Investment Funds Observations 2017 - Part One

After several years of lacklustre returns, nearly all strategies covered by Preqin have shown positive results in 20171, with event-driven and equity funds performing particularly well. According to Preqin’s survey of investment managers in June 2017, the leading drivers are largely political. Benign stock markets since late 2016 (the so-called ‘Trump Bump’), optimism around widespread US tax and regulatory reform, and possible further interest rate rises were identified as the top three contributors to improved performance. Investors have consistently ranked performance as the most significant factor in selecting new funds, as well as the most significant driver for reducing allocations, so a return to positive results is certainly welcome news for the industry.

Whilst positive performance, if sustained, will alleviate some of the challenges that that hedge funds have faced in the last decade, others will remain. Large institutional investors, who have been able to extract concessions on fees and other terms, are unlikely to give up on these demands just because they are now making the returns they expect. Managers will need to demonstrate that their fees are rewarding their genuine risk-adjusted performance, and not just favourable markets. Competition from other parts of the alternative assets industry, as well as a renewed enthusiasm for passive strategies among some allocators, will all need to be contended with.

From our vantage point as advisers to many of the world’s top hedge fund managers, these broader market forces flow through to our instructions, and ultimately drive many of the terms of the funds we advise.

In this series we take a look at what we have been seeing in the investment funds world. Part one will focus on hedge funds.

The master-feeder structure returns

After a few years of relative decline, the Cayman Islands-based master-feeder structure (that is, where both the master and the offshore feeder are registered in the Cayman Islands) has re-asserted itself as the most common fund structure. We have also seen a significant increase in the number of registered unit trust and sub-trust structures (mostly marketed to Japanese investors).

In prior years we had observed a trend for start-up managers avoiding a master-feeder structure, largely because they did not wish to incur the additional costs, or because they did not have a sufficiently large US investor pool. It is possible this trend is starting to reverse, following improving sentiment among US institutions and allocators. As well as a rise in completely new funds, we have been involved in a number of fund restructurings to turn a standalone vehicle into a master-feeder structure, principally in order to accommodate a new US-based feeder.

Hedge Fund Structures

1 Preqin Special Report: Hedge Fund Manager Outlook H2 2017