PREQIN SPECIAL REPORT: CONSOLIDATION IN THE FUND OF FUNDS INDUSTRY

OCTOBER 2017

alternative assets. intelligent data. PREQIN SPECIAL REPORT: CONSOLIDATION IN THE FUND OF HEDGE FUNDS INDUSTRY EXECUTIVE SUMMARY

he fund of hedge funds industry is in a Fig. 1: Fund of Hedge Funds Manager AUM by Region, 2007 - 2017 (As at June 2017) period of change. In recent years, the T 1,400 fund of hedge funds sector has contracted as investors broadly have moved capital 1,200 out of multi-manager vehicles in favour of 1,000 direct investment (Figs. 1 & 2). 800 798 Although most investors still maintain some exposure to funds of hedge funds, 600 563 both the proportion of investors allocating 400 to these funds (Fig. 3), as well as the amount of capital they direct to multi- 200 205 ($bn) Assets manager funds (Fig. 1), has declined. 0 30

As managers look to build value for institutional investors, an increasing Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 number of firms now look beyond Global North America Europe Asia-Pacific & Rest of World traditional commingled vehicles to offer Source: Preqin Online alternative structures, additional services beyond asset management and an since the Global Financial Crisis (GFC). KEY FACTS increasing range of strategies. Mergers Amid a changing regulatory landscape, a and acquisitions (M&A) within the fund challenging performance environment and $5.4bn of hedge funds industry has allowed a declining investor base, fund of hedge Average size of merging fund of synergistic gains and provided rapid funds managers have looked to adapt and hedge funds managers at time of deal completion. expansion or diversification of merging or evolve in a bid to survive in an increasingly acquiring businesses. Hedge Fund Online competitive marketplace. notes 58 such deals involving over 100 $4.9bn fund of hedge funds managers completed As a result, we saw M&A levels within the Average size of acquiring fund of hedge funds managers at time of deal since 2008 as of June 2017. industry growing in the period 2008-2013 completion. (pages 4-5). During this five-year period, 2008-2013: GLOBAL FINANCIAL CRISIS much of the M&A activity was within $2.6bn TRIGGERS INCREASE IN M&A ACTIVITY Europe; however, over the longer term, Average size of target fund of hedge The AUM of the fund of hedge funds there is an even split between North funds managers at time of deal industry has been in general decline America- and Europe-based managers completion.

Fig. 2: Fund of Hedge Funds Launches and Liquidations by Year Fig. 3: Proportion of Active Hedge Fund Investors with a of Inception/Liquidation (As at June 2017) Preference for Funds of Hedge Funds, 2013 - 2017 250 70% 207198 200 180 179 180 63% 62% 157 173 181 60% 60% 60% 150 136 136 135139 60% 102 10190 100 72 70 52 65 50% 50 31 34 10 0 40% -50 56 -100 30% -150 131 No. of Fund Launches/Liquidations of Fund No.

161 of Investors Proportion -200 170177166 20%

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 10% Pre-1997 Year of Inception/Liquidation YTD 2017 0% No. of Launches No. of Liquidations Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Source: Preqin Hedge Fund Online Source: Preqin Hedge Fund Online

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(40%). For instance, Man Group has had Fig. 4: Fund of Hedge Funds over Time, a long history of acquisitions; during the 2000 - 2017 YTD (As at June 2017) period 2008-2013, it completed deals 12 11 to acquire GLG MMI (2010) and FRM Capital Advisors (2012). The latter is now 10 a $16.2bn entity currently investing in 8 8 8 over 100 hedge funds. Among the US- 8 7 based managers involved in M&A was California-based Franklin Templeton, which 6 5 acquired K2 Advisors in a bid to create 4 4 4 4 new investment strategies and broaden its of M&A Deals No. distribution capabilities. 2 2 2 2 2 1 1 2014: PEAK IN ACTIVITY If the GFC was the trigger for M&A activity 0 in the fund of hedge funds space, 2014 could be considered its peak. Of the 58 2000 2003 2004 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

M&A deals noted on Preqin’s Hedge Fund 2017 YTD Online in the nine years since 2008, nearly Source: Preqin Hedge Fund Online one in five were completed in 2014 alone. Until 2016, there were more acquisitions When looking at all fund of hedge within the sector than mergers; however, funds acquisitions globally since 2008, In 2014, Cantor Fitzgerald AM since Q2 2016, there have been two major the majority of targets for buyers are strengthened its asset management mergers within the fund of hedge funds within their own domestic region (Fig. 6); platform and expanded further into industry. EnTrust Capital and Permal Group however, Europe-based acquirers have alternative assets by acquiring Fintan joined forces to become the $25.2bn completed the most geographically diverse Partners. Merger activity during the year entity EnTrustPermal in Q2 2016. More acquisitions since 2008, with seven out of also included La Francaise AM and Tages recently, in Q2 2017, PAAMCO and KKR the 15 acquisition targets based beyond Capital, which entered into a strategic Prisma completed their merger to form Europe’s shores. partnership in a bid to strengthen their PAAMCO Prisma, with the combined unit position in Europe. managing $16.9bn as at June 2017. As Following these recent mega-mergers, as a result of these two deals, both groups well as the increase in M&A activity over 2015 – PRESENT: RECENT have now moved into the top 10 largest the past decade, Preqin takes a closer look CONSOLIDATION fund of hedge funds managers globally at how M&A levels have changed over Following the high levels of M&A in 2014, by AUM. Despite all four firms involved in time, the activity of various combined activity more recently has declined (Fig. 4); these mega-mergers being based in the entities since their M&A deal as well as the however, many of the deals that have been US, North America-based firms involved investors that are currently looking for fund completed in recent years have been of a in M&A are more likely to be part of an of hedge funds opportunities. large size, which has attracted much media acquisition than a merger, with firms based attention. in Europe or Asia-Pacific & Rest of World the most likely to be involved in a merger deal (Fig. 5).

Fig. 5: Consolidating Fund of Hedge Funds Managers by Fig. 6: Location of Target Firm by Location of Acquiring Firm, Location and Deal Type, 2008 - 2017 YTD (As at June 2017) Deals Completed 2008 - 2017 YTD (As at June 2017) 100% 18 90% 16 32% 33% Location of 80% 37% 5 1 14 Target Firm 70% Target 12 Asia-Pacific & 60% Rest of World 32% 10 8 50% 29% Acquirer 39% 8 40% Europe 30% Merger 6 12 Proportion of Firms Proportion

No. of M&A Deals No. 5 20% 38% 4 38% 6 North America 10% 24% 2 2 0% 0 North America Europe Asia-Pacific North America Europe Asia-Pacific & & Rest of World Rest of World Firm Location Location of Acquiring Firm Source: Preqin Hedge Fund Online Source: Preqin Hedge Fund Online

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alternative assets. intelligent data. PREQIN SPECIAL REPORT: CONSOLIDATION IN THE FUND OF HEDGE FUNDS INDUSTRY 2008-2013: MANAGERS LOOK TO M&A POST GFC here were 37 fund of hedge funds Fig. 7: Fund of Hedge Funds Managers Involved in M&A Deals by Location, 2008 - 2013 manager mergers or acquisitions T 18 completed in the six years following the GFC. While over the course of 2016 and 16 2 1 2017 YTD, high-profile mergers have 14 4 dominated the headlines, in the years 12 3 2008-2013, acquisitions grabbed more 9 headlines, despite a similar amount of each 10 8 deal type. 8 5 9 6 3 EUROPEAN ACTIVITY of M&A Deals No. Europe-based firms were the most active 4 1 6 6 6 during 2008-2013, accounting for half of all 2 5 3 3 firms involved in M&A deals (Fig. 8). Nearly 0 half (48%) of all firms acquired in 2008- 2008 2009 2010 2011 2012 2013 2013 were based in Europe, with the US (7 deals), UK (7) and Hong Kong (3) the most North America Europe Asia-Pacific & Rest of World targeted single countries in the period. Source: Preqin Hedge Fund Online Among the most active firms throughout this period, as well as in years to follow, and UBP Alternative Investments all of funds managers were based in Europe. was Man Group (Fig. 12). The - completed domestic M&A deals during the In comparison, 70% of Europe-based based firm acquired three fund of hedge period. acquirers targeted domestic managers. fund managers between 2008 and 2013; the first, the landmark of GLG NORTH AMERICAN ACQUIRERS 2012 saw Franklin Templeton acquire K2 Partners, marked a major strategic move Despite Europe completing the greatest Advisors (which at the time managed by Man as the London-based giant looked number of M&A deals between 2008 and $9.3bn in AUM) as the former sought to to diversify its product offering. Two more 2013, when it comes to acquiring firms, the strengthen its presence in alternative deals followed in Q3 2012 and Q1 2013, greatest proportion were based in North assets. with the acquisitions of FRM and OFI Asset America. The international acquisition Management respectively. strategies of these North America-based North Carolina-based Morgan Creek firms drove the high level of European Capital Management also looked to Europe Elsewhere in Europe, Aberdeen Asset activity during 2008-2013: one-third of all and completed the acquisition of London- Management, Gottex Fund Management acquisitions by North America-based fund based Signet Capital Management in 2013

Fig. 8: Fund of Hedge Funds Managers Active in M&A Activity by Fig. 9: Target Fund of Hedge Funds Managers by Location, Location, 2008-2013 vs. 2014-2017 YTD (As at June 2017) 2008-2013 vs. 2014-2017 YTD (As at June 2017) 100% 100% 15% 16% 90% 25% 90% 21% 80% 80%

70% 70% 21% 60% 50% 25% 60% 48% 50% 50% 40% 40%

Proportion of Firms Proportion 30% 30% 57% 50% 20% 35% Firms Target of Proportion 20% 36% 10% 10% 0% 0% 2008-2013 2014-2017 YTD 2008-2013 2014-2017 YTD

North America Europe Asia-Pacific & Rest of World North America Europe Asia-Pacific & Rest of World Source: Preqin Hedge Fund Online Source: Preqin Hedge Fund Online

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as part of a strategy to expand its global WHERE ARE THEY NOW? In 2012, Rothschild & Cie Gestion merged footprint. Over the course of 2008-2013, fund of with HDF Finance; the combined firm now hedge funds industry assets decreased by operates as Rothschild HDF Investment Other North America-based managers approximately one-third (Fig. 10). Several Solutions and its R Investments – Opal that completed deals in Europe included firms that underwent consolidation over Global Equity fund featured as a top Permal Group and Nexar Capital. Permal the period were able to buck the trend in performing fund of hedge funds in Preqin’s Group acquired Fauchier Partners in 2012, asset decline seen across the industry and 2017 Global Hedge Fund Report. which allowed Permal Group to provide a record positive growth. wider range of investment strategies and Another fund of hedge funds manager enhance its European business. SkyBridge Capital acquired Citi Alternative to show positive growth over the period Investments in 2010, expanding was Arden Asset Management. The New Nexar Capital’s acquisitions of Jersey- SkyBridge’s existing seeding operation into York-based firm recorded asset growth of based Ermitage Group and ’s Allianz the traditional fund of hedge funds sector. 57% from $7bn in 2013 to $11bn mid-way Alternative Asset Management allowed Since December 2013, SkyBridge has seen through 2015, before being acquired itself New York-based Nexar Capital to reinforce its assets grow 14% to $10.5bn as of June by Aberdeen Asset Management in 2016. its capabilities in Europe and grow its AUM 2017. to over $3bn.

Fig. 10: Fund of Hedge Funds Manager AUM by Region, Fig. 11: Fund of Hedge Funds Managers Active in M&A Activity 2008 - 2013 by Location and Deal Type, 2008 - 2013

1,400 100% 12% 1,195 90% 16% 16% 1,200 34 80% 948 70% 1,000 902 910 40% 20 810 535 30 50 786 60% 48% 800 22 60% 357 25 50% 374 375 280 224 40% 600 30% 400 of Firms Proportion 48% 20% 36% 625 572 494 485 508 536 10% 20%

Assets under Management ($bn) Assets 200 0% 0 Merger Buyer Target 2008 2009 2010 2011 2012 2013 Deal Type North America Europe Asia-Pacific & Rest of World North America Europe Asia-Pacific & Rest of World Source: Preqin Hedge Fund Online Source: Preqin Hedge Fund Online

Fig. 12: Notable Fund of Hedge Funds Managers Involved in M&A Deals, 2008 - 2013

Date Firm Type Firm New Entity

GLG MMI Q4 2010 Acquired UK FRM Capital Advisors Man FRM Q3 2012 Man Group UK Acquired ($300mn), UK ($16.2bn as at 30 June 2017) OFI Asset Management Q1 2013 Acquired ($600mn), France Rothschild HDF Investment Q2 2012 Rothschild & Cie Gestion France Merged with HDF Finance France Solutions K2 Advisors K2 Advisors Q3 2012 Franklin Templeton US Acquired ($9.3bn), US ($10.3bn as at 30 June 2017) Source: Preqin Hedge Fund Online

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alternative assets. intelligent data. PREQIN SPECIAL REPORT: CONSOLIDATION IN THE FUND OF HEDGE FUNDS INDUSTRY 2014: PEAK IN ACTIVITY

onsolidation within the fund of Fig. 13: Fund of Hedge Funds Managers Involved in M&A Deals by Location, Chedge funds industry reached a peak 2013 - 2015 in 2014 (Fig. 13). One-fifth of all fund of 25 hedge funds deals seen since 2008 were completed in 2014, with nearly three-times 20 as many deals completed in the year than 8 in 2013 or 2015. 15

KEY DEALS COMPLETED ACROSS CONTINENTS 10 7

As seen in Fig. 18, La Francaise and Tages of M&A Deals No. 3 2 Capital announced they were entering into 5 2 a strategic partnership in Q1 2014. As part 7 5 of the deal, La Francaise took a 40% stake 4 0 in Tages and delegated the management 2013 2014 2015 of its funds of hedge funds and UCITS funds to the London-based firm. The deal North America Europe Asia-Pacific & Rest of World strengthened both firms’ presence in Source: Preqin Hedge Fund Online Europe and created a business with AUM of around $3bn. While this deal represents different regions and gaining access to INCREASED ACTIVITY IN ASIA-PACIFIC & consolidation within the involved new opportunities and investors. REST OF WORLD firms’ regional market, a wider trend of Although many of the larger consolidation intercontinental M&A activity emerged One such example is Europe- deals within the fund of hedge funds in 2014 as firms sought to create a global headquartered Man Group’s acquisition industry typically occurred within North presence in the industry. of Pine Grove Asset Management. Pine America and Europe, there was also Grove Institutional Partners II - Class C significant M&A activity in regions beyond From 2014 onwards, there has been returned 15.46% over the two-year period these centres for hedge fund activity in an increase in the proportion of M&A to 31 December 2013, outperforming 2014 (Fig. 15). For instance, funds of hedge deals being completed across different the Preqin All-Strategies Fund of Hedge funds from Australia, South and continents (Fig. 14). As the hedge fund Funds benchmark by 90bps over the same South Korea were all involved in domestic industry continues to evolve, a growing timeframe. The acquisition also provided deals. proportion of managers have chosen to Man Group with increased exposure to US- diversify their offering by expanding into based institutional investors.

Fig. 14: Geographical Relationship of Fund of Hedge Funds Managers Entering into M&A Deals over Time, 2008 - 2017 YTD Fig. 15: Fund of Hedge Funds Managers Active in M&A Activity (As at June 2017) by Location, 2014 vs. 2008-2017 YTD (As at June 2017)

100% 100% 14% 90% 90% 24% 27% 33% 80% 80% 36% 70% 70% 43% 60% 60% 50% 50% 32% 40% 76% 73% 40% 67% 30% 30% Proportion of Firms Proportion Proportion of M&A DealsProportion 20% 20% 42% 32% 10% 10% 0% 0% 2008-2013 2014 2015-2017 YTD 2014 2008-2017 YTD (Excl. 2014)

Home Continent Foreign Continent North America Europe Asia-Pacific & Rest of World

Source: Preqin Hedge Fund Online Source: Preqin Hedge Fund Online

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In Australia, JANA merged with MLC period to June 2017, outperforming the Fintan Partners, a provider of absolute with the aim of Preqin All-Strategies Fund of Hedge Funds return, fixed income products. Cantor has offering a more solutions-based service benchmark by over six percentage points significant expertise in the fixed income to investors, while Blue Sky Alternative over the same period. space and was seeking to expand into Investments Limited acquired Investment alternatives. As part of the deal, Fintan Science Pty Ltd and rebranded to Blue In response to investor pressure for maintained its name and investment team, Sky Investment Science. The resulting firm more specialized services, Gottex Fund and in 2014 launched Fintan Partners offers investment in a range of alternative Management completed the acquisition Specialty Credit Fund I. Fintan Partners asset classes, including hedge funds. In of Arpad Busson’s EIM Group in Q3 2014. Specialty Credit Fund II followed in 2015. South Korea, Kiwoom Asset Management Gottex Fund Management has since and Woori Asset Management merged rebranded itself as LumX Group and has 2014 saw a significant increase in the their operations. recorded asset growth of around 4% since number of M&A deals completed in the June 2014, in a period when the wider fund of hedge funds industry. While the WHERE ARE THEY NOW? industry contracted. The firm managed years that followed saw less activity in Blue Sky Investment Science’s Blue Sky $6.2bn as of 31 December 2016. terms of volume, the trend in the size of Alliance Fund - Real Return Portfolio, which consolidating entities was to change as is open exclusively to Australia-based For Cantor Fitzgerald Asset Management, investors continued to demand more from investors, has generated a cumulative scale was one of the major motivations even the largest of managers. return of 15.38% over the three-year in its acquisition of California-based

Fig. 16: M&A Deals Completed over Time by Type, Fig. 17: Fund of Hedge Funds Manager AUM by Region, 2008 - 2017 YTD (As at June 2017) 2013 - 2015 100% 900 819 786 807 90% 800 30 27% 23 32% 33% 25 80% 700 197 183 70% 224 600 60% 500 50% 400 40% 73% 68% 67% 300 592 601 30% 536

Proportion of M&A DealsProportion 200 20% Assets under Management ($bn) Assets 100 10% 0% 0 2008-2013 2014 2015-2017 YTD 2013 2014 2015

Acquisition Merger North America Europe Asia-Pacific & Rest of World Source: Preqin Hedge Fund Online Source: Preqin Hedge Fund Online

Fig. 18: Notable Fund of Hedge Funds Managers Involved in M&A Deals in 2014

Date Firm Type Firm New Entity

La Francaise AM Merged Tages Capital Tages Capital Q1 2014 ($800mn), France with ($3.4bn), Italy ($2.1bn as at 31 March 2017) Cantor Fitzgerald Investment Advisors Fintan Partners Cantor Fitzgerald Investment Advisors Q1 2014 Acquired ($2.1bn), US ($965mn), US ($2.4bn as at 31 December 2016) Investment Science Asset Blue Sky Alternative Investments* Blue Sky Investment Science Asset Q1 2014 Acquired Management Australia Management ($2.3bn as at 30 June 2017) ($70mn), Australia Gottex Fund Management EIM Group LumX Asset Management Fund Management Q3 2014 Acquired (£6.0bn), ($4.0bn), Switzerland ($6.2bn as at 31 December 2016) Man Group Pine Grove Asset Management Man FRM Q3 2014 Acquired ($11.7bn), UK ($1.0bn), US ($16.2bn as at 30 June 2017) *Blue Sky Alternative Investments did not operate funds of hedge funds prior to this acquisition. Source: Preqin Hedge Fund Online

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alternative assets. intelligent data. PREQIN SPECIAL REPORT: CONSOLIDATION IN THE FUND OF HEDGE FUNDS INDUSTRY 2015-2017 YTD: RECENT CONSOLIDATION 2014 proved to be a bumper year in terms Fig. 19: Solutions Offered by Fund of Hedge Funds Managers of the number of mergers and acquisitions within the fund of hedge funds industry, as the trend of consolidation gathered pace. More recently, there have been fewer deals 23% across 2015-2017 YTD combined than in 35%35% 2014; however, the nature of the deals has been high profile, with several established managers joining forces. 65% 77% TRANSATLANTIC ACQUISITIONS Titan Advisors acquired London-based credit specialist Saguenay Strathmore in Q3 2015 in a bid to diversify its fund offering to include credit-focused Offers Commingled Products Exclusively Offers Commingled Products strategies. In addition, in what proves to Does Not Offer Commingled Products Offers Other Services be a recurring theme throughout this time period, the acquisition enabled Titan Source: Preqin Hedge Fund Manager Survey, November 2016 to offer more customized solutions to its largest proportion of the three time ranked as the sixth largest global fund of investors in order to meet the growing periods analyzed in this report (Fig. 21). hedge funds manager by AUM in Preqin’s demand for solutions-based offerings Furthermore, not only have mergers 2017 Global Hedge Fund Report. rather than off-the-shelf funds. become more prevalent in recent times, but the average size of firms involved in In Q2 2017, PAAMCO and KKR Prisma Aberdeen Asset Management expanded mergers has increased significantly from completed their merger to form the new its position in the US following its $1.6bn in 2008-2014 to $8.5bn throughout partnership PAAMCO Prisma. Continuing acquisition of New York-based Arden Asset 2015-2017 YTD. Indeed, these mergers the trend seen with other mergers in this Management; this also strengthened have created some of the largest fund of period, being able to provide customized its range of hedge fund solutions and hedge funds managers in the world. solutions, benefits of operational scale and broadened its hedge fund platform. a larger pool of resources were cited as Following its merger in 2016, new entity the main motivations behind the move. In MEGA-MERGERS EnTrustPermal offered a broader array of addition, nearly half of PAAMCO Prisma’s One-third of all M&A deals completed investment solutions and expanded its combined assets are held in advisory in 2015-2017 YTD were mergers, the managed account platform. EnTrustPermal services ($15.5bn as at 30 June 2017).

Fig. 20: Fund of Hedge Funds Managers Active in M&A Activity Fig. 21: M&A Deals Completed by Type, 2008 - 2017 YTD by Location, 2014 - 2017 YTD (As at June 2017) (As at June 2017)

25 100% 90% 27% 32% 33% 20 80% 8 70% 15 60% 50% 10 7 40% No. of Firms No. 73% 68% 67% 2 1 30% 5 2 of M&A DealsProportion 20% 7 7 4 1 10% 2 0 0% 2014 2015 2016 2017 YTD 2008-2013 2014 2015-2017 YTD

North America Europe Asia-Pacific & Rest of World Acquisition Merger

Source: Preqin Hedge Fund Online Source: Preqin Hedge Fund Online

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This provides yet further evidence within Fig. 22: Fund of Hedge Funds Managers Active in M&A Activity by Location and Deal the fund of hedge funds industry of a Type, 2015 - 2017 YTD (As at June 2017) shift away from just commingled fund 100% 11% management in a bid to diversify offerings 90% 17% 17% and meet investor needs. 80% 17% 17% 70% NORTH AMERICAN ACTIVITY 33% There is a clear theme throughout the 60% 2015-2017 YTD period of several high- 50% 100% profile mergers, particularly in the US, with 40% 72% 67% all merger deals completed in the period 30%

Proportion of Firms Proportion 50% exclusively involving North America-based 20% firms (Fig. 22). Furthermore, at least half of 10% all acquiring and targeted firms were also 0% based in the region. All Merger Acquisition Target Deal Type WHERE ARE THEY NOW? North America Europe Asia-Pacific & Rest of World Following its acquisition of Saguenay Strathmore, Titan Advisors, which had Source: Preqin Hedge Fund Online historically invested in long/ equity former place in Preqin’s Largest Fund of a new entity, Standard Life Aberdeen. and macro/CTA managers, launched Titan Hedge Funds Managers in Europe league The investment division operates under Legacy Credit Opportunities Fund, an table in the 2017 Preqin Global Hedge Aberdeen Standard Investments. -dedicated fund of hedge funds, Fund Report, gaining 21 from 2016 places with primarily a credit focus. to sit in fourth.

Aberdeen Asset Management’s acquisition In Q3 2017, Aberdeen completed a merger of Arden Asset Management saw the with Standard Life Investments to form

Fig. 23: Fund of Hedge Funds Manager AUM by Region, Fig. 24: Average Size of Firm at Time of M&A Deal by Firm Type, 2014 - 2017 YTD (As at June 2017) 2008-2014 vs. 2015-2017 YTD (As at June 2017)

900 819 9 8.5 807 798 798 800 30 23 25 30 8 700 183 7 197 203 205 6 600 5.2 5 500 4.0 4 400 3.0 3 2.5 300 592 601 570 563 ($bn) Size Mean Firm 2 1.6 200 1 Assets under Management ($bn) Assets 100 0 0 Target Acquirer Merger 2014 2015 2016 2017 YTD Firm Type North America Europe Asia-Pacific & Rest of World 2008-2014 2015-2017 YTD

Source: Preqin Hedge Fund Online Source: Preqin Hedge Fund Online

Fig. 25: Notable Fund of Hedge Funds Managers Involved in M&A Deals, 2015 - 2017 YTD (As at June 2017)

Date Firm Type Firm New Entity

Titan Advisors Saguenay Strathmore Titan Advisors Q3 2015 Acquired ($4.1bn), US ($1.7bn), UK ($4.7bn as at 30 June 2017) Investcorp SSARIS InvestCorp Q4 2015 Acquired ($4.5bn), US ($712mn), US ($1.5bn as at 30 June 2016) Aberdeen Asset Management Arden Asset Management Aberdeen Standard Investments Q1 2016 Acquired ($3.0bn), UK ($11.0bn), US ($10.1bn as at 30 June 2017) EnTrust Capital Merged Permal Group EnTrustPermal Q2 2016 ($11.4bn), US with ($18.4bn), US ($24.4bn as at 30 June 2017) PAAMCO Merged KKR Prisma PAAMCO Prisma Q2 2017 ($10.1bn), US with ($10.3bn), US ($16.9bn as at 30 June 2017)* *PAAMCO Prisma has total assets under management and advisement of $32.4bn as at June 2017 Source: Preqin Hedge Fund Online

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alternative assets. intelligent data. PREQIN SPECIAL REPORT: CONSOLIDATION IN THE FUND OF HEDGE FUNDS INDUSTRY CONCLUSION

4 58 Number of fund of hedge funds $798bn Number of M&A deals completed Size of the fund of hedge funds acquisitions completed by Man Group by funds of hedge funds since 2008. industry as at June 2017. since 2008, the most active firm.

onsolidation has provided some Fig. 26: Notable Fund of Hedge Funds Managers managers with the means to grow C Assets under Manager Location Year Established their firm at a time when the wider fund Management of hedge funds industry has contracted $24.4bn as at EnTrustPermal US 1971 both in terms of AUM and number of 30 June 2017 participants. BlackRock Alternative $22.4bn as at US 1995 Advisors 30 June 2017 $16.2bn as at The merged entity EnTrustPermal was Man FRM UK 1991 formed in 2016 and is currently the fifth 30 June 2017 $10.5bn as at largest fund of hedge funds manager in SkyBridge Capital US 2005 30 June 2017 the world. While this represents a slight Aberdeen Standard $10.1bn as at UK 1998 movement in Preqin’s league tables for Investments 30 June 2017 Permal Group, which placed sixth at the Source: Preqin Hedge Fund Online end of 2016, EnTrust Capital has recorded strong movement having being previously Fig. 27: Active Hedge Fund Investors with a Preference for Funds of Hedge Funds by ranked outside the top 10. Type, 2016 vs. 2017 90% 81% 81% Man Group, which has been particularly 80% 78% 78% active in the M&A space since 2008, has 69% 70% 67% 64% 65% seen its assets grow steadily over recent 63% 63% 60% years. As at 30 June 2017, its fund of hedge 54% 54% funds AUM stood at $16.2bn, marking 50% an increase of around 41% since June 40% 2014. Conversely, the wider European 30% fund of hedge funds industry recorded 20% a 9% contraction over the same period. Type of Investor Proportion 10% The London-based firm currently ranks 0% as the second largest Europe-based fund of hedge funds manager and the ninth Jun-16 Jun-17 Jun-16 Jun-17 Jun-16 Jun-17 Jun-16 Jun-17 Jun-16 Jun-17 Jun-16 Jun-17 largest in the world. Public Private Sector Sovereign Endowment Foundation Insurance Pension Fund Wealth Fund Plan Company INVESTORS STILL SEEK FUNDS OF HEDGE FUNDS Source: Preqin Hedge Fund Online Investors withdrew a net $110bn from seek exposure to the asset class via multi- nearly four in every five seeking exposure the hedge fund industry over the manager vehicles, either solely or as part to the asset class via multi-manager course of 2016 as concerns surrounding of a mixed allocation. Furthermore, when vehicles. performance and fees led some high- it comes to the investors that allocate the profile investors to issue redemption largest amounts of capital to hedge funds, Preqin’s Hedge Fund Online currently requests. As seen in Fig. 27, the majority namely pension funds and sovereign lists 83 investors actively searching for (60%) of investors active in hedge funds wealth funds, this proportion increases to fund of hedge funds opportunities.

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Wealth managers account for the greatest Fig. 28: Active Mandates for Funds of Hedge Funds by Investor Type proportion of fund searchers, followed by foundations and public pension funds, Wealth Manager indicating that funds of hedge funds 5% 4% seeking capital have a wide variety of 19% Foundation 5% allocators to approach (Fig. 28). Public Pension Fund 5% In a challenging environment, fund of Endowment Plan hedge funds managers have sought to Asset Manager 10% remain competitive by expanding their 17% product offering to move away from the traditional commingled fund to a Insurance Company more customizable and solutions-based 10% Private Sector Pension Fund approach. In a period when fees are of 13% Bank/Investment Bank paramount concern to investors and 12% managers are being pressured to keep Other costs low, forming a stronger offering through merging with or acquiring a pre- Source: Preqin Hedge Fund Online existing business is particularly attractive. This has allowed many funds of hedge funds to expand the range of investment solutions they offer and remain relevant in an ever-changing industry.

Fig. 29: Sample Investors Planning New Fund of Hedge Funds Investments over the Next 12 Months Investor Type Location Investment Plan for the Next 12 Months The Virginia-based wealth manager is expecting to launch later this year and plans to invest in the hedge fund asset class. It will allocate client Ivy Road Partners Wealth Manager US capital to a fund of hedge funds vehicle and has already identified six to eight fund operators. The $1bn foundation will consider investing in funds of hedge funds over the next 12 months. University of Georgia Foundation is planning University of Georgia on committing $10mn and will invest opportunistically. Regionally, the Foundation US Foundation investor is targeting Asia-, North America- and emerging markets-focused vehicles. Strategically, it has a preference for long/short equity, macro, managed futures and event driven funds. Source: Preqin Hedge Fund Online

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alternative assets. intelligent data.

alternative assets. intelligent data.

PREQIN SPECIAL REPORT: CONSOLIDATION IN THE FUND OF HEDGE FUNDS INDUSTRY

OCTOBER 2017

PREQIN

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