Charlotte Bonde Tamm presents insights into hedge fund investments among Nordic investors
Earlier this year, SEB Enskilda Prime Brokerage carried out its first Nordic hedge fund investor survey. It looked at a variety of issues, including investment process, investment thresholds, strategy preferences and expected allocations. The results for the industry were positive: it can be concluded that the hedge fund industry expects to grow further during 2010. This article examines the key findings and looks at some of the conclusions reached.
Investors who responded to the survey represented over €465bn AUM, with pension funds, insurance companies, and asset managers together representing the largest investor group. They had combined assets of over €445bn. Some 41% of the investors expect to increase their allocations this year and most have not yet reached their maximum allocation quota to hedge funds. Some 80% of investors have the mandate to allocate 0-30% of their assets to hedge funds (excluding funds of hedge funds), while 52% have allocated less than 10% of the total assets. It is encouraging to see that there are assets available to be invested.
Nearly three-quarters of the respondents in the survey were based in Sweden. Among the Nordic investors, the Swedes and the Finns have the longest history of hedge fund investments. Brummer & Partners, Sweden's leading asset management firm, launched the hedge fund Zenit in July 1996 and the Finnish asset manager Estlander & Partners launched its hedge funds Alpha Trend and Global Markets in August 1991. Brummer & Partners today manages €6.3bn and Estlander & Partners manages €370m. However, their Norwegian and Danish neighbours have faced tighter regulation, which has delayed investment in this segment.
Nordic investors are using many channels to source hedge funds. The most common way is through capital introduction teams, which are used by 76% of investors, while word of mouth recommendations among industry colleagues are a close second at 73%.
During 2009, a strong year but still a very uncertain time, most Nordic investors had less than 50 new meetings with hedge funds and invested in only one out of 20 of these. Fund of hedge funds were the most active. They invested in approximately one out of 10 managers that they met. This is likely to be a result of two factors: first, asset managers and pension funds often look more widely across the alternative investment universe and have a greater focus on asset allocation. Second, funds of hedge funds undertake rigorous screening to narrow down their universe to a preferred list and hence only meet with managers that they are already quite certain would match their criteria. Most Nordic investors are open-minded when it comes to hedge fund strategies and diversification of their investments. In 2009, most investors allocated the majority of their assets to hedge funds that they had not previously invested in.
One in four Nordic investors seed hedge funds from inception, while 73% want to see a one to three-year track record before they invest. Nordic investors seem to have adapted
to the fact that there are many small hedge funds in the Nordic countries and 33% do not impose any restrictions on the proportion of a fund's assets that they would represent in investing, and 31% do not require funds to have a minimum asset size before they invest.
Liquidity is an important factor when choosing a manager. The strategies with generally higher liquidity terms like global macro, long/short equity and CTAs are preferred. Some 46% of investors usually require that the funds have at least monthly liquidity. However, it is also notable that 56% of the investors accept lock-ups if the fund's strategy so requires. This indicates that the level of knowledge about different strategies is high. Rigorous liquidity terms can lead to investors missing out on alpha generated by longer-term business cases, dependent on the underlying strategy of the fund.
Nordic institutional investors prefer to invest in single managers as opposed to fund of hedge funds, and 74% invest through single managers. The investment process is fairly short - 50% of Nordic investors have an investment process that is shorter than three months and more than 80% have an investment process of less than six months. Also, most Nordic investors are confident in their own ability to pick hedge funds, with 65% not using external advisers when choosing managers.
After the turbulence of 2008, the requirement for greater transparency has been discussed internationally. This has resulted in increased demand for structured solutions like managed accounts. This debate has not affected the Nordic market, where 86% of investors have not changed their transparency requirements. This position is further reinforced by the survey results, which show that the larger Nordic institutions find UCITS wrappers, in general terms, an expensive and unnecessary format, despite increased interest among Norwegian investors.
It would be a mistake to think that Nordic investors tend to invest primarily in Nordic hedge funds, when 68% of the investments during 2009 were in non-Nordic funds. Nordic investors are sophisticated and are looking outside the region to access other prominent managers as well as diversify their portfolios.
Global macro and long/short equity strategies are the ones that most investors expect to perform favourably during 2010, with 46% and 43% of the votes respectively. Around 25% of investors expect event-driven, credit and high yield/distressed strategies to perform well during 2010, while only around 11% of investors expect to increase their allocations to these strategies this year. This is likely to be because of portfolio diversification and long-term investment decisions, where the next year's performance will not be the most important factor in the decision.
The outlook for hedge funds is looking brighter. Investors still have assets to invest and are expecting to increase their hedge fund allocations. Global macro and long/short equity funds can expect the highest inflows and are by far the most popular strategies. Even though Nordic investors appreciate higher transparency, it is not necessarily seen as a requirement to invest. All in all, Nordic investors came out quite well after the financial turbulence of 2008, which is reflected in their overall appetite for alternative investments.
Charlotte Bonde Tamm is head of capital introduction at SEB Enskilda Prime Brokerage