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Signs of Life

Date: Tuesday, August 4, 2009
Author: Financial Advisor Mag.com

Optimism reigned throughout the second quarter as investor sentiment thawed and many investors began reallocating capital to alternative funds across the spectrum, according to Brighton House Associates, a firm based in Marlborough, Mass., that researches alternative investments.

“The second quarter proved to be a positive one given all that has gone on in the past 12 months. Investors began to come out of their cash positions and take advantage of the many new opportunities that have arisen amidst the economic ash. Funds of hedge funds served as stepping stones for many investors, giving them the ability to invest in the alternative space and still maintain broad diversification among strategies and geography,” according to BHA’s second quarter 2009 research report.

However, following the 2008 economic crisis and the Madoff scandal, investors want more transparency. Gone are the days when investors did not require disclosure of investment activities or proof of investment returns. “The balance of power has shifted from fund managers to investors and, during the second quarter, investors increasingly demanded higher exposure and increasing details on position levels,” the report mentions.

Investors also seemed to prefer smaller funds where they could develop closer relationships with portfolio managers and get a better understanding of portfolio details. “Portfolio directors at a Connecticut‐based single‐family office and an Illinois‐based tax‐exempt institution expressed interest in funds with smaller asset bases in order to obtain a more in depth view of the portfolio holdings,” the report says.

Heading into the third quarter, BHA sees hedge funds with under $200 million in assets under management—a substantial portion of which is personal capital—in a strong position to capture investor interest. “Funds that combine this with increased transparency have an even greater opportunity to attract investors looking to distance themselves from firms that are solely driven by raising as much capital as possible,” the report continues.

The report observes that while many strategies realized increased interest during the quarter, volatility arbitrage and fixed income were two of the most intriguing. The push for liquidity focused investors on highly liquid, short‐term trading‐oriented funds. Investors also increasingly favored the relative stability and predictable returns that fixed-income funds provide. In the private equity space, venture capital showed signs of rebounding after a rough start to the year.

Investors and managers are hoping to build on the momentum created during the second quarter and carry it forward into the second half of the year, the report concludes.

BHA works with 150 alternative investment managers and acts as an unbiased research liaison between these managers and its global network of institutional investors.