WAISC September 19, 2012 The Evolution of and Industry.

WAISC

September 19, 2012

The Evolution of and Industry

2© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

Setting the Stage

“The value of the hedge fund industry”

■ Quantitative metrics and literature review

■ Aggregated hedge fund data from 1994 to 2011

■ Hedge funds outperformed traditional asset classes

is the second part of a two-part series

Part I:

This survey


Hedge fund performance


Part I: Key findings

Average return from 1994-2011 (after fees):

Hedge funds achieved these returns with considerably lower volatility and Value-at-Risk than stocks and commodities

Hedge funds

9.07%Stocks

7.18%

Bonds

6.25%Commodities

7.27%


Part I: High return/low volatility

Hedge Funds

Global Stocks

Global Bonds

Commodities

Mean 9.07 7.18 6.25 7.27

Std 7.20 15.72 3.95 22.47

Sharpe 0.76 0.23 0.68 0.16

Value-at-Risk at 5%

2.69 10.71 1.19 8.42

Panel A: Descriptive statistics for hedge funds and main asset classes

Statistics for hedge funds and main asset classes


Hedge funds’ return and risk characteristics


Part I: Fee split

Index (1994-2011)

AnnualizedGross

eturns (%)

Net returns to the

investor (%)

Investor share (%)

Manager share (%)

Costs to the investor/ Returns to the hedge

Fund manager (%)

HFRI 12.61 9.07 71.93 28.073.54

Source: Centre for Hedge Fund Research


Hedge funds’ diversification benefits


Part I: Conclusion

Important role in asset liability management

Low correlation with other asset classes

Well-suited for diversification

Higher performance/lower tail risk than conventional portfolio


Part II: About this Research

Gain insights into the state of the global hedge fund industry

150 hedge fund managers

$550 billion in AUM

Objective


The Back Story

■ Significant redemptions from HNW

■ New capital from institutions

■ Major wave of regulation

■ Increased focus on operational infrastructure

Pre-2008, industry experiencing dynamic growth

Since the financial crisis:


Key Findings

Institutional investors now a clear majority

Correlation between investor and manager size

New money from North America, Middle East and Asia-Pacific

Managers spending more time on due diligence


The Institutionalization of the Industry

Shift in hedge fund investor base

Institutions a clear majority of investors

(57%)

Industry adapting to these new investors and their demands


Bifurcation of Industry

Larger investors choosing larger managers

HNW/ family offices opt for small managers

Boutique end of market adapting (e.g. co-opetition)

Balancing act for mid-sized players


Investors Sparking Operational Change

82%: Investors more demanding re: transparency

Demands more pronounced at larger funds

Hedge funds responding with new policies and hires

Increased Transparency



9/10 respondents: increased demand in due diligence

Proportion highest among largest funds (96%)

“The amount of time we spend dealing with due diligence has doubled.”

Greater Focus on Due Diligence


Intense growing pains

Climbing headcounts and costly investments in infrastructure

“Our overhead has increased by 35% over the past three years from hiring people and technology.”

“We will need to keep improving our automation of processes in order to keep up.”

Implications



Adapting to a Changing Regulatory Landscape

Wave of regulatory change

9/10: Increased demand for regulatory compliance

Managers perplexed by overlap

Frustrated by moving deadlines/changing rules

Significant costs


Looking Ahead

Global hedge fund industry in state of metamorphosis

Larger managers become more institutionalized

Smaller managers face challenges■ Many thriving through new models/structures

Industry continues to evolve

+1 416 777 3939

Peter Hayes

[email protected]

Thank you

© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firmsof the KPMG network of independent firms are affiliated with KPMG International. KPMGInternational provides no client services.

The information contained herein is of a general nature and is not intended to addressthe circumstances of any particular individual or entity. Although we endeavour to provideaccurate and timely information, there can be no guarantee that such information is accurateas of the date it is received or that it will continue to be accurate in the future. No one shouldact on such information without appropriate professional advice after a thorough examinationof the particular situation.

WAISC September 19, 2012 The Evolution of and Industry.

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