds? Limited supply of high quality managers 54% 81% Poor performance 25% 57% Redemption liquidity/ strategy mismatch 41% Fund(s) AUM too small 3% 25% Top 3 choices Lack of track record 4% 24% First choice Limited product knowledge 13% 3% Other 6% 1% 0% 30% 40% 50% 60% 70% 80% 90% % of investor respondents The two key factors constraining investment in liquid alternatives run by hedge funds are a limited supply of high quality managers and performance concerns. While a number of traditional money managers have launched liquid alternative products, including PIMCO, Natixis and New York Life/Mainstay Funds, hedge fund managers have been slower to embrace the trend. Results from this sample set show that only 17% of hedge fund firms offer alternative mutual funds, and 13% offer alternative UCITS. With increasing demand from retail investors and private wealth asset managers, and 28% of manager respondents planning or considering launching at least one liquid alternatives product in the next 12 months, we expect the supply of high quality managers offering liquid alternatives to grow (see pages 33-40). The second greatest challenge or concern around investing in liquid alternatives is performance. When investing in liquid alternatives, there is the risk that constraints on leverage and liquidity (and in effect a manager s investment universe) may hinder a manager s ability to generate alpha. That said, the objective of investing in liquid alternatives is to marry better risk-adjusted returns with transparency and liquidity. As mentioned earlier, investors who allocate to liquid alternatives are presumably willing to give up some alpha in exchange for this improved liquidity, transparency and in some cases, reduced fees.

33 Deutsche Bank Survey November Investors: What are the main benefits of investing in long only run by a hedge fund manager (Please select three in order of importance)? Manager skill and expertise 47% 80% Expect better performance in long only strategy 23% 70% Better liquidity Lower fees 3% 57% 63% Top 3 choices First choice Capacity constraints on the existing hedge strategy 13% Other 7% 17% 0% 30% 40% 50% 60% 70% 80% 90% % of investor respondents Results suggest that investors consider allocating to a hedge fund-run long only product as a pure performance play. Manager skill and expertise, as well as better expected performance in the long only strategy are cited by investors as the top two benefits of investing in hedge fund-run long only products. These are two clearly different considerations. The first benefit manager skill and expertise is born out of the idea that hedge fund managers can bring their investment edge to the long only world, where they would outperform their respective benchmarks. One can assume that investors who placed this as their first choice are increasing allocations to hedge fund run long only, as an alternative to traditional long only, and are willing to pay higher fees for such investments. Indeed 57% of respondents increasing allocations to hedge fund-run long only products rather than those of traditional asset managers consider manager skill and expertise the foremost reason for doing so. In contrast, those investors placing better expected performance in the long only strategy as their first choice may be of the view that hedge fund managers can generate higher returns on the long side of the book amid the strong performing equity markets. Investors who placed this as their first choice may be investing in hedge fund-run long only as an alternative or complement to traditional hedge fund strategies. Indeed 70% of investors who are increasing their allocations to hedge fund-run long only as an alternative to traditional hedge funds are doing so with the view that the long only version will generate higher returns.

34 30 Deutsche Bank Survey November 2013 Investors: What are the main challenges and/or concerns around investing in long only run by hedge fund managers? Fee terms 23% 40% No challeng /concerns 33% 37% Strategy outside manager s core competency 17% 33% Headline risk 13% 27% Top 3 choices Board approval 3% 7% First choice Other 13% 0% 5% 15% 25% 30% 35% 40% 45% % of investor respondents Investors globally, and in particular pension funds, are becoming increasingly sensitive to hedge fund fees. Qualitative data indicates that schemes can often pay a disproportionate amount of their fee allocation to hedge fund managers, who comprise only a fraction of the portfolio. Deutsche Bank s 2013 Alternative Investment Survey found that nearly three quarters of investors are negotiating hedge fund fees, albeit with varying degrees of success. 14 It is not surprising, therefore, to see that concern around fees is one of the key factors constraining investment in hedge fund run long only as well. While fees on hedge fund-run long only funds are lower than traditional 2&20 hedge fund fees (see pages 42-44), they are still substantially higher than the average cost of a mutual fund. One of the most interesting findings, and perhaps the most encouraging, was that one third of responding investors indicate that they see no challenges or concerns around investing in long only funds run by hedge fund managers. 14 Deutsche Bank 2013 Alternative Investment Survey

35 Deutsche Bank Survey November Looking forward, one of the key factors that will enable further allocations to traditional alternatives, liquid alternatives, and hedge fund-run long only is the growing trend of investors diversifying their traditional portfolios and incorporating a risk-based approach to asset allocation. Alternatives represent a growing part of investors portfolio, and the post-crisis market environment has proven to many an increased need for an efficient and diversified portfolio with lower volatility and low correlation to markets. As investors have become increasingly experienced hedge fund allocators, there has been continued discussion about where alternatives belong within the wider portfolios. With this in mind, we asked investor respondents how they categorise hedge funds in their overall portfolio: Investors preferred asset allocation approach All investors (excluding funds of funds) By number 17% 42% By HF AUM 37% 23% 42% 40% Traditional asset allocation approach (equities/bonds/alternatives) Traditional asset allocation approach (equities/bonds/alternatives) Risk-based asset allocation approach (equity L/S into equity bucket, credit into fixed income bucket etc.) Risk-based asset allocation approach (equity L/S into equity bucket, credit Other into fixed income bucket etc.) Other 59% of investors use either a risk-based approach to portfolio construction or some variation, compared to the 52% reported in Deutsche Bank s 11th annual Alternative Investment Survey published in February When we analyze the data by HF AUM, the percentage increases to over three quarters. We conclude that it is the smaller investors who continue to use the traditional asset allocation approach, whereas larger allocators and consultants are moving towards a risk-based approach. It is apparent that a growing number of investors are allocating to hedge funds and alternative products within the context of the wider portfolio, rather than categorizing them as a separate hedge funds or alternatives allocation. By doing so, investors effectively allow alternatives to compete for a place in the portfolio with other traditional long only managers. At the same time, a greater acceptance of hedge funds within the wider portfolios may open up further discussions around the inclusion of hedge fund-run long only as well. 15 Deutsche Bank 2013 Alternative Investment Survey

36 32 Deutsche Bank Survey November 2013

37 Deutsche Bank Survey November Asset growth & product proliferation

38 34 Deutsche Bank Survey November 2013 Section highlights: Responding managers have raised $31bn over the past 12 months for non-traditional hedge fund products. One third of all investors who allocate to hedge fund-run long only and/or liquid alternatives increased their allocations to one or more of those products over the past 12 months; 43% of all investors plan to grow those allocations over the next 12 months. Notably, the net percentage of investors (within this group) increasing allocations to alternative 40 Act mutual funds has increased from 46% to 66% year on year. 67% of managers whose product suite extends beyond traditional hedge funds have launched at least one new non-traditional hedge fund product within the last 12 months. Of these respondents, 60% have launched at least one long only vehicle, 35% have launched at least one alternative 40 Act mutual fund and have launched at least one alternative UCITS product. Collectively, 51 new products have been launched by managers in this sample set over the last 12 months, including 26 long only funds, 10 UCITS products and 9 alternative 40 Act mutual funds. One fifth of all hedge fund manager respondents are planning to launch at least one non-hedge fund product in the next 12 months, and a further 42% are considering it. Managers: How much have you raised for non-traditional hedge fund products in the past 12 months? 30% 25% 27% 27% 15% 13% 5% 7% 7% 0% Less than $50m $50 - $100m $100m - $500m $500m - $1bn $1 -$2bn $2 -$5bn $5bn+ It appears that increased demand, illustrated by significant inflows, is accelerating the pace at which hedge fund managers are diversifying their product lines. Over the past 12 months, responding managers have raised $31bn of new capital for their non-traditional hedge fund products. Bluechip firms have been the key beneficiaries of new capital: three quarters of managers who raised over $500m have more than $10bn+ in firm-wide assets under management. 75% of those managers who raised over $1bn into non-traditional products over the past 12 months have US-based headquarters. As a group they have, on average, seen two thirds of all new business flow into non-traditional hedge fund products since 2008 this is not surprising given that half of these managers have been running such products for over 10 years. Only one manager in this group has less than 3 years experience in the space. Half of these firms employ at least one credit strategy, and another half employ at least one equity strategy.

39 Deutsche Bank Survey November Investors: How have your allocations changed to traditional and non-traditional hedge fund products over the past 12 months? 100% 90% 80% 70% 93% % of investors allocating Of those investors who allocate, net % who increased allocations over last 12 months % of all respondents who increased allocations to non-traditional hedge fund products over the last 12 months 60% 50% 40% 54% 60% 46% 30% 0% Traditional hedge fund products 32% 36% Long only run by hedge fund managers 21% Alternative UCITS run by hedge fund managers 12% Alternative 40 Act mutual funds run by hedge fund/fund of funds managers We asked investors how their allocations to traditional and non-traditional hedge fund products have changed over the past 12 months. It is encouraging to see a significant net increase for all product types; however there is certainly still room to grow in terms of the percentage of investors allocating to these products. Investors: How do you plan to change your allocations to traditional and non-traditional hedge fund products over the next 12 months? 100% 90% 80% 70% 60% 94% % of investors allocating Of those investors who allocate, net % who plan to increase allocations over next 12 months % of all respondents planning to increase allocations to non-traditional hedge fund products over the next 12 months 64% 66% 50% 40% 30% 51% 43% 44% 33% 21% 0% Traditional hedge funds Long only run by hedge fund managers Alternative UCITS run by hedge fund managers Alternative 40 Act mutual funds run by hedge fund/fund of funds managers Looking forward to the next 12 months, asset flows to these products are expected to increase, partly driven by an increase in the percentage of investors allocating to such products. Notably, the net percentage increasing their allocations to alternative 40 Act mutual funds has increased from 46% over the last 12 months to 66% over the next 12 months. On a weighted average basis, it is estimated that at least $13bn in net new capital will be directed towards such products over the next 12 months as result of these planned allocations.

40 36 Deutsche Bank Survey November 2013 Investors: To which strategies are you/your clients planning to increase allocations? Hedge fund-run long only Global equity 53% US equity Emerging markets equity European equity 44% 42% 42% Asian equity 24% Credit / fixed income Sector specific equity 18% 16% Multi strategy Quant equity Other 5% 4% 7% 0% 30% 40% 50% 60% Hedge fund-run alternative UCITS Fundamental equity long/short 84% Global macro 59% Fundamental equity market neutral 39% Equity driven Credit L/S 32% 30% Emerging markets 23% Managed futures Multi strategy Systematic equity market neutral 18% Fixed income (rates) 11% Alternative beta 9% FX trading Quant 7% 5% Volatility trading 2% Commodities 2% Distressed Structured credit 0% 2% Other 5% 0% 40% 60% 80% 100%

41 Deutsche Bank Survey November Hedge fund-run alternative 40 Act mutual funds Fundamental equity long/short Credit L/S 46% 61% Event driven 46% Global macro 46% Managed futures 36% Multi strategy 32% Emerging markets 29% Fundamental equity market neutral Volatility trading Systematic equity market neutral FX trading 18% 18% 14% 25% Distressed Commodities Alternative beta Fixed income (rates) Structured credit Quant 14% 11% 7% 7% 7% 0% Other 18% 0% 30% 40% 50% 60% 70% Results from our survey suggest that the majority of new allocations over the next 12 months to hedge fund-run long only products and liquid alternatives will flow into equity strategies. Investors globally over the past 12 months have been increasing their exposure to equities to take advantage of the strong market rally. Hedge fund managers who can offer compelling long only or liquid alternative products will be well placed to receive further inflows.

42 38 Deutsche Bank Survey November 2013 New product growth New launch activity over the past 12 months Managers: Have you launched a non-hedge product within the last 12 months? 33% Yes No 67% Note: Only those respondents who already run non-traditional HF products answered this question. Results from our survey suggest that the pace of convergence between hedge funds and mainstream asset managers is accelerating: 67% of managers whose product suite extends beyond traditional hedge funds have launched one or more non-traditional hedge fund products within the last 12 months. Managers: What type of non-hedge product have you launched in the last 12 months? Long only 60% Alternative 40 Act 35% Alternative UCITS Other 30% 0% 30% 40% 50% 60% 70% Note: Only those managers who have launched a non-traditional hedge fund product in the last 12 months answered this question. Respondents were allowed to select more than one product. Other primarily includes longer dated credit vehicles. The trend towards launching long only vehicles has been fairly pronounced, with 60% of those managers launching a new long only product in the last year. This is not surprising given this year s market rally. Meanwhile, 35% have launched at least one alternative 40 Act mutual fund and have launched at least one alternative UCITS fund. Hedge fund managers responding to this survey have launched over 51 new non-traditional hedge fund products in the last year, including 26 long only funds, 9 alternative 40 Act mutual funds, and 10 UCITS vehicles. Participants also launched at least 6 new longer dated credit funds were launched as well. We separately asked funds of funds about recent product launches, and discovered that 5 fund of funds respondents launched multi-manager alternative 40 Act mutual funds over the past 12 months.

43 Deutsche Bank Survey November New launch plans for the next 12 months Managers: Do you have plans to launch a non-hedge fund product in the next 12 months? All managers 38% Yes Considering No 42% Results from our survey suggest that product proliferation is set to continue. One fifth of all hedge fund manager respondents are planning to launch one or more non-hedge fund products in the next 12 months, and a further 42% are considering it. When analyzed further, we see both incumbent players continue to launch new products and new entrants are moving into the space. Of the 21 managers who currently run long only, more than half are considering launching a new long only vehicle in the next 12 months. 21% of those managers who do not currently offer long only are considering launching a new long only product over the next 12 months. Of the 18 managers who manage liquid alternative funds, 39% are planning to launch another product over the next 12 months. Based on the results from the survey, it is estimated that more than 50 new non-traditional hedge fund products will be launched next year by responding managers, with strategies including (but not limited to) long only, liquid alternatives and illiquid credit vehicles. 24% of funds of funds who do not currently offering alternative 40 act mutual fund products either have plans to launch or will consider launching a new multi-manager alternative 40 act fund within the next 12 months.

44 40 Deutsche Bank Survey November 2013

45 Deutsche Bank Survey November Pricing

46 42 Deutsche Bank Survey November 2013 Section highlights: Responding managers are pricing their long only funds at 0.83% and 12.38%, on a weighted average basis. The median management fee is 0.88%, while the median performance fee is 8.75%. Interestingly, 41% of responding managers do not charge a performance fee on their long only funds. Manager respondents indicate that the typical management fee on their alternative 40 Act mutual funds ranges between 0.5% and 1.0%, with the weighted average being 0.95% and the median being 1.0%. Responding managers are pricing their alternative UCITS products at 1.53% and 16.56%, on average, compared the industry average, which stands at 1.40% and 17.24%. 16 The median management and performance fee for alternative UCITS in the sample set is 1.5% and 15%. In this section, we summarize fee schedules for hedge fund run long only and liquid alternatives operating by hedge fund managers. Chart A and chart B below provide a summary of the average management and performance fees on hedge fund-run liquid alternatives and long only vehicles, relative to traditional hedge funds, as reported by hedge fund managers. Table 1: Fee schedule 17 Management fee Average management fee 2.0% 1.5% 1.0% 0.5% Hedge fund-run long only 0.8% Alternative 40 Act mutual funds 1.0% Alternative UCITS 1.5% Traditional hedge funds (industry average) 1.7% 0% Performance fee Average performance fee 20.0% 15.0% 10.0% 5.0% Hedge fund-run long only 12.4% Alternative UCITS 16.6% Traditional hedge funds (industry average) 19.5% 0% Note: Mutual funds are prohibited from charging a performance fee under the 1940 Investment Companies Act. 16 Author s calculations using Hedge Fund Intelligence data (Hedge Fund Intelligence, October 2013). 17 With the exception of the traditional hedge fund average management and performance fee, the fee schedule reflects the author s calculations using responses from the manager survey. The average industry hedge fund management and performance fee are the author s calculations using Hedge Fund Intelligence data (Hedge Fund Intelligence, October 2013). Calculations do not take into account instances where no management or performance fee is charged.

47 Deutsche Bank Survey November Long only run by hedge fund managers Managers: What is the average management fee for your hedge fund-run long only products? 11% 6% 6% No management fee 6% Less than 0.25% % % % Greater than 1.5% 33% 39% From this sample set, the weighted average management fee charged on hedge fund-run long only products is 0.83%, and the median is 0.88%, which is substantially less than the traditional 2% hedge fund management fee. 72% of responding managers say they typically charge a management fee of between 51 and 100 basis points on their long only funds. The key observation here is that the majority of responding managers have more than $5bn in firm wide AUM, and the marginal cost of launching new product is much lower than it might be for smaller managers. Managers: What is average performance fee for your hedge fund-run long only funds? 24% 41% No performance fee Less than 5.0% % % Greater than 15.0% 24% 6% 6%

48 44 Deutsche Bank Survey November 2013 Almost half of responding managers indicate that they charge a typical performance fee of more than 10.0%, with the weighted average performance fee among the sample being 12.38% (and the median being 8.75%). By contrast, 41% of responding managers do not charge a performance fee on such products. Many investors appear willing to pay managers for the skill and expertise they can bring to a long only product, albeit at a lower price than their traditional hedge fund investments, and as long as they deliver on performance. We note that some managers have share classes that charge a management fee of 1.5% and a performance fee greater than 15%. These share classes have a lock up of one year or more, and are outperforming their benchmarks by more than 5% YTD. Alternative 40 Act mutual funds run by hedge fund managers Investors comment that a better alignment of fees is one of the most attractive benefits of investing in alternative 40 Act mutual fund products. As previously discussed, mutual funds are prohibited from charging performance fees and are often offered through a variety of share classes, ranging from institutional to retail. The Investment Manager ( IM ) may apply a suite of fees to a mutual fund, and the share class will depend on how they market the fund, and to whom. Fees that may be charged on an alternative mutual fund include a management fee, marketing fee, 12(b) 1, fees, platform fees, load fees, and trail fees. Managers: What is the average management fee on your alternative 40 Act fund(s)? 30% % % % Greater than 1.5% 40% The majority (70%) of responding managers are paid a management fee of between 0.5% and 1.0%, with the weighted average being 0.95% (median being 1.0%). It is important to note that 60% of responding managers operate in the capacity of a subadvisor to a multi-manager alternative fund run by an independent investment manager. The management fee that they earn as a sub-advisor may at times be different from the management fee incurred by the investors, as the latter is paid to the investment manager and split among the various sub-advisors at the discretion of the investment manager. Results indicate what the hedge fund manager is paid as a sub-advisor. The remaining 40% run their own single manager investment fund, acting as both the investment manager and the investment advisor. Interestingly, there was no discernible difference in the management fee earned between groups.

49 Deutsche Bank Survey November Managers: What is the average all in fee on your alternative 40 Act mutual fund(s)? Less than 1.5% % % % % % 30% The all in fee refers to the total cost of the share class incurred by the end-investor. This fee may be a single management fee, as in the case for most institutional share classes, which is paid to investment manager. For other institutional and retail share classes, a combination of different listing and distribution fees may apply on top of the management fee. As a result, the all in fee may vary considerably depending on the share class, and also the type and structure of the fund (single manager versus multimanager or open end versus closed end). We asked this question to all managers running alternative 40 Act mutual fund products, regardless of whether they are a sub-advisor or running their own single manager fund. While the all in fee may not be relevant for those managers who act in the capacity of sub-advisor, we were interested to get a sense of what their end-investors were being charged on an overall basis. We also asked this question to investors. Interestingly, the average all in fee that investors are willing to pay (2.0%) is close in line with the average all in fee that is being charged by investment managers (1.93%).

50 46 Deutsche Bank Survey November 2013 Alternative UCITS run by hedge fund managers Managers: What is the average management fee on your alternative UCITS products? 38% 25% % % % % 25% 13% 63% of responding managers charge a management fee of less than 1.75% on their alternative UCITS products, with the average management fee being 1.53%, and the median being 1.5%. Managers: What is the average performance fee on your alternative UCITS products? 25% % 63% % % 13% The vast majority of managers (75%) charge an average performance fee of between 15.0% and 20.0% on their alternative UCITS funds, with the average performance fee being 16.56% (median is 15.0%). Three quarters of responding managers do not have a hurdle rate in place. The remainder use Libor plus an absolute percentage or the relevant market benchmark.

51 Deutsche Bank Survey November Hedge Fund Capital Group: Primary Contacts Europe Anita Nemes +44 (0) Christina Fast +44 (0) Guillaume Mathais +44 (0) Penelope Millar +44 (0) Emily Roberts +44 (0) Nidhi Verma +44 (0) United States Marlin Naidoo +1 (212) Lauren Anderson +1 (212) Matt Costello +1 (415) Jennifer Flandina +1 (312) Nadean Novogratz +1 (212) Rachel Rode +1 (212) Allison Ruddy +1 (212) Fred Shek +1 (212) Asia Pacific Masa Yanagisawa +81 (3) Angharad Fitzwilliams Damien Jasczyk +61 (2) Michelle Lim Ayako Shigezaki +81 (3)

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