According to Hedge Funds Research, hedge funds this year have experienced more than USD50 billion of net outflows, continuing a theme that began back in Q4 2015.
Prior to this, the industry had enjoyed a near constant quarter-on-quarter increase in net inflows, taking total industry assets beyond USD3 trillion. This year, it would appear institutions have taken pause for thought and questioned the value of their offshore hedge fund allocations.
By contrast, however, the alternative UCITS industry has continued to grow from strength to strength. According to Hedge Fund Research, this area of the market had USD200 billion in assets under management in 2015. Another source, Kepler Partner, puts the figures slightly higher at USD285 billion in AUM for 2015, rising to USD302 billion through Q3 2016.
This is welcome news to those operating UCITS platforms in Europe, one of the largest and best known of which is the GAIA platform operated by Schroders, which currently has approximately USD30 billion in alternatives, of which approximately USD15 billion is in alternative UCITS.
"At Schroders, if we look at our top 10 best selling funds year-to-date on our global platform, four of those are alternative UCITS. We feel we are well positioned in respect of alternative UCITS.
"With respect to the growth of the GAIA platform, between 2013 and the end of 2015 alternative UCITS AUM for the industry at large grew by 40 per cent whereas the GAIA platform grew by 120 per cent. In discrete periods we've seen strong growth," explains Andrew Dreaneen (pictured), Head of Schroder GAIA Product & Business Development, Schroders.
Across Schroders' alternative UCITS funds range, demand has been at its strongest for one of its own internally managed funds; the flagship European Alpha Absolute Return Fund, a low net European equity long/short fund managed by Lionel Rayon. The fund has attracted USD1.19 billion of assets with the majority of the growth in 2016. This particular fund does not sit on the GAIA platform, which primarily showcases external hedge fund managers.
The other three funds in the top 10, which are on the GAIA platform include: Schroder GAIA BlueTrend, a systematic trend following strategy with north of USD300 million in net inflows; Schroder GAIA Two Sigma Diversified, which launched at the end of August 2016 and has already attracted more than USD400 million in net inflows; and Schroder GAIA Cat Bond, a catastrophe bond fund which has had roughly USD300 million in net inflows.
In addition to Schroder GAIA Two Sigma Diversified, the platform also onboarded Schroder GAIA Indus PacifiChoice, a pan-Asian equity long/short fund.
"We are continually working to build out our client offering through the GAIA platform, looking to partner with high quality hedge fund managers," says Dreaneen. "In addition, investors are continually looking for alternative alpha sources across discretionary and systematic managers.
"In terms of Indus, we feel that there are few pan Asian equity long short strategies available to UCITS investors, and as the Asian markets are inherently inefficient, it provides an excellent back-drop for alpha generation. For Two Sigma, we have seen increased demand for both equity market neutral and systematic macro strategies, so being able to offer a blend of these two strategies with a manager like Two Sigma, is an incredibly attractive proposition for investors."
In order to capitalise on the growing trend among European institutions for regulated hedge funds, this year Schroders rolled out the Schroder GAIA II platform. By supporting AIFMD-compliant funds, it allows Schroders to bring clients a wider range of alternative fund strategies.
The first fund to launch on GAIA II was Schroder GAIA II NGA Turnaround, a long/short liquid distressed debt and equity strategy managed by New Generation Advisors. NGA manages USD800 million in assets and has one of the longest and most successful track records in the sector, investing over three full credit cycles.
Aside from broadening the strategy mix, another reason for setting up GAIA II is in response to an evolving regulatory environment. There might be instances in the future where some of the more sophisticated UCITS funds are required to be reclassified either within UCITS as more complex strategies or potentially move into a non-UCITS structure. By now having a non-UCITS platform, Schroders is prepared for any such eventuality.
Going back to the GAIA UCITS platform, Dreaneen sees the role it plays as two-fold. On the manager side, he says that Schroders has seen a notable pick-up in conversations it is having with non-European managers wishing to learn more about UCITS.
"Some have their own offices and sales teams in Europe and have gone it alone, but many managers prefer to rent a compartment on an umbrella platform or join a full support plug and play platform with proven distribution. Either way, the uptick in interest from US and Asian managers is encouraging and should eventually lead to more choice for investors" says Dreaneen.
On the investor side, the market potential for alternative (asset raising potential) is significant and cuts across all investor channels.
Two thirds of the total AUM in alternative UCITS is held by private banks and wealth managers. Demand for non-plain vanilla strategies (e.g. discretionary macro, systematic strategies) has increased noticeably and despite the mixed returns of the asset class "we've seen many allocators going from a 10 per cent to 15 or 20 per cent recommended allocation to alternatives, of which hedge funds form the majority of those allocations.
"In reality, many remain way below that level; typically a 5 per cent or less allocation and only a handful of approved alternative UCITS funds, with a view to increasing that number to 20 or 30 funds through time. Therefore, I think the demand from the core investor is by no means saturated. There is still plenty of room for further growth going forward," suggests Dreaneen.
Then there are the sophisticated retail, or `mass affluent' investors. Intermediaries for these investors are looking to mimic the investment models being used by the private banks and advising their clients to look at actively managed, absolute return strategies. "This is quite an untapped market and offers huge potential," adds Dreaneen.
Finally, on the large institutional side, Dreaneen confirms: "We are receiving RFPs from some of Europe's largest pension funds and beyond; Canadian pension funds, Asian Institutions and more notable interest from the consultant community than in the past. The institutional and mass retail channels are huge areas of growth for Alternative UCITS and Schroders is well positioned with a franchise of over 20 alternative UCITS funds and more than 800 distribution professionals globally.
"By channel, I would estimate 85 per cent are intermediaries, which for us cut across asset managers, private banks, family offices and fund-of-funds; the core allocation mentioned above. And 15 per cent are institutions; insurance companies and pension funds."
From a geographical standpoint, GAIA's investor base is approximately 75 per cent Europe and 25 per cent non-Europe, of which the majority are based in Asia Pacific and Latin America.
"There are challenges and opportunities in both the institutional and retail space although I think the core market will continue to dominate. The institutional and mass affluent markets are less mature but they are increasing in potential," concludes Dreaneen.