2020 PREQIN GLOBAL PRIVATEHEDGE FUND EQUITY REPORT & VENTURE – SAMPLE CAPITAL PAGES REPORT 2020 PREQIN GLOBAL HEDGE FUND REPORT SAMPLE PAGES

ISBN: 978-1-912116-23-2

13 2020 PREQIN GLOBAL HEDGE FUND REPORT – SAMPLE PAGES Contents

4 CEO's Foreword – Mark O'Hare, Preqin 54 Niche Strategies 6 Our Evolving Industry – Jon Hitchon, Managed 55 Volatility Trading Funds Association 56 Activist Funds 57 Discretionary vs. Systematic Traders 1. Overview of the Industry 58 Emerging Markets 8 Executive Summary 59 Alternative Risk Premia 9 Hedge Fund Megatrends 60 Cryptocurrency Strategies 10 Hedge Funds in 2019: Key Facts

6. League Tables 2. Hedge Fund Management 62 Largest Funds 12 Investors Issue Redemptions Across the Globe 64 Largest Fund Managers 15 Managers Faced Challenging Conditions 66 Largest Investors 18 In Focus: Early Lifecycle Demand 68 Largest Funds of Hedge Funds 20 What Makes a Successful Prime Broker? – Frank Magnani & Andrew Wilkinson, Interactive 7. Regions Brokers 72 North America 22 In Focus: Evolving Fee Structures 74 Europe 24 Fund Terms and Conditions 76 Asia-Pacific 78 Rest of World 3. Performance 28 Performance Benchmarks 8. Funds of Hedge Funds 31 Performance in 2019 82 Finding the Value in Funds of Hedge Funds 34 In Focus: Artificial Intelligence, Real Returns 36 Performance over the Longer Term 9. CTAs 88 CTAs 4. Investors 40 Investor Caution and Rebalancing 10. Liquid Alternatives 43 Capital Looks to Defense 94 Liquid Alternatives 45 Aligning Hedge Fund Interests for a Better Industry Outcome – Tom Kehoe, AIMA 11. Outlook 5. Hedge Fund Strategies 98 2020 Outlook for Hedge Funds 48 Equity Strategies 102 Preqin Predictions 49 Macro Strategies 50 Event Driven Strategies 51 Credit Strategies 52 Relative Value Strategies 53 Multi-Strategy

2 2020 PREQIN GLOBAL HEDGE FUND REPORT – SAMPLE PAGES 1. OVERVIEW OF THE INDUSTRY Executive Summary

Market challenges spur greater innovation in the hedge fund industry

For hedge fund managers, 2019 marked the start structures. For example, when Arizona-based Camkay of a much-needed recovery following 2018’s weak Capital Management launched its Crisis Alpha Intraday performance. Capitalizing on strong equity market CTA fund in 2019, the firm offered a 0% & 30% fee tailwinds, the asset class returned +11.45% over the model with a high-water mark. year, bouncing back from the -3.06% return recorded the year before. As performance improved, assets Fund managers are also increasingly applying artificial under management (AUM) rose, increasing by 4.6% intelligence & machine learning (AIML) techniques to compared with the year before to hit $3.61tn as of improve operational efficiencies and boost returns. November 2019. That is the highest point since Q3 2018 After all, AIML funds have outperformed the wider ($3.62tn). hedge fund market and other systematically traded hedge funds on a three- and five-year annualized basis. Still, 40% of hedge fund investors we surveyed in Nearly a quarter (23%) of systematic hedge funds November 2019 said that performance did not live up launched in 2019 use AIML, which is more than double to expectations. 2019’s improved performance is only the proportion that did so in 2016 (see page 35). the second time that industry returns have exceeded double digits in the past six years. For hedge fund Investors Seek Defensive Strategies managers, the pressure is on. Although market conditions have become more difficult, the hedge fund industry keeps growing. The Worst Year for Redemptions since 2016 Investors are continuing to look to the asset class There are some clear warning signs for the industry. to diversify their portfolios and generate high, For a start, investors withdrew a net $82bn from hedge uncorrelated returns. Delivering risk-adjusted returns funds in the year to November 2019, which marks with low volatility is a key benefit of a hedge fund the worst year for redemptions since $110bn was allocation that extends beyond headline returns, and withdrawn in 2016. What’s more, net outflows occurred using a risk-free rate of 2%, the Sharpe ratio of hedge in every major region. funds has been steady around the 2.5 mark for four years. Shifting investor sentiment also made the market more challenging for new launches. Just 529 hedge funds Amid slowing global economic growth, and jitters launched in 2019 – roughly half the number seen in that the market cycle could be at its peak, investors 2018 (1,169) – marking the seventh consecutive year are looking to the industry in search of defensive of decline. Liquidations outpaced new funds entering strategies. Demand for relative value strategies, the market, shrinking the number of active funds in the which are designed to produce returns regardless of industry to 16,256. market direction, spiked over 2019. And relative value strategies funds made up 14% of all launches last year, Fund Managers Evolve and Innovate the largest share achieved in over five years. The silver lining? Today’s market challenges are creating opportunities for fund managers to do what Over the next 12 months, more than three-quarters they do best: adapt, evolve, and innovate. Take fees, (79%) of surveyed investors say that they plan to which have long been a bugbear for investors. Several allocate the same amount of capital or more to hedge funds that launched recently have eschewed the funds. If the market cycle does turn and conditions industry standard of a 2% management fee and a 20% get even tougher, star managers will have a golden performance fee in favor of more investor-friendly fee opportunity to demonstrate their value.

8 2020 PREQIN GLOBAL HEDGE FUND REPORT – SAMPLE PAGES 1. OVERVIEW OF THE INDUSTRY Hedge Fund Megatrends

Key themes shaping the hedge fund industry

Emerging Manager Recovering Demand Performance Investors are increasingly looking to smaller or newer The +11.45% return of the Preqin All-Strategies Hedge funds1 in search of outperformance or favorable fee Fund benchmark marks only the second time in the terms. past six years that the annual return has reached double digits.

Industry Consolidation Fee Pressure The number of hedge fund launches in 2019 trailed Following pressure from investors, the mean fund liquidations for the first time on record. The management fee of funds launching in the market number of active vehicles is therefore shrinking, has been decreasing. Managers are altering their creating a consolidated and leaner industry. structures in a bid to attract capital in a competitive market.

Market Slowdown Almost half (43%) of surveyed investors are looking to position their hedge fund portfolio more defensively in 2020 in response to our position in the cycle.

1 Opportunities Investing with Early Lifecycle Hedge Funds: A Preqin & 50 South Capital Study, https://www.preqin.com/insights/special-reports-and- factsheets/opportunities-investing-with-early-lifecycle-hedge-funds-a-preqin-50-south-capital-study/26521

9 2020 PREQIN GLOBAL HEDGE FUND REPORT – SAMPLE PAGES Our Evolving Industry

The Managed Funds Association (MFA) on keeping pace with the changing regulatory and market environments in the hedge fund industry

For years, Preqin’s Global Hedge Fund Report has provided interesting and useful insight into our industry and its investors and this year’s is no different. Over the past year, our industry has continued to grow. Assets under management are near an all-time high and 80% of institutional investors surveyed by Preqin reported that they plan to maintain or increase their allocations to hedge funds over the longer term. And MFA has grown alongside our industry – both staff and revenue have doubled in size. Part of this growth is to help members meet the demands we feel from our client base. Jon Hitchon Managing Director and COO, Two Sigma Institutional investors are becoming more and more Chair, Managed Funds Association Board of Directors sophisticated.

That is why each year MFA brings together thousands of were concerned about disclosing sensitive information fund managers, service providers, prime brokers, and and worked directly with lawmakers, the SEC, and the institutional investors in the industry’s leading network CFTC to change this approach. – a network that is one of the most valuable aspects of our engagement with MFA. The peer-to-peer networking That work is part of MFA’s far-reaching, on-the-ground and legal, operational, and compliance training helps us advocacy, which is driven by the issues we, as MFA reduce risk, manage costs, and attract assets. members, identify as priorities. 2020 will be a busy year on Capitol Hill and at the regulatory agencies. We will be MFA has also taken steps to keep pace with the changing active participants in the process – whether it is working regulatory and market environments by creating three to improve the CFTC’s swaps trading framework or new annual conferences in the past three years alone. contributing to the SEC’s efforts to modernize the At MFA’s inaugural DATA conference in September Advisers Act advertising rules. 2019, speakers from Amazon, Apple, and Microsoft, as well as policymakers and fund managers, discussed MFA has also worked closely with regulators and the compliance challenges that accompany obtaining, policymakers in Europe in support of their goal of securely storing, and utilizing data. deepening capital markets by advocating for regulation that considers the unique nature of investment firms. At that conference, MFA released a report, authored by Our primary concern is that the post-Brexit regulatory McKinsey on our behalf, titled ‘The Lifecycle of Data in framework ensures our members have continued Context: How Data Proliferation is Shaping Alternatives.’ access to investors – and investors have access to our That paper found that more than 60% of MFA members members’ expertise. We have also made clear that surveyed believe alternative data will create the any changes to longstanding portfolio delegation rules potential for additional alpha as data quality and the would threaten that access. analytical techniques applied to it improve. As MFA moves into the future, we are confident our On the advocacy front, MFA worked to encourage reach and impact will continue to grow in partnership regulators to simplify systemic risk reporting mandated with and in service to our members. by Dodd-Frank. We heard from our members that they

6 2020 PREQIN GLOBAL HEDGE FUND REPORT – SAMPLE PAGES 3. PERFORMANCE In Focus: Artificial Intelligence, Real Returns

AIML hedge funds are on the rise following outperformance and competitive market hedging

Hedge funds using artificial intelligence/ research methods to provide deeper insight into machine learning (AIML) are delivering long-term markets. As AI applications continue to improve, the outperformance. AIML funds have outperformed the number of specialized core AI managers has risen. wider hedge fund market and other systematically Paris-based Walnut Investments and San Francisco- traded hedge funds on a three- and five-year based Numerai are among these specialist managers, annualized basis (Fig. 3.8). With mass amounts of with the former utilizing AI to create self-learning data on public equities, bonds, financial statements, trading systems. currency movements, and even social media all publicly available, AIML can be used by the hedge fund More systematic hedge funds are utilizing AIML. industry in helping managers analyze data and predict The proportion of systematic hedge funds launched market movements. With AIML developing in capability in 2019 that use AIML is over double the proportion and delivering returns, more applications of AIML are in 2016 (23% vs. 10% respectively, Fig. 3.10). In a being seen across the market. tough fundraising environment, AIML can help fund managers to differentiate themselves from competitors Fund managers use AIML in a variety of ways. and appeal to investors. Prominent industry veterans such as Two Sigma, Man Group, and D.E. Shaw have for many years included As the capability of AIML systems improves over time, AIML strategies in their offering, implementing AI the impact on the hedge fund market will increase.

Fig. 3.8: Performance of AIML Hedge Funds vs. Systematic Hedge Funds (Excl. AIML Funds) and All Hedge Funds

14% 12% 11.45% 10% 8.00% 7.92% 8% 7.60% 6.65% 6.03% 6% 5.34% 5.12% 5.44% 5.22% 4.39% 4.38% 3.75% 4% 2.78% 2.31%

Net Return 1.62% 1.94% 2% 0.81% 0% -0.11% -2% -0.33% -4% -2.82% Q1 2019 Q2 2019 Q3 2019 Q4 2019 2019 3-Year 5-Year Annualized Annualized

AIML Hedge Funds Systematic Hedge Funds (Excl. AIML Funds) All Hedge Funds

Source: Preqin Pro

34 2020 PREQIN GLOBAL HEDGE FUND REPORT – SAMPLE PAGES 3. PERFORMANCE

With the ability to rapidly process and analyze massive surprise to see hedge funds look to AI in a bid to amounts of data, AIML systems can quickly adapt to aid performance and gain a competitive edge in the changing market conditions. Given the advantages market. afforded by this cutting-edge technology, it is no

Fig. 3.9: Rolling Three-Year Volatility and Sharpe Ratio of AIML Hedge Funds, 2016 - 2019

4.5 3.5 Three-Year Sharpe Ratio (RFR=2%)

4.0 3.0 3.5 2.5 3.0 2.5 2.0 2.0 1.5 1.5 1.0 Three-Year Volatility Volatility Three-Year 1.0 0.5 0.5 0.0 0.0 Jun-19 Jun-18 Jun-17 Jun-16 Sep-19 Dec-19 Sep-18 Dec-18 Sep-17 Dec-17 Sep-16 Dec-16 Mar-19 Mar-18 Mar-17 Mar-16

Three-Year Sharpe Ratio Three-Year Volatility

Source: Preqin Pro

Fig. 3.10: Proportion of Systematic Hedge Fund Fig. 3.11: Hedge Funds Using AIML by Top-Level Launches that Use AIML, 2010 - 2019 Strategy

30% 25% 23% 21% 20% 18% 25% 24% 23% 15% 12% 11% 20% 10% 17% 7% 4% 5% 2% 15% 1% 0% Proportion of AIML Funds Proportion 10% 10% 8%

5% 5% Proportion of Fund Launches of Fund Proportion 5% 4% 4%

1% Multi-Strategy Niche Strategies Niche Equity Strategies Credit Strategies 0% Macro Strategies Managed Futures/CTA Event Driven Strategies Driven Event Alternative Risk Premia 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Relative Value Strategies Value Relative

Source: Preqin Pro Source: Preqin Pro

35 2020 PREQIN GLOBAL HEDGE FUND REPORT – SAMPLE PAGES 2. HEDGE FUND MANAGEMENT Managers Faced Challenging Conditions

Consolidation and volatility concerns are reshaping the global hedge fund industry

Two key trends characterized the global hedge fund Why? The size of the market, for a start. “There were landscape in 2019: consolidation and investor concerns just 530 hedge funds in 1990, managing a total of over market volatility. $39bn,” industry titan Jeffrey Vinik, whose Tampa- based firm Vinik Asset Management closed in 2019, Consolidation of a Saturated Market noted in the Wall Street Journal.1 Today, there are Between 2012 and 2018, new hedge fund launches more than 16,300 active hedge funds, all competing for outpaced liquidations. But, as the industry has grown, $3.61tn of active capital in an evolving market. the number of fund launches has trailed liquidations. Just 529 hedge funds and CTAs launched in 2019, fewer As a result, fund managers are having to work harder than half the number (1,169) that launched in 2018 (Fig. to retain existing clients and win new investor capital. 2.10). There are also additional challenges to consider – such as increasing investor demand for favorable terms, a

Fig. 2.8: Hedge Fund Industry AUM by Manager Location

Canada $40bn UK $463bn North America bn Europe $2,783 Sweden $673bn $45bn US $2,718bn Bermuda Switzerland $21bn $31bn Hong Kong $61bn France $44bn Asia-Pacific Brazil bn $22bn $121 Australia $24bn

Rest of World $30bn

Source: Preqin Pro. Data as of November 2019

1 Wall Street Journal, https://www.wsj.com/articles/twilight-of-the-stock-pickers-hedge-fund-kings-face-a-reckoning-11572197217

15 2020 PREQIN GLOBAL HEDGE FUND REPORT – SAMPLE PAGES 2. HEDGE FUND MANAGEMENT

growing focus on ethical investment, and the higher new force in the quantitative alternatives world," Trium costs of starting a fund amid increasing regulation – all Capital's co-head Donald Pepper said in a statement.2 while maintaining performance. Heightened Market Volatility Fund managers of all sizes have grappled with Amid concerns that a 10-year bull run in equity changing market conditions. Prominent names such markets may be coming to an end, 43% of investors we as London-based Arrowgrass Capital Partners and surveyed in November 2019 are positioning their hedge New York-based Hoplite Capital Management opted fund portfolios more defensively in the year ahead, up to close. Other firms have pursued mergers. Nordea from 33% in 2018. Asset Management, part of Helsinki-based financial services group Nordea, shut down one fund to reduce Investors are looking to actively managed hedge fund operational costs before merging the capital into strategies, such as relative value and macro, to help another fund. Some managers have acquired other generate returns on a risk-adjusted basis. Indeed, firms. London-based alternative asset manager Trium the share of relative value strategies fund launches Capital bought Sabre Fund Management, a boutique rose from 8% in 2018 to 14% in 2019 (Fig. 2.14). There investment management firm also based in London, to are also indicators of increasing investor appetite for expand its existing quantitative offerings and "create a macro strategies: macro funds appeared in 36% of

2 Trium Capital, https://trium-capital.com/library/news/trium-in-the-news-trium-capital-expands-quant-equity-capabilities-with-sabre-fund-management- tie-up

Fig. 2.9: Hedge Fund Managers by Location and Year Established

400 370 351 350 313 295 281 281 289 300 268 250 194 200 150 107 94 100 77 85 90 81 88 83 78 No. of Fund Managers No. of Fund 72 74 71 71 70 63 54 53 45 36 50 17 22 23 13 13 15 11 11 11 12 15 4 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Year Established North America Europe Asia-Pacific Rest of World

Source: Preqin Pro

Fig. 2.10: Hedge Fund Launches and Liquidations, 2000 - 2019*

2,000 18,000

1,800 17,000 1,600 16,544 16,644 16,743 16,000 No. of Active Funds 1,400 16,230 16,256 15,689 1,200 15,000 14,852 1,000 14,000 13,916 800 13,000 600 12,639 12,000 400 200 11,000 No. of Fund Launches/Liquidations No. of Fund 0 10,000 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

No. of Fund Launches No. of Fund Liquidations No. of Active Funds

Source: Preqin Pro *Liquidations data starts at 2012, the year Preqin begawn tracking hedge fund data.

16 2020 PREQIN GLOBAL HEDGE FUND REPORT – SAMPLE PAGES 2. HEDGE FUND MANAGEMENT

investors’ searches in 2019, up from 34% in 2018 (see Fig. 2.11: Proportion of Number and AUM of page 44). Hedge Funds by Top-Level Strategy

45% 43% On the CTA front, even though in 2019 these funds 40% posted their strongest performance since 2014, 35% 30% 30% 26% liquidations outnumbered launches by nearly six to 25% 20% one (62:11). CTAs are predominantly trend following in 9% 14% 7% 15% 11% 12% 1% 10% 8% 8% 8% 8% 7% their strategy, and have been caught out in periods of 5% 3% Proportion of Total Proportion 5% short-term market volatility. But, given how well they 0% performed last year, we may see demand for CTAs pick up in 2020.

Looking ahead, as investors brace for further volatility Multi-Strategy Niche Strategies Niche Credit Strategies Equity Strategies Macro Strategies in equity markets, expect to see more demand for Managed Futures/CTA actively managed strategies. And as competition Strategies Driven Event Relative Value Strategies Value Relative intensifies, watch for further consolidation in a rapidly No. of Active Funds Industry AUM evolving industry. Source: Preqin Pro

Fig. 2.12: Hedge Fund Launches and Fig. 2.13: Hedge Fund Launches and Liquidations in 2019 by Top-Level Strategy Liquidations in 2019 by Manager Location

Equity Strategies 247 198 North America 689 326 Macro Strategies 48 28 Event Driven Strategies 65 39 Credit Strategies 79 57 Europe 219 120 Relative Value Strategies 42 65

Niche Strategies 3 35 Asia-Pacific 94 64 Multi-Strategy 40 31 Managed Futures/CTA 62 11 Rest of World 14 19 Alternative Risk Premia 3 4 -400 -200 0 200 400 -1000 -500 0 500 No. of Fund Launches/Liquidations No. of Fund Launches/Liquidations No. of Fund Liquidations No. of Fund Liquidations No. of Fund Launches No. of Fund Launches Source: Preqin Pro Source: Preqin Pro

Fig. 2.14: Hedge Fund Launches by Top-Level Fig. 2.15: Hedge Fund Launches by Manager Strategy, 2014 - 2019 Location, 2014 - 2019

100% 100% 1% 2% 2% 2% 2% 1%2% 4% 3% 3% 4% 3% 4% 8% 7% 7% 7% 4% 7% 90% 8% 10% 8% 8% 9% 7% 7% 90% 13% 11% 11% 11% 12% 1% 1% 1% 80% 8% 8% 7% 7% 11% 8% 14% 80% 70% 11% 12% 8% 21% 11% 20% 20% 19% 20% 60% 12% 10% 12% 70% 23% 10% 11% 11% 8% 50% 8% 10% 8% 7% 11% 6% 60% 40% 10% 10% 50% 30% 45% 44% 40% 20% 42% 36% 39% 42% 10% 67% 66% 66% 65% Proportion of Fund Launches of Fund Proportion 30% 63% 62% 0% 2014 2015 2016 2017 2018 2019 20% Proportion of Fund Launches of Fund Proportion Equity Strategies Macro Strategies 10% Event Driven Strategies Credit Strategies 0% Relative Value Strategies Niche Strategies 2014 2015 2016 2017 2018 2019 Multi-Strategy Managed Futures/CTA Alternative Risk Premia North America Europe Asia-Pacific Rest of World Source: Preqin Pro Source: Preqin Pro

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