Hedge Fund Spotlight - Preqin

What Are Investors Looking For? Size and Track Record Requirements10%26%1 Year or Less18%2 Years3 Years4 Years or More46%17%18%Will Invest9%70%60%50%Will ConsiderInvesting40%76%30%20%47%46%Will Not Invest10%0%EmergingManagersSpin-OffsSeedEmerging Manager Fund TypeSource: Preqin Investor Outlook: Alternative Assets, H1 20145. Investors are becoming more demanding when selecting hedgefund managers and, as a result, they want to see a significant trackrecord before investing. There has been an increase in the proportionof investors requiring four or more years’ track record over the pastyear from 22% to 26%. The most common minimum track recordrequirement is three years, with 45% of investors having this policy.Investor Screening of the MarketThe investors interviewed by Preqin in December 2013 indicatedthat they are searching for funds across all size ranges; however,how is this translating into actual fund searches? Looking at investoractivity data on Preqin Investor Network, we can see just howproactive investors are in discovering and researching potentialinvestment opportunities across various fund sizes. Over 5,600accredited investors across 3,200 institutional firms use the Networkto obtain overview and contact information for all hedge funds opento investment. More than 140,000 pages of alternatives fund, firm,performance, market overview and benchmark data are reviewed byinvestors on the Network every month.Fig. 6: Proportion of Funds in Each Size Group that HaveBeen Screened by Investors on Preqin Investor Network, overOne, Three and 12-Month Periods100% 100% 100% 100%96%100%90%95%89%81%77%80%69%68%70%1 Month62%60%40%3 Months49%48%50%36%33%30%12 Months25%18%20%10%0%Less than 150mnFig. 5: Minimum Fund Manager Track Record Required byInstitutional Investors in Hedge Funds35% 150-499mnIn line with a reduction in appetite for emerging managers, theaverage minimum track record required by hedge fund investorsbefore committing to a manager has increased. In 2012, 16% ofinvestors were willing to invest with a manager with less than ayear’s track record, but this has decreased to 10%, as shown in Fig.37% 500-999mnMinimum Track Record Requirements80% 1-4.9bnInterest in investing with spin-off teams has also dropped over thepast year, with 35% of investors currently targeting such investmentscompared to 38% in 2012. Spin-off funds provide access toexperienced industry professionals but they do not always offerexposure to the value-added niche strategies that investors typicallylook for in an emerging manager allocation. Seeding new hedgefunds is a more niche aspect of the hedge fund industry, with suchopportunities typically taken up by fund of hedge funds managersor investors with a large capital base. The proportion of investorsinterested in seeding opportunities has declined from 19% in 2012 to15%, with this market dominated by specialist seeding firms.15%90% 5-9.9bnWith investors showing a willingness to at least consider smallermanagers in 2014, Preqin conducted a more in-depth studyinto investor attitudes towards emerging funds. There has beenan overall reduction in appetite for emerging managers amonginstitutional hedge fund investors since Preqin last conducted thisstudy in October 2012. Thirty-seven percent of investors will invest infirst-time funds (Fig. 4), compared to 42% in 2012. This continues atrend of decline from 54% in 2010 and 48% in 2011, suggesting thatinvestors have moved towards investing with more established fundmanagers as they often perceive such investments to be less risky.100% 10bnor MoreEmerging Manager PreferencesDownload DataFig. 4: Institutional Hedge Fund Investor Attitudes TowardsEmerging Manager Fund TypesProportion of Respondentsmentioned by 39% of respondents, as investors look to tap into thespecialized knowledge of these larger firms, where the principalsmay have decades of specific sector knowledge. Twenty-sevenpercent of investors cited institutional quality funds as a reasonfor targeting larger managers, as smaller funds are often less welldeveloped in terms of infrastructure and back office operations, andmay be less equipped to deal with the sizeable assets invested byinstitutional investors.Proportion of FundsIncepted in YearFeature ArticleFund SizeSource: Preqin Investor Outlook: Alternative Assets, H1 20144Hedge Fund Spotlight / March 2014Source: Preqin Investor Network 2014 Preqin Ltd. / www.preqin.com

What Are Investors Looking For? Size and Track Record RequirementsAs Fig. 6 clearly shows, every month all of the largest funds on theplatform are reviewed by investors. It is unsurprising that the largesthedge fund in the world today, Bridgewater All Weather Strategy,is the most viewed hedge fund on the Network; however, moresurprisingly, among the top 20 most viewed funds on the Networkover the past 12 months, there are four funds with less than 100mnin assets under management. As Fig. 6 also shows, investors arecasting a broad net when screening funds on the Network, with atleast two-thirds of funds in all size ranges having been consideredby investors on the Network over the last year. The wide fund sizescope that the surveyed fund investors indicated they are searchingacross in Fig.1 is translating into fund screening on Preqin InvestorNetwork.Fig. 7 shows the proportion of funds incepted in each year since2000 that have been reviewed on Preqin Investor Network over thepast 12 months. 2013 is excluded as this does not represent a fullyear of page views on the Investor Network. The reduced appetitefor funds with less than a three-year track record, as highlighted inFig. 5, is apparent as fund views drop off for funds incepted since2010. However, with over 60% of funds with less than a three-yeartrack record being reviewed by the investors on the Network over thepast year, managers of newer funds can take confidence that manyinvestors are regularly looking at funds with a shorter track-record,possibly not for immediate investment but more as potential futureinvestments when a longer history of fund returns has been built.OutlookInvestors are looking at a wide range of hedge fund managersfor investment in 2014, with a number of different criteria to beconsidered in the manager selection process. Track record is themost common reason for investors preferring funds with more than 1bn in assets and investors value the investment experiencetypically associated with these managers. As a result there has beenan overall reduction in the proportion of investors targeting newerDownload DataFig. 7: Proportion of Funds by Year of Inception that HaveBeen Screened by Investors on Preqin Investor Network overa 12-Month Period75%70%Proportion of RespondentsFeature Article70%68% 68% 68% 68%68%66%68%66%66%65%63%62%61%60%55%50%45%40%2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012Year of InceptionSource: Preqin Investor Networkmanagers over the past year as investors focus on investing withestablished firms.However, the majority of investors are willing to consider smallermanagers with less than 500mn in assets, with the nimblenessof these firms a particularly attractive characteristic. In addition, anumber of the largest hedge funds are becoming closed to newinvestment and this is another factor which could lead to investorslooking at smaller managers. As a result, there are opportunities forthese managers, although funds will need to build an impressivetrack record in order to be successful. There will be opportunitiesfor both smaller and larger managers to secure institutional capitalin 2014 and those managers that can differentiate themselves fromtheir competitors in terms of both strategy and performance are likelyto be most successful.Data SourcePreqin’s Hedge Fund Investor Profiles tracks over 4,500 institutional investors in hedge funds worldwide. Extensive profilesinclude track record requirements, typical investment size, appetite for first-time funds, assets under management, current andtarget allocations to hedge funds, future investment plans and more.For more information, or to arrange a demonstration, please visit:www.preqin.com/hfipPreqin Investor Outlook: Alternative Assets, H1 2014With more than 13,000 private equity, hedge fund, real estate and infrastructure vehicles currently open forinvestment, competition for investor capital is extremely high, and understanding investors and what they arelooking for is more important than ever.Based on the results of extensive interviews with 430 institutional investors in alternative assets, PreqinInvestor Outlook: Alternative Assets, H1 2014 explores investor appetite in the coming year, strategies andgeographies targeted, key issues and satisfaction with returns, and more.Preqin Investor Outlook:Alternative AssetsH1 2014Private EquityHedge FundsReal EstateInfrastruccturealternative assets. intelligent data.To download your complimentary copy, please visit:www.preqin.com/investoroutlook5Hedge Fund Spotlight / March 2014 2014 Preqin Ltd. / www.preqin.com

Preqin Global Data CoverageAs of 1 March 2014alternative assets. intelligent data.35,210Fund Coverage:Funds15,090 Private Equity* FundsFirm Coverage:16,6284,558 PE RealEstate Funds765 InfrastructureFunds6,559 Hedge Fund Firms1,941 PEREFirms441 Infra. FirmsFirms7,687 PE FirmsPerformance Coverage:14,797 Hedge Funds15,450Funds (IRR Data for 5,382 Funds and Cash Flow Data for 2,489 Funds)Fundraising Coverage:1,152 PEREFunds8,696 Hedge Funds5,453 PE Funds14,633149 Infra. FundsFunds Open for Investment/Launching SoonIncluding 2,115 Closed-Ended Funds in Market and 382 Announced or Expected Funds1,773 PE FundsDeals Coverage:973 PEREFunds11,643 Hedge Funds97,402Deals Covered; All New Deals Tracked34,008 Buyout Deals**Investor Coverage:254 Infra. Funds6,933 Infra. Deals56,461 Venture Capital Deals***11,651Institutional Investors Monitored,Including 8,225 Verified Active**** in Alternatives and 87,672 LP Commitments to Partnerships5,253 Active PE LPs4,502 Active Hedge Fund InvestorsAlternatives Investment Consultant Coverage:460Consultants TrackedFund Terms Coverage: Analysis Based on Data for Around8,800Best Contacts: Carefully Selected from Our Database of overFunds272,463Active ContactseThe Preqin DifferencPlusComprehensive coverage of:- Placement Agents- Fund Administrators- Law Firms- Debt Providers2,201 ActiveInfra. LPs4,232 Active RE LPs- Dry Powder- Compensation- Plus much more.- Over 150 research, support and development staff- Global presence - New York, London, Singapore and SanFrancisco- Depth and quality of data from direct contact methods- Unlimited data downloads- The most trusted name in alternative assetsNew York: 1 212 350 0100 - London: 44 (0)20 7645 8888 - Singapore: 65 6305 2200 - San Francisco 1 415 635 3580www.preqin.com*Private Equity includes buyout, venture capital, distressed, growth, natural resources and mezzanine funds.**Buyout deals: Preqin tracks private equity-backed buyout deals globally, including LBOs, growth capital, public-to-private deals, and recapitalizations. Our coverage does not include private debt and mezzanine deals.***Venture capital deals: Preqin tracks cash-for-equity investments by professional venture capital firms in companies globally across all venture capital stages, from seed to expansion phase. The deals figures provided by Preqin are based onannounced venture capital rounds when the capital is committed to a company.****Preqin contacts investors directly to ensure their alternatives programs are active. We emphasize active investors, but clients can also view profiles for investors no longer investing or with programs on hold.

Does Fund Size Affect Hedge Fund Performance?Lead ArticleDownload DataDoes Fund Size Affect Hedge FundPerformance?Selina Sy analyzes the performance of hedge funds in 2013 by fund size and examines whether smaller hedgefunds can offer investors more favourable returns than larger and more established hedge funds.As our feature article What Are Investors Looking For? Size andTrack Record Requirements revealed, investors are looking at abroad range of fund sizes when selecting fund managers for the yearahead. Fund size is related to a variety of characteristics such asfund strategy and scope, as well as the ability of the manager to growcapital and attract larger investors. Twenty-one percent of investorsthat seek to invest in smaller funds – specifically those with less than 1bn in assets – told Preqin that they target these funds in orderto achieve better returns (see Preqin Investor Outlook: AlternativeAssets H1 2014). With investors turning away from investing in justthe largest funds this year, we examine the relationship betweenassets under management and returns posted by hedge funds bothin 2013 and over the longer term.Hedge Fund Returns vs. Fund SizeAs our 2014 Preqin Global Hedge Fund Report revealed, 2013 wasa good year for hedge fund performance in the eyes of investors,with 84% of investors interviewed by Preqin stating that hedgefund returns had met or exceeded expectations over the past year.Preqin’s Hedge Fund Analyst shows that it was funds with assetsunder management in the range 100-999mn that posted thelargest gains in 2013, with average returns of these funds in excessof 13.7% (Fig. 1). Funds with assets of less than 100mn postedlower average returns than their peers in larger size categories in2013, with average returns of 11.45%. Larger funds with assets inthe 1-5bn category posted returns in between the smallest fundsand the mid-large sized funds at 12.08% on average. Funds withmore than 5bn in assets under management represent a very smallproportion of the industry, and thus these funds have been omittedfrom this analysis as there is insufficient data to form any meaningfulconclusions.Fig. 1: 12-Month Average Returns over 2013 by Fund SizeDistribution of Returns in 2013According to the Preqin Investor Outlook: Alternative Assets H12014, 29% of respondents cited high absolute returns as theirmain returns objective from their hedge fund investments, andperformance remains one of the key factors when evaluating orexiting a fund. Fig. 2 shows performance over 2013 according tothe 25th percentile, median and 75th percentile values among eachof the fund size categories, and this data shows that the top threequarters of all fund groups achieved positive returns in 2013. Thetop quarter of funds in the size range 100-499mn saw cumulativereturns exceed 20.76%, and these funds were the main contributorsto the impressive performance of this size category over the courseof the year. Twenty-seven percent of funds in this size categoryposted returns in excess of 20% in 2013, and this is higher than theproportion of funds in the 500-999mn and 1-5bn categories thatachieved this (19%).Funds with assets of less than 100mn had the largest range betweenthe 25th and 75th percentiles out of all the fund size categories,with the top quarter delivering returns surpassing 18.58%. Nearly aquarter (23%) of funds with less than 100mn in assets made a lossin 2013, which is notably higher than the proportion of funds in othersize categories which were in the red for the year. As a result of thiswide dispersion in returns, investment in small funds is a difficulttask and it is usually just the most experienced investors, whichcan take on the risk of investing in a fund with a greater chance offailure, that are able to invest in these funds. Investors which aresuccessful in picking top performing funds are likely to be rewardedwhen the fund grows, as funds in the 100-499mn size range haveon average higher returns with less variation in performance. Fundswith more than 500mn had the lowest range between the 25th andFig. 2: 2013 12-Month Cumulative Return Quartiles by FundSize 100-499mn13.79%Less than 100mn2%4%6%8%10%12%14%16%Average 12-Month Net ReturnsSource: Preqin Hedge Fund Analyst7Hedge Fund Spotlight / March .85% 1-5bn13.71%18.62%18.58% 500999mn 500-999mn20.76%20% 100499mn12.08%Less than 100mn 1-5bn12-Month Cumulative Return25%Fund SizeSource: Preqin Hedge Fund Analyst 2014 Preqin Ltd. / www.preqin.com

Fund Size and PerformanceFig. 3: Distribution of 2013 12-Month Cumulative Returns byFund Size60%13%50%30%13%20%11%5%7%Less than 100mn0%18%15%18%23%16%17%7%3%2%7%1% 0%5%5%3%6%14%21%25.01% to 30%15.01% to 20%5.01% to 10%0.01% to 5%18%8%2%3%60%30.01% to 35%20.01% to 25%17%Fig. 4: Top Performing Funds by 3-Year Annualized Returnand VolatilityGreater than 35%10.01% to 15%20%40%10%9%1%6%3%16% 500-999mnProportion of Funds80%9%5%6%7%10% 1-5bn70%9%3%5%6%8%90% 100-499mn100%Download Data-4.99% to 0%-9.99% to -5%-10% or Less3-Year Annualized VolatilityLead Article50%Less than 100mn40% 100-499mn30% 500-999mn20% 1-5bn10%0%0%20%40%60%80%3-Year Annualized ReturnsFund SizeSource: Preqin Hedge Fund AnalystSource: Preqin Hedge Fund Analyst75th percentiles, with 70% of these funds posting returns of between0% and 20% in 2013.Although investors look at a variety of features when assessingpotential investment opportunities, performance remains the keyfactor in the selection process. Forty-eight percent of investorsstated that returns are a key factor when looking at a fund managerand 21% of investors also stated the potential for better returns fromsmaller managers as a reason for preferring funds with less than 1bn in assets. Many investors lack the skill and risk appetite tomake meaningful allocations to these smaller funds and instead lookto invest in more established funds. However, there are opportunitiesfor the smallest fund managers to grow from investors which arelooking to gain access to niche opportunities and markets, or indeedto gain other benefits through seeding arrangements.Fund Size and VolatilityWhile the majority of investors were happy with the performance ofhedge funds in 2013, it is still vital that fund managers demonstratestrong risk-adjusted returns. According to the Investor Outlook,28% of hedge fund investor respondents cited consistency or lowvolatility of returns as their top returns objective from their hedgefund investments, while 25% named high risk-adjusted returns asthe key factor. The case for the top 50 performing funds over the lastthree years by volatility from each size category is displayed in Fig.4, with funds grouped according to their most recently reported AUMfigure. It illustrates that the largest funds have tended towards lowerreturns with the lowest volatility over the three-year period, and asa result, these funds are more concentrated towards the bottom leftof the chart. For many investors, long-term low volatility of hedgefund performance is attractive and these funds with 1-5bn in assetsare generally able to provide this. Larger top performing funds haveclearly demonstrated a tendency towards lower risk, albeit with lowerreturns, over the three-year period, which has no doubt satisfied themore risk-averse investors that are looking towards establishedtrack records with minimum volatility.Top performing funds with assets of less than 100mn have shownthe largest variation in risk-return profile over the three-year period,with these funds exhibiting higher returns and higher volatility thantheir larger counterparts. This again indicates that although smallerfunds can provide attractive returns to investors, a high degree ofinvestor skill is required to select the best funds due to the variationin returns. This combined with the higher volatility of these fundsmeans that they may not be attractive to most investors, and it islikely to be the more established investors that are willing to take onthe risk associated with investing in smaller funds.OutlookOur feature article shows that investors are looking at a varietyof fund sizes for investment in 2014 and different investors havedifferent return objectives from their hedge fund investments.8Hedge Fund Spotlight / March 2014As funds become larger, the distribution of returns among thebest performing funds moves towards the lower end of the returnspectrum, in line with lower volatility. Fund managers in the midsized groups, i.e. those from 100-499mn or from 500-999mn,have shown the highest mean and median returns in 2013. The sizerange 500-999mn had the lowest proportion of funds suffering aloss in 2013, and the longer term return and volatility characteristicsof these funds are similar to funds with assets of more than 1bn.Therefore, those investors which are looking to move away frominvesting in just largest funds, but without taking on too muchvolatility, may choose to look towards investing in those funds withmore than 500mn in assets.Subscriber QuicklinkSubscribers to Preqin’s Hedge Fund Analyst can click hereto use the Advanced Search to view detailed performanceinformation for over 8,700 hedge funds worldwide.Funds can be filtered by size, type, structure and strategy, aswell as geographic focus and manager location.For more information, or to arrange a demonstration, pleasevisit:www.preqin.com/hfa 2014 Preqin Ltd. / www.preqin.com

2014 Preqin Global Alternatives Reportsalternative assets. intelligent data.The 2014 Preqin Global Alternatives Reports are the most comprehensive reviews of the alternatives investment industry everundertaken, and are a must have for anyone seeking to understand the latest developments in the private equity, hedge fund,real estate and infrastructure asset classes.2014 Preqin GlobalInfrastructureReportKey content includes: Interviews and articles from the most important people in the industry today. Detailed analysis on every aspect of the industry with a review of 2013 and predictions forthe coming year. Comprehensive source of stats - including fundraising, performance, deals, GPs,secondaries, fund terms, investors, placement agents, advisors, law firms.2014 Preqin GlobalHedge FundReportISBN: 978-1-907012-53-2 175 / 95 / 115www.preqin.comISBN: 978-1-907012-71-6 175 / 95 / 115www.preqin.comalternative assets. intelligent data.alternative assets. intelligent data.2014 Preqin GlobalReal EstateReport2014 Preqin GlobalPrivate EquityReportISBN: 978-1-907012-53-2 175 / 9

Hedge Fund Spotlight, the monthly newsletter from Preqin providing insights into the hedge fund industry, including information on investors, funds, performance and more. Hedge Fund Spotlight uses information from our online product Hedge Fund Online, which includes Hedge Fund I