Content Includes:
Reasons Why Investors
Use Liquid Alternatives
Liquid Alternatives:
Investor and Fund Manager
Outlook
April 2015
Launches of New UCITS
and Alternative Mutual
Funds
Average Minimum
Investment Size of Liquid
Alternative Funds
Typical Fund Terms of
Liquid Alternative Funds
10 Largest Liquid
Alternative Funds
by Assets under
Management
alternative assets. intelligent data.
Liquid Alternatives: Investor and Fund Manager Outlook
Liquid Alternatives
- Introduction
The rise of liquid alternative products,
such as UCITS and alternative mutual
funds, have opened up the possibility of
hedge fund investment for more than just
the largest investors. These regulated
products, with lower investment minimums
and fees, have proved attractive to retail
clients, and institutional investors and
funds of hedge funds have shown an
increasing interest in these products.
In this section, we examine the current
universe of hedge funds structured under
UCITS
798
64
$199bn
the UCITS and ’40 act regimes, taking a
closer look at the barriers to entry and the
investors in these funds.
Alternative Mutual Funds
Number of active UCITS funds.
Number of new UCITS funds launched
in 2014.
Assets under management of UCITS
funds (as of December 2014).
348
53
$240bn
Number of alternative mutual funds.
Number of new alternative mutual
funds launched in 2014.
Assets under management of
alternative mutual funds (as of
December 2014).
Source: Preqin Hedge Fund Analyst
Reasons Why Investors Use Liquid Alternatives
51%
Increased Liquidity*
31%
Increased Transparency*
28%
Regulated Nature of the
Structure*
*Proportion of current investors in liquid alternatives.
$414,000
Alternative Mutual Funds
Lower Costs Involved*
Source: Preqin Investor Interviews, November 2014
Average Minimum Investment Size of Alternative
Mutual Funds
$190,000
19%
Performance in 2014
+1.45%
Return of UCITS funds over 2014.
+4.36%
Return of alternative mutual funds
over 2014.
UCITS Funds
$1.261mn
Commingled Hedge Funds
Source: Preqin Hedge Fund Analyst
2
© 2015 Preqin Ltd. / www.preqin.com
Liquid Alternatives: Investor and Fund Manager Outlook
Overview of
Liquid Alternative Funds
In recent years, there has been a
proliferation of alternative routes into
hedge funds, with new structures rising
to prominence that offer investors greater
liquidity and transparency with lower
barriers to entry. In Europe, the UCITS
structure has been a way for hedge
funds to offer their hedge fund strategies
to those investors looking to allocate to
hedge funds through a more regulated
and liquid product. Similarly, in the US,
there has been significant growth in the
number of hedge funds offered through
a ’40 act mutual fund structure. In this
section, we take a look at the demand
for liquid alternatives and why they are
attractive to investors.
Fig. 1: Investors’ Reasons for Investing in Liquid Alternatives
Increased Liquidity
53%
Increased Transparency
31%
Increased Regulation
28%
Lower Cost
19%
Better Returns
9%
Better Opportunities
9%
Less Leverage
3%
Lower Volatility
3%
Less Risk
3%
Other
Why Do Investors Allocate to Liquid
Alternatives?
9%
0%
10%
20%
30%
40%
50%
60%
Proportion of Respondents
Preqin surveyed institutional investors
with a current allocation to an alternative
mutual fund or UCITS product in order to
gain insight into their attitudes towards
investing in liquid alternatives (Fig. 1).
The majority of those interviewed (53%)
cited increased liquidity as the leading
reason for investing in hedge funds
through a liquid alternative structure.
Looking at Fig. 2, we can see that both
alternative mutual funds and UCITS
funds grant their investors more frequent
access to capital compared to traditional,
commingled hedge funds, which makes
them an attractive solution for investors
that want frequent access to capital.
Increased transparency (31%) and
access to a regulated strategy (28%)
are other leading reasons for investing in
liquid alternatives.
Source: Preqin Investor Interviews, November 2014
Fig. 2: Mean Terms & Conditions for Liquid Alternative Funds vs. Hedge Funds
Terms & Conditions
1.55%
1
56
have an average minimum investment
size of $414,000. Nineteen percent of
investors stated that they allocate to
liquid alternatives as a lower-cost route
into hedge fund investment (Fig. 1). Both
UCITS and alternative mutual funds
charge, on average, lower management
fees than commingled hedge funds (Fig.
Fig. 4: UCITS Fund Launches Each Year as a Proportion of
Total Hedge Fund Launches
160
30%
20%
13%
8%
7% 5% 6%
5% 5%
2%
2%
4%
2% 1%
4%
2%
0%
Other
Foundation
Public
Pension Fund
Insurance
Company
Endowment
Plan
Family Office
Private Sector
Pension Fund
Asset Manager
2%
Wealth Manager
12% 11%
UCITS Hedge
Funds
Source: Preqin Hedge Fund Investor Profiles
© 2015 Preqin Ltd. / www.preqin.com
No. of UCITS Fund Launches
Alternative
Mutual Funds
40%
Fund of Hedge
Funds Manager
1.04%
3
16%
15%
140
14%
13%
12%
120
12%
9%
100
80
5%
60
0
152
126
2%
5
2001
2%
9
10
2003
8
21
31
6%
92 90
4%
3% 3%
8%
138
5%
40
20
6%
10%
8%
8%
64
46 51
4%
2%
Proportion of Total Hedge Fund
Launches
Proportion of Investors Active in
Liquid Alternatives
1.42%
Liquid alternative funds also have lower
barriers to entry which make them
accessible to a wide range of investors
(Fig. 2). The minimum investment for
alternative mutual funds is $190,000;
the average hedge fund, on the other
hand, requires a minimum investment
that is five times higher. UCITS funds
48%
0%
1,261
Source: Preqin Hedge Fund Analyst
62%
10%
Hedge Funds
190
Redemption Frequency (Days)
60%
50%
Alternative Mutual
414
Management Fees
Fig. 3: Proportion of Investors Allocating to Liquid
Alternative Hedge Funds
70%
UCITS Funds
Minimum Investment ($000s)
0%
2005
2007
2009
2011
2013
Year of Inception
No. of UCITS Fund Launches
Proportion of Total Hedge Fund Launches
Source: Preqin Hedge Fund Analyst
3
Liquid Alternatives: Investor and Fund Manager Outlook
Liquid Alternative Fund Launches
Alternative mutual funds have seen a
rise in prominence over the past few
years, as shown in Fig. 5. 2014 saw the
highest number of alternative mutual
fund launches on record; it is likely the
final number of alternative mutual funds
launched in 2014 will be even higher than
this, as more data becomes available in
the first half of 2015. This illustrates that
fund managers are increasingly looking
to diversify their product line-up to meet
the demands of a growing audience of
investors looking to gain access to hedge
fund strategies. Undeniably, 2014 has
witnessed the growth in significance
of alternative mutual funds within the
hedge fund industry, with the proportion
of alternative mutual fund launches
reaching the highest on record, at 7% of
all hedge fund launches.
In contrast, there has been a decline in the
number of UCITS-compliant hedge fund
launches over the past few years (Fig. 4).
Post-financial crisis, there was a surge
in UCITS launches as fund managers
responded to investor demands for liquid,
regulated and transparent structures
with new products that could meet these
needs. This increase in the number
of UCITS launches reached a peak in
2010, a year in which 152 new UCITS
products came into market. In 2014, 64
hedge funds strategies offering a UCITS
No. of Alternative Mutual Fund
Launches
8%
7%
50
7%
6%
40
5%
30
3%
10
3%
2%
20
0
1%
2
1%
1%
1%
4
4
5
34
1%
1%
16
8
21
12
3%
39
5%
4%
4%
53
52
42
3%
2%
1%
1%
11
0%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Year of Inception
No. of Alternative Mutual Fund Launches
Proportion of Total Hedge Fund Launches
Source: Preqin Hedge Fund Analyst
Fig. 6: Strategy Breakdown of UCITS Fund Launches by Year of Inception
100%
90%
Proportion of Fund Launches
Fig. 3 shows that fund of hedge
funds managers make up the largest
proportion of investors with an allocation
to alternative mutual funds (62%) and
UCITS hedge funds (48%). Fund of
hedge funds managers were among
the earliest adopters of these products,
and many have begun to use liquid
alternatives as part of their wider hedge
fund investments. Asset managers and
wealth managers account for 12% and
11% respectively of investors allocating to
UCITS funds; the liquid, transparent and
familiar structure meets the needs of the
clients these asset managers and wealth
managers serve, and these groups play a
significant role in channelling capital into
liquid alternatives. In the US, foundations
have a significant interest in alternative
mutual funds: 13% of all alternative
mutual fund investors tracked by Preqin
are in this group.
60
4%
16%
21%
80%
70%
60%
2%
2%
13% 10%
8%
13%
40%
1%
9%
4%
5%
25% 18% 31%
1%
4%
1%
9%
17%
14%
16%
10%
21%
9%
3%
9%
4%
7%
2%
7%
6%
6%
7%
22%
8%
4%
15%
Niche Strategies
19%
8%
1%
Multi-Strategy
9%
4%
17%
20%
25%
24% 29%
50%
Relative Value
Strategies
Credit Strategies
32%
Event Driven Strategies
30%
46%
20%
10%
51%
42% 38% 37%
47% 52%
51%
40%
26%
Macro Strategies
Equity Strategies
0%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Year of Inception
Source: Preqin Hedge Fund Analyst
Fig. 7: Strategy Breakdown of Alternative Mutual Fund Launches by Year of
Inception
100%
90%
Proportion of Fund Launches
Investors in Liquid Alternatives
Fig. 5: Alternative Mutual Fund Launches Each Year as a Proportion of Total
Hedge Fund Launches
Proportion of Total Hedge Fund
Launches
2). These traits have opened up the
opportunity to invest in hedge funds to
a wider audience of investors; in turn,
those hedge fund managers that offer
their strategies as liquid alternatives can
grow assets across a broad spectrum of
allocators.
13% 13%
6%
80%
14%
33%
25%
9%
6%
6%
40%
30%
17%
13%
25%
18%
31%
50%
21% 21%
24%
70%
60%
9%
24%
15% 10%
5%
6%
10%
21% 2%
18%
3%
27%
21%
25%
19%
11%
2%
24%
19%
4%
Multi-Strategy
Relative Value
Strategies
Credit Strategies
10%
24%
17%
Event Driven Strategies
64% 21%
38%
Macro Strategies
20%
10%
38%
38%
25%
29% 31% 33%
24% 28%
13%
Equity Strategies
0%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Year of Inception
Source: Preqin Hedge Fund Analyst
4
© 2015 Preqin Ltd. / www.preqin.com
Liquid Alternatives: Investor and Fund Manager Outlook
10%
8.88%
9%
7.93%
8%
7.74%
7%
UCITS Hedge
Funds
6%
4.84%
5%
3.78% 4.10%
4%
3%
3.28%
2.27%
2%
1.45%
1.44%
0.82%
1% 0.74%
0.01%
5-Year
Annualized
3-Year
Annualized
2-Year
Annualized
Q4 2014
Q3 2014
-0.19%
Q2 2014
All Hedge
Funds
0.23%
-0.13%
2014
0%
-1%
Q1 2014
It is unsurprising, given the liquidity
restrictions imposed on the structures,
that liquid strategies, such as equity
strategies and macro strategies, are
dominating both the alternative mutual
fund and UCITS landscape (Fig. 7
and Fig. 6, respectively). However,
despite offering daily liquidity, a greater
proportion of alternative mutual funds
offer credit strategies than is seen among
UCITS funds; in 2014, nearly a quarter of
all alternative ’40 act fund launches had
a credit focus, compared to just 9% of
UCITS.
Fig. 8: Performance of UCITS Hedge Funds (As at December 2014)*
Net Returns
structure were launched; however, this
number is expected to increase to around
the same level as seen in 2013 and 2012,
90 and 92 respectively, as more data
becomes available.
Return Period
Performance of Liquid Alternatives
10%
8.88%
7.89%7.93% 7.91%
8%
7.74%
6.24%
6%
2.27%
2.00% 2.41%
2%
1.44%
0%
Alternative
Mutual Funds
4.36%
3.78%
4%
All Hedge
Funds
1.00%
0.23%
5-Year
Annualized
3-Year
Annualized
2-Year
Annualized
2014
Q3 2014
Q2 2014
Q4 2014
-0.19%
-1.09%
-2%
Q1 2014
In 2014, UCITS hedge funds were
unable to avoid the difficulties affecting
the broader hedge fund industry, posting
1.45% for the year. This was more than
five percentage points down on the gains
posted in 2013 (+6.82%). Q4 proved to
be the worst quarter for UCITS funds,
with a slight gain in November failing
to offset the marginal declines seen in
October and December (Fig. 8).
Fig. 9: Performance of Alternative Mutual Funds (As at December 2014)*
Net Returns
As regulated products, liquid alternatives
are subject to restrictions on the
instruments and leverage that fund
managers can employ, which limits the
implementation of the full hedge fund
strategy. As a result, these products
tend to produce lower returns, with lower
volatility than their commingled hedge
fund counterparts (Fig. 10)
Source: Preqin Hedge Fund Analyst
Return Period
Fig. 10: Rolling Volatility of UCITS Hedge Funds, Alternative Mutual Funds,
Hedge Funds and S&P 500 Benchmark, January 2012 - December 2014*
20%
18%
Alternative
Mutual Funds
16%
14%
UCITS Hedge
Funds
12%
10%
S&P 500
8%
6%
All Hedge
Funds
4%
2%
Nov-14
Sep-14
Jul-14
May-14
Mar-14
Jan-14
Nov-13
Jul-13
Sep-13
Mar-13
May-13
Jan-13
Nov-12
Jul-12
Sep-12
May-12
Jan-12
0%
Mar-12
Despite the disappointing performance
in 2014, UCITS-compliant hedge funds
and alternative mutual funds continue to
demonstrate their ability to consistently
deliver absolute returns over the longer
term. Annualized gains of 3-5% were
posted by UCITS hedge funds over the
two-, three- and five-year periods to
the end of 2014. Although more volatile
(Fig. 8), alternative mutual funds have
delivered higher returns in the region of
6-8% over the same periods (Fig. 9).
Source: Preqin Hedge Fund Analyst
Three-Year Volatility
In the alternative mutual fund space, Q3
proved the most testing, with a loss in
July followed by a decline in September,
representing the worst month for
alternative mutual funds in over a year.
Despite the performance in 2014 failing to
match the double-digit return generated in
the same period last year, the Alternative
Mutual Fund benchmark beat the Preqin
All-Strategies Hedge Fund benchmark in
2014 (Fig. 9).
Source: Preqin Hedge Fund Analyst
*Please note, all performance information includes preliminary data for December 2014 based on net returns reported to Preqin in early January 2015. Although
stated trends and comparisons are not expected to alter significantly, final benchmark values are subject to change.
© 2015 Preqin Ltd. / www.preqin.com
5
Liquid Alternatives: Investor and Fund Manager Outlook
Outlook
As more investors look to diversify their
portfolios by investing in hedge fund
strategies, there has been a proliferation
of alternative structures to the offshore
commingled product to allow these
investors access to the asset class. The
US mutual fund structure and European
UCITS structure have allowed fund
managers to replicate their strategies in a
transparent, liquid, regulated and familiar
structure, which can appeal to both retail
clients and, increasingly, institutional
investors. Although the limitations on the
strategy may impact the ability of liquid
alternatives to deliver the same level of
performance as hedge funds, the lower
volatility and barriers to entry will continue
to appeal to investors seeking alternative
investments which can deliver consistent,
risk-adjusted returns. For fund managers
looking to strengthen their product
offerings and appeal to a broader group
of investors, the growing interest in these
products from a large range of investors
may lead to inflows in 2015.
Fig. 11: 10 Largest Liquid Alternative Funds by Assets under Management
Manager
Structure
Assets under
Management
Core Strategy
Standard Life Investments
UCITS
$35.4bn as at
30 September 2014
Multi-Strategy
J.P. Morgan Asset
Management
Alternative Mutual Fund
$26.9bn as at
30 September 2014
Long/Short Credit
GS Strategic Income Fund
Goldman Sachs Asset
Management
Alternative Mutual Fund
$25.9bn as at
30 September 2014
Long/Short Credit
BlackRock Strategic Income
Opportunities Fund
BlackRock Alternative
Investors
Alternative Mutual Fund
$20.5bn as at
30 September 2014
Long/Short Credit
MainStay Marketfield Fund
MainStay Investments
Alternative Mutual Fund
$16.0bn as at
30 September 2014
Multi-Strategy
J.P. Morgan Asset
Management
UCITS
$9.5bn as at
30 September 2014
Fixed Income
Arbitrage
Morgan Stanley
Investment Management
UCITS
$8.6bn as at
30 September 2014
Macro
Natixis Global Asset
Management
Alternative Mutual Fund
$8.0bn as at
30 September 2014
Long/Short Equity
AQR Capital Management
Alternative Mutual Fund
$6.4bn as at
30 September 2014
Managed
Futures/CTA
John Hancock
Investments
Alternative Mutual Fund
$5.9bn as at
30 September 2014
Multi-Strategy
Fund
Standard Life Global Absolute Return
Strategies Fund
J.P. Morgan Strategic Income
Opportunities Fund
JPMIF Income Opportunity Fund
Morgan Stanley Investment Funds Diversified Alpha Plus
Gateway Fund
AQR Managed Futures Strategy
Fund
John Hancock Global Absolute
Return Strategies Fund
Source: Preqin Hedge Fund Analyst
Key Facts
53%
Proportion of investors in
liquid alternatives that
allocate capital as a
result of the increased
liquidity of these funds.

These funds have lower
investment minimums
and fees, which allow
smaller investors and
retail clients to access
hedge fund strategies.
Alternative mutual funds
have outperformed
alternative UCITS on a
one-, two-, three- and
five-year annualized
basis.
Data Source:
Preqin’s Hedge Fund Analyst contains detailed profiles for over 1,400 UCITS and alternative mutual funds, including
information on investment focus, fund strategies, geographic and industry preferences, and much more.
Preqin’s Hedge Fund Investor Profiles provides access to comprehensive profiles for over 340 investors that are open
to investing in liquid alternative funds. Profiles include information on current and target allocations to hedge funds, assets
under management, strategy and geographic preferences and much more.
For more information, please visit:
www.preqin.com/hedge
6
© 2015 Preqin Ltd. / www.preqin.com
Liquid Alternatives: Investor and Fund Manager Outlook
Performance of UCITS and
Alternative Mutual Funds
Fig. 12: Net Returns of Top Performing UCITS Hedge Funds in 2014
Manager
Core Strategy
Net Return in
2014 (%)
Auriga Investors
SEB Asset Management
Milltrust International
GAM
Sector Asset Management
Long/Short Equity
Macro
Long Bias
Foreign Exchange
Long Bias
54.38
34.83
29.33
23.30
21.15
Fund
Montserrat Global Fund - B
SEB Asset Selection Opportunistic Fund - C (H-NOK)
Milltrust India Fund
GAM Star Discretionary FX - GBP
Sector Healthcare Value Fund - Class A NOK
Source: Preqin Hedge Fund Analyst
Fig. 13: Net Returns of Top Performing Alternative Mutual Funds in 2014
Manager
Core Strategy
Net Return in
2014 (%)
Daman Investments
ProFund Advisors
ProFund Advisors
BlackRock Alternative Investors
Long Bias, Value-Oriented
Long/Short Equity
Long/Short Equity
Long/Short Equity
231.95
45.20
36.83
31.18
Touchstone Investments
Long/Short Equity
30.37
Fund
Daman Fifth Fund
Biotechnology UltraSector ProFund - Investor Class
Health Care UltraSector ProFund - Investor Class
BlackRock Real Estate Securities Fund - Investor A
Touchstone Global Real Estate Fund - Institutional
Class
Source: Preqin Hedge Fund Analyst
Fig. 14: Net Returns of Top Performing UCITS Hedge Funds, January 2012 - December 2014
Fund
Montserrat Global Fund - B
Arcus Japan Fund - Relative Institutional Class
Sector Healthcare Value Fund - Class A NOK
Tiburon Taiko Fund - Class A (JPY)
Vitruvius Japanese Equity Portfolio - BI (JPY)
Manager
Core Strategy
Auriga Investors
Arcus Investment
Sector Asset Management
Tiburon Partners
Belgrave Capital Management
Long/Short Equity
Long Bias
Long Bias
Long Bias
Long Bias
Annualized Return,
2012-2014 (%)
39.72
29.83
28.80
22.96
22.91
Source: Preqin Hedge Fund Analyst
Fig. 15: Net Returns of Top Performing Alternative Mutual Funds, January 2012 - December 2014
Fund
Biotechnology UltraSector ProFund - Investor
Class
Daman Fifth Fund
Health Care UltraSector ProFund - Investor Class
Consumer Services UltraSector ProFund Investor Class
Merk Currency Enhanced U.S. Equity Fund Institutional Class
Manager
Core Strategy
Annualized Return,
2012-2014 (%)
ProFund Advisors
Long/Short Equity
73.05
Daman Investments
ProFund Advisors
Long Bias, Value-Oriented
Long/Short Equity
72.62
41.93
ProFund Advisors
Long/Short Equity
38.27
Merk Investments
Foreign Exchange
21.58
Source: Preqin Hedge Fund Analyst
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Liquid Alternatives:
Investor and Fund Manager
Outlook
April 2015
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