INTERNATIONAL, A new global study of institutional investors, investment consultants and hedge funds released today by The Bank of New York Mellon and Casey, Quirk & Associates highlights the role of oil prices and high net worth investors in the continued growth in hedge fund investment across the Middle East region.
Entitled 'The Hedge Fund of Tomorrow: Building an Enduring Firm', the global study includes the following regional findings:
• The Middle East has not been a major source of outflows over 2008-2009, accounting for less than 3% of total global outflows. Redemptions were concentrated in the high-net-worth segments, both family offices and bank platforms.
• By year-end 2013, Middle East investors will account for about US$194 billion in hedge fund assets, or about 7.5% of total global hedge fund assets. This is an almost 30% increase on 2007, when the Middle East accounted for about US$109 billion, or a 5.8% share.
• Future flows will come primarily from high-net-worth segments. The majority of flows for 2010-2013 from the Middle East will come from high-net-worth investors, primarily family offices.
• However, both institutional and individual investors in the Middle East are highly susceptible to oil prices, and therefore future hedge fund investments may vary widely. The study estimates substantially different outcomes in “Bull” and “Bear” scenarios: total 2013 hedge fund assets in our “Bull” scenario are more than 65% larger than under the “Bear” scenario.
• In aggregate, the Middle East has preferred to invest directly rather than by using funds of hedge funds. The concentration of institutional assets among a few large sovereign funds, and high-net-worth assets among a select group of large family offices, facilitates direct investments.
Looking at the global picture, hedge fund assets will bottom out at roughly US$1 trillion in 2009, after which capital appreciation and US$800 billion in net inflows over the next four years will push global levels to US$2.6 trillion by 2013, the study states.
It found that institutions remain firmly committed to hedge fund investing, with institutional investors comprising less than 20% of hedge fund redemptions in 2008-2009.
Global high net worth investors could account for as much as 60% of new net flows for the period 2010-2013, although their return to hedge fund strategies will rely on capital market conditions and hedge fund performance.
Funds of hedge funds will solidify their role as the primary hedge fund distribution channel, capturing almost 60% of net inflows between 2010 and 2013 by continuing to offer services most investors will find difficult to replicate on their own, such as manager-sourcing and ongoing due diligence.
According to the study, the hedge fund industry is facing a “transformational crisis” and must address key shortcomings in its business and operating models. As a result, hedge funds will rely more on third parties for a growing range of administrative support. Fund administrators will play a greater role in hedge funds’ operations, which will require stronger integration of hedge fund servicing activity with traditional custody and cash platforms.
Hani Kablawi, Head of Middle East & Africa at The Bank of New York Mellon, said: “While we have produced two previous studies on this topic, this is the first time we have been able to include some sizeable Middle East institutional and high net worth investors among the respondents. It is clear their perspective diverges materially from the wider consensus in key areas, and as such their contribution offers a valuable insight into the preferences, appetite for risk and investment criteria of hedge fund investors within our region.”
David Aldrich, Managing Director, Alternative Investment Services at The Bank of New York Mellon, commented: “The events of 2008 have changed the old dynamic. Investor and regulatory demands for new levels of transparency mean the legacy operating model no longer works. Hedge funds increasingly will turn to independent third parties for middle- and back-office functions such as portfolio accounting and reconciliation, custody of non-collateral assets, pricing and valuation, cash management, and counter-party risk-mitigation. Allowing third parties to play a bigger role in their business will be a sign the hedge fund industry is maturing.”
Kevin Quirk, Partner with Casey Quirk, said: “Enduring hedge fund management firms will more closely align their business models with investor needs for transparency and liquidity. This means new fee models and longer-term incentive structures.
“By striking better-designed balances, they will come to define the central value proposition of active asset management," he said.
Results from this year’s study, the third in an ongoing series jointly created by The Bank of New York Mellon and Casey Quirk, were based on interviews with more than 150 institutional investors, investment consultants, hedge funds, funds of hedge funds and industry experts around the world.