On average, the managers say they have budgeted 33 hours for initial registration and 87 hours annually for ongoing registration. They have allotted an average $28,600 for the initial registration and $33,000 for ongoing work throughout the year.

Managers become more negative looking out 12 months
Looking out over the next 12 months, the majority of managers feel somewhat positive about four markets, neutral about three markets and slightly negative about seven markets.

The four markets where they feel the markets will move up slightly, in rank order, are: Nymex Oil, Consumer Price Index, Dow Jones Industrial Average and S&P500.

In three markets where the majority of managers feel the market will be neutral over the next 12 months, in rank order are: 30-Year Fixed Mortgage Rates, DJ Stoxx and Nikkei225 Stock Average.

In seven markets, where the majority of managers feel the market will be down slightly over 12 months, are: Euro, Yen, Pound, 10-Year Treasury, FTSE 100 Stock Average, Comex Gold, and DJ Corporate Bond Index.

This quarter, 35 managers completed the survey. Full results are available in the current issue of Investor Focus.

During 2011, funds of funds continued to be challenged by flat performance, large US public pensions increasingly investing directly with hedge funds, some pensions doing their own manager research and due diligence, and a tough asset raising environment. Criticism is heard about their extra layer of fees, overdiversification and lack of transparency.

Various forces at work in the environment include:

 Performance: For the $1 billion+ funds of funds responding to the survey, the average performance for the first half of 2011 was 0.4% compared with 5.9% in the first half of 2010 and 6.8% in the first half of 2009.

55% of the $1 billion+ fund of funds managers are above their high water mark and are collecting performance fees. The other 45% of the funds of funds are below the high water mark. 2011 is the fourth consecutive year of their not receiving performance fees. As a result, some are closing their funds. And in other cases, talent is leaving for firms that will pay higher compensation or they are leaving the industry altogether.

For the first ten months of 2011, the average fund of funds, as represented by the HFRI fund of funds index, lost 4.2%. In comparison, the HFRI hedge fund manager weighted index was down 3.43%. Over the same time period, the S&P500 is down 0.35%.

 Reminders of the Ponzi schemes and frauds from 2008 and 2009 are reinforced as sentencing is occurring for a number of these e.g. Tom Petters. And with the three-year anniversary of Bernard L Madoff Investment Securities bankruptcy filing, the SIPC trustee continues to file lawsuits against the Madoff family, former employees, feeder funds and “net winner” investors as well as negotiate settlements.

The highly publicized Galleon and related insider trading investigations and sentencings may also be causing uncertainty among some investors.

Yet industry veterans generally agree that funds of funds are here to stay. The largest funds of funds continue to be resilient and raise assets. And in an attempt to fill investor needs, some funds of funds have developed specialized niche products while others are providing consulting work or managed account platforms.

Small and medium-sized pensions, foundations and endowments which want access to hedge funds will probably not go direct to hedge funds as it takes extensive resources to research each manager in the portfolio. Some of the recent smaller institutional mandates include Ohio State Highway Patrol Retirement System recently selecting Pinnacle Asset Management for a $10 million fund of funds mandate. The London Borough of Camden pension fund is looking for a fund of funds manager to manage a $64-80 million mandate. It will be the $1.5 billion authority’s first allocation to hedge funds. The mandate is for a specialist multi-strategy fund of funds.

A few new large funds of funds have been launched. One example is Goldman Sachs raising $600 million for a new fund of funds that will seed eight to ten start-ups with each receiving about $75-150 million. The fund is expected to raise about $1 billion.

Other positives have emerged: Some third party marketers say some of the funds of funds’ process is now more transparent and efficient. Others note that some of the smaller and medium-sized funds of funds are using technology to replace people in an effort to run a lean shop.

Consolidations and mergers are another factor in the current environment. A number of funds of funds have recently merged. Examples in 2011 include Athena Capital Advisors acquiring Stonehorse Capital Management, Arden taking over Robeco-Sage, Saguenay acquiring Strathmore, Nexar taking over Ermitage and Richmond Park Capital purchasing Olympia Group.

As we go to press, reports circulate that Geneva-based Union Bancaire Privee is in talks to acquire Nexar. UBP’s funds of funds group, which had been hurt by the Madoff Ponzi scheme and financial crisis, currently has assets of about $11 billion compared with $64 billion in June 2008 and $18.7 billion in 2010.

UBP acquired ABN Amro Bank, the Swiss private banking arm of ABN Amro, in August which added $14.3 billion in assets, 350 people and helped strengthen its wealth management division.

Some of the transactions represent a minority stake that could set the stage for multi-generational ownership. For example, in January, TA Associates announce it had taken a minority stake in Evanston Capital Management. And in November, Evercore Partners agreed to buy a 45% non-controlling interest in ABS Investment Management. In both cases, the fund of funds founders will continue to lead the company, the investment process and day-to-day operations remain unchanged. The founders signed long term employment contracts.

Despite searching various possibilities, some funds of funds have decided to shut their funds. One example is 1794 Commodore Funds, a boutique fund of funds 45% owned by family office William A Burden & Co, 45% by York Capital and 10% by certain employees. It announced in mid-November that it had decided to close. Sources say redemptions gradually eroded assets under management.

 
Compensation highlights

Against this backdrop, Infovest21’s tenth annual compensation survey found:

 In comparing 2011 results with the positions examined in 2007, 2008, 2009 and 2010, the trend in compensation for 2011 is mostly lower. Chief Executive Officer, Senior Analyst, Mid-Level Analyst, Director of Investor Relations, Controller and IT Director were the exceptions, receiving a higher total compensation package in 2011 than in 2010. On the other hand, the Chief Investment Officer, Chief Financial Officer, Portfolio Manager, Junior Analyst, Director of Research, Director of Sales & Marketing, Client Services, Compliance Director, Fund Accountant and Director of Operations had lower compensation this year than in 2010.

 Some similarities existed between the 2011 and 2010 samples:

o 55% of the funds of funds in the 2011 sample were above their high water mark and earning their performance fee compared with 54% in 2010 and 12% in 2009.

o 50% said there had been no change in headcount in 2011 – the same percentage as in 2010 compared with 36% in 2009.

o The average number of employees cut was three in 2011, about the same as in 2010 but considerably less than 34 in 2009. The average number of people added was three in 2011 compared with 6.5 in 2010 and three in 2009. The largest percentage of staff added were operations-oriented while the largest percentage of those fired were marketing and compliance.

o In 2011, 81% of the respondents were stand-alone organizations compared with 81% in 2010 and 64% in 2009.

Major differences between 2011 and 2010 include include:
o The average performance for the first half of the year for the surveyed funds of funds was 0.4% compared with 5.9% last year.

o 40% of the sample was headquartered in the New York area compared to 53% in 2010 and 60% in 2009. Two-thirds said they had more than one office compared to 61% last year.

o Funds of funds are more optimistic about the outlook for compensation.
 60% expect the base salary will increase as a percentage of the total package compared with 15% in 2010 and 28% in 2009.
 20% expect the base compensation will fall as a percentage of the total compensation package.
 Another 10% expect the equity component will decrease as a percentage of the total package compared with 8% in 2010 and 41% in 2009.
 Another 10% expect the equity component to decrease as a percentage of the total package.

Total Compensation
Lois Peltz, president of Infovest21, observed that Chief Executive Officer was the top position, paid in the $5 million+ range. Three positions have total compensation between $600,000 and $999,999. They were Chief Investment Officer, Chief Risk Officer and Portfolio Manager. Five positions – Director of Research, Senior Analyst, Director of Sales & Marketing, Chief Financial Officer and Controller – had total compensations in the $300,000 to $499,000 range. Three positions – Compliance Director, IT Director and Mid Level Analyst – had total compensation between $200,000 and $299,999. Five positions – Director of Investor Relations, Director of Operations, Fund Accountant, Client Services and Junior Analyst – had total compensation between $100,000 and $199,999.

In its just-released marketer sentiment indicator, Infovest21 finds that marketers rated equity long/short the strategy attracting the most investor interest this quarter. Equity long/short had been in the third spot in the last quarter. Global macro, which had been at the top spot last quarter as well as for several quarters prior to that, fell to second spot in the fourth quarter.

Strategies having a higher ranking this quarter i.e. attracting more investor interest included equity long/short, multi-strategy, market neutral, distressed, asset based lending, convertible arbitrage and activists.

Meanwhile, global macro, merger arbitrage, emerging markets, managed futures, energy, and fixed income arbitrage had lower rankings this quarter.

Short-biased and statistical arbitrage remained at the same level as last quarter. Statistical arbitrage remains the lowest on the list of strategies.

Another highlight of the survey is that 50% of the marketers surveyed say that pension plan interest in hedge funds is “up significantly” from last quarter. The majority of marketers felt the interest was “up slightly” from the prior quarter for family offices, endowments, foundations, and consultants.

The marketers also highlighted the strongest investor interest in Asia where 38% of the marketers said the investor interest was “up significantly” and 38% said investor interest was “up slightly.”

Full results of Infovest21’s quarterly marketer sentiment survey appear in the current issue of Investor Focus.

2011 vs 2010 comparison
Lois Peltz, president of Infovest21, commented, “In comparing 2011 and 2010 results, the trend was mixed. Chief Executive Officer, Chief Operating Officer and Portfolio Manager received, on average, a lower total compensation package in 2011 than in 2010 as did some of the mid and junior level positions e.g. Mid-Level Analyst, Junior Analyst and Assistant Controller.”

However, some of the investment and infrastructural positions saw increases such as the Chief Financial Officer, Senior Analyst, General Counsel, Comptroller, Director of Operations and Operations/Mid Office.

The total compensation for the Director of Sales and Marketing in 2011 was about the same level as 2010.

Profile
The profile of the hedge fund manager who responded to the 2011 survey, had an average track record of 13.5 years and gained 3.4% during the first half of the year.

Other highlights
• Two-thirds were above their high water mark
• 76% had assets between $1-4.9 billion
• 85% of the respondents said their assets had increased over the past year
• 74% were stand-alone organizations
• 60% said they had increased their headcount while 7% said they reduced headcount.
• Going forward, 40% of the respondents expect the base salary will increase as a percentage of the total compensation package while 27% expect the base salary will decrease. 13% expect the equity component of the package to increase while 20% expect the equity component to decline.

As would be expected, the $1 billion+ hedge fund managers received higher compensation in all positions surveyed than those hedge fund managers with assets below $1 billion. The greatest differential was in the Chief Investment Officer position while the narrowest differential was in IT.

Methodology
The survey was conducted during September, October and November by phone or email.

23 executive and back office positions were included. Top management positions included Chief Executive Officer, Chief Investment Officer, Chief Financial Officer, Chief Operating Officer and Chief Risk Officer. Investment positions included Portfolio Manager, Senior Analyst, Mid-Level Analyst, Junior Analyst and Director of Research. Sales and marketing positions included Director of Sales and Marketing, Director of Investor Relations and Client Services. Legal/Compliance positions were General Counsel and Compliance Director/Manager while financial positions included Controller, Assistant Controller, and Fund Accountant. Director of Operations and Operations/Mid Office comprised the operations positions. Other positions included Head Trader, Trader and IT.

The results are based on data from 15 separate hedge fund management firms, all with assets over $1 billion. In calculating the statistics throughout the survey, we include only those respondents who provided concrete compensation data with dollar figures.

Separate surveys were conducted and results analyzed for those managers with assets over $1 billion and those with assets under $1 billion. Similar compensation results are available for funds of funds.

Among the highlights are:

Hedge Fund/Fund of Funds Allocations• On average, family
offices allocated about 26% of their portfolio to hedge funds.
• On average, the family offices allocated to 23 hedge fund managers.
• The average allocation to funds of funds was quite small at 1.0%.

Views on Hedge Funds
Almost two-thirds of the family offices viewed hedge funds “very
favorably” while 20% viewed hedge funds “somewhat favorably” while 8% were neutral and 4% viewed hedge funds negatively.

Family offices were divided on their views of the current hedge
fund environment: Almost 40% of the families said few investment opportunities existed while 31% said many investment opportunities existed. 23% said excellent talent was available while
15% said talent wasn’t available.

Manager Selection and Strategies Allocated To
The three most important selection criteria cited in manager
selection were performance, experience and reputation.

Equity long/short, distressed, and event driven were the most
frequently allocated to strategies.

Almost one-third of the typical family offices’ portfolio is allocated to managers with assets between $500 million
and $999 million. Another one-quarter is allocated to managers with assets between $100 and $499 million while 18% of the assets go to managers with assets below $100 million.

Fees
The average fee structure paid to a hedge fund was 1.6% management fee and 18.9% incentive fee. The average management fee and incentive fee for funds of funds was 1.0% and 7.8% respectively.

Almost 60% of the families said the fees have stayed the same
compared with last year.

Almost half of the family offices say they have not been able to
negotiate favorable terms with managers.

Family offices’ largest concern with hedge funds is managers
making up their own rules.

Single versus Multiple family office responses
A number of significant differences can be found when comparing single family offices responses with those of multiple
family offices. Some highlights include:
• Single family offices have more experience with hedge funds as seen in terms of years investing with
hedge funds.
• Multiple family offices are larger proponents of hedge funds than single family offices.
• For single family offices, performance is the most important criteria in selecting a manager.
However, for multiple family offices, experience is the key component
• Very little overlap exists in the strategies that the single and multiple family offices are considering for the first time. Global macro was cited most frequently by single family offices while the largest percentage of multiple family offices cited emerging markets.

About 80% of the funds of funds say that smaller managers provide better performance than larger managers. Over 50% feel that smaller managers have inferior infrastructure to larger managers while 40% feel they are also riskier than larger managers.

About 60% of the funds of funds said managed account platforms do not address some of the smaller manager weaknesses.

When asked the number of underlying managers allocated to in various asset buckets, the largest category was $500-$999 million range. The average number allocated to was:
Asset Category Number of Underlying Managers
in this Asset Size
<$100M 5
$100M-499M 11
$500-999M 16
$1B-4.9B 14
$5B+ 6

Most positive about event driven/special situations over the next three months
Of the 22 strategies examined in this quarter’s sentiment survey, the majority of funds of funds felt “very positive” about one strategy – event driven/special situations, “slightly positive” about eight strategies, “neutral” about 13 strategies and “somewhat negative” about three strategies.

47% of the funds of funds felt “very positive” about event driven/special situations and 40% felt “slightly positive” about the strategy.
In eight strategies, the majority of funds of funds felt “somewhat positive.” In rank order, these were: Merger arbitrage (53%), distressed (50%), sector (47%), multi-strategy (43%), equity long/short (40%), global macro (40%), activist (38%) and volatility arbitrage* (27%)

In 13 strategies, the majority of funds of funds felt “neutral.” These were, in rank order: mortgage backed (73%), convertible arbitrage (62%), market neutral (60%), fixed income arbitrage (53%), energy (53%), short-biased (47%), foreign exchange (47%), ETFs (47%), emerging markets (47%), asset based lending (44%), managed futures (40%), PIPES* (33%) and volatility arbitrage* (27%).
In three strategies, the majority of fund so funds felt “somewhat negative:” Statistical arbitrage (47%), PIPES (33%) and volatility arbitrage* (27%)
*same percentage cited another respones

Three Month Outlook
Very Positive (%) Somewhat Positive (%) Neutral (%) Somewhat Negative (%) Very Negative (%) Total (%)
Activist 6 38 31 19 6 100
Asset Based Lending 6 12 44 31 6 100
Convertible Arbitrage 0 6 62 31 0 100
Distressed 0 50 31 19 0 100
Emerging Markets 13 33 47 7 0 100
Event Driven/Special Situations 47 40 13 0 0 100
Energy 7 40 53 9 0 100
ETFs 0 13 47 27 13 100
Equity Long/Short 20 40 20 13 7 100
Fixed Income Arbitrage 0 13 53 33 0 100
Foreign Exchange 0 33 47 20 0 100
Global Macro 7 40 33 20 0 100
Managed Futures 7 27 40 20 7 100
Market Neutral 0 20 60 20 0 100
Merger Arbitrage 7 53 33 7 0 100
Mortgage Backed 7 13 73 0 7 100
Multi-Strategy 0 43 36 7 14 100
PIPES 0 0 33 33 33 100
Sector 7 47 33 7 7 100
Short Biased 0 20 47 27 7 100
Statistical Arbitrage 0 20 27 47 7 100
Volatility Arbitrage 13 27 27 27 7 100

Looking out over the next 12 months, fund of funds sentiment becomes more positive except for event driven/special situations. In no strategy did the majority of funds of funds feel “very positive” while in 10 markets, the majority of funds of funds felt “somewhat positive” and in 12 markets, the majority of funds of funds felt “neutral” and “somewhat negative” about one.

The majority of funds of funds were “somewhat positive” in merger arbitrage (69%), emerging markets (54%), event driven/special situations (54%), equity long/short (54%), activists (46%), distressed (46%), asset based lending (38%), global macro (38%), and volatility arbitrage (31%).

The majority of funds of funds were “neutral” about convertible arbitrage (77%), mortgage- backed (62%), fixed income arbitrage (54%), short biased (54%), PIPES (50%), foreign exchange (46%), market neutral (46%), managed futures (38%), multi-strategy (38%), sector (38%) and volatility arbitrage* (31%).

In one strategy – statistical arbitrage – the majority of funds of funds felt “somewhat negative.”

Twelve-Month Outlook
Very Positive (%) Somewhat Positive (%) Neutral (%) Somewhat Negative (%) Very Negative (%) Total (%)
Activist 8 46 31 8 8 100
Asset Based Lending 0 38 3` 23 8 100
Convertible Arbitrage 8 0 77 15 0 100
Distressed 0 46 23 31 0 100
Emerging Markets 8 54 31 8 0 100
Event Driven/Special Situations 38 54 8 0 0 100
Energy 17 33 25 25 0 100
ETFs 0 23 54 0 23 100
Equity Long/Short 23 54 15 8 0 100
Fixed Income Arbitrage 8 15 54 15 8 100
Foreign Exchange 31 15 46 8 0 100
Global Macro 15 38 31 15 0 100
Managed Futures 15 31 38 8 8 100
Market Neutral 0 15 46 31 8 100
Merger Arbitrage 8 69 15 8 0 100
Mortgage Backed 8 15 62 15 0 100
Multi-Strategy 0 31 38 15 0 100
PIPES 0 0 50 25 25 100
Sector 15 31 38 15 0 100
Short Biased 0 8 54 31 8 100
Statistical Arbitrage 0 15 31 46 8 100
Volatility Arbitrage 15 31 31 15 8 100

Methodology: Infovest21 conducts this survey on a quarterly basis. This quarter, 49% of the funds of funds had assets below $1 billion while 51% had assets above $1 billion.

In three markets, the majority of managers feel the markets would move up slightly over 12 months – Nikkei225 Stock Average (23%), Yen (38%)*, and Consumer Price Index (28%)*.

In six markets, the majority of managers feel the market will be about the same over the next 12 months – Yen (38%)*, 30-Year Fixed Mortgage Rate (32%), Consumer Price Index (28%)*, DJ Corporate Bond Index (28%)*, 10-Year Treasury (28%), FTSE 100 Stock Average (27%)
In four markets, the majority of managers feel the market will be down slightly over 12 months – Pound (62%), Euro (50%), Nymex Oil (35%) and DJ Corporate Bond Index (28%).

In one market, Comex Gold, the majority of managers felt gold would be down significantly.
*tie i.e. same percentage had more than one response

Twelve- Month Outlook New Highs (%) Up Significantly (%) Up Slightly (%) Neutral (%) Down Slightly (%) Down Significantly (%) New Lows (%) Total (%)
Dow Jones Industrial Average 0 42 4 8 12 27 8
S&P 500 0 42 4 8 8 31 8 100.0
Nikkei 225 Stock Average 0 15 23 15 15 23 8 100.0
FTSE 100 Stock Average 0 15 15 27 12 23 8 100.0
DJ Stoxx 0 12 12 25 12 29 8 100.0
10-Year Treasury 0 12 24 28 12 20 4 100.0
30-Year Fixed Mortgage Rate 0 0 28 32 28 8 4
Dow Jones Corporate Bond Index 0 8 20 28 28 12 4 100.0
Consumer Price Index 0 20 28 28 16 8 0 100.0
Euro (in dollars) 0 0 8 8 50 31 4
Yen (per dollar) 0 0 38 38 19 4 0
Pound (in dollars) 0 0 4 21 62 12 0
NYMEX Oil (spot month) 0 8 19 15 35 23 0
COMEX Gold (spot month) 4 15 12 15 15 35 4

Geography and sectors
In ranking geographic market opportunities, 35% of the managers felt the US had the highest level of market opportunities followed by Latin America and South America with each cited by 12% of the managers.

Looking at sectors, commodities and consumer garnered the most interest – each was cited by 12% of the managers respectively.

64% of managers feel assets flows are weak
In its just-released manager sentiment indicator, Infovest21 found that 39% of managers surveyed find current institutional asset flows at this time to be “slightly weak.” Another 25% categorize the assets lows as “very weak.”

On the other hand, 14% of managers find institutional asset flows as “slightly strong” while only 4% says they are “very strong.” The remaining 18% say asset flows are neutral.

Almost 60% of the managers say institutional asset flows are the same as last quarter, while 36% say they are weaker and 7% say they are stronger.

As would be expected, the larger managers i.e. those with assets over $1 billion, had the more positive responses while the smaller managers i.e. those with assets below $1 billion, had the more negative responses.

Methodology: Infovest21 conducts this survey on a quarterly basis. This quarter, 28 managers responded.

In three markets, the majority of managers feel the markets would move up slightly over 12 months – Nikkei225 Stock Average (23%), Yen (38%)*, and Consumer Price Index (28%)*.

In six markets, the majority of managers feel the market will be about the same over the next 12 months – Yen (38%)*, 30-Year Fixed Mortgage Rate (32%), Consumer Price Index (28%)*, DJ Corporate Bond Index (28%)*, 10-Year Treasury (28%), FTSE 100 Stock Average (27%)
In four markets, the majority of managers feel the market will be down slightly over 12 months – Pound (62%), Euro (50%), Nymex Oil (35%) and DJ Corporate Bond Index (28%).
*tie i.e. same percentage had more than one response

64% of managers feel assets flows are weak
Infovest21 also found that 39% of managers surveyed find current institutional asset flows at this time to be “slightly weak.” Another 25% categorize the assets lows as “very weak.”

On the other hand, 14% of managers find institutional asset flows as “slightly strong” while only 4% says they are “very strong.” The remaining 18% say asset flows are neutral.

Almost 60% of the managers say institutional asset flows are the same as last quarter, while 36% say they are weaker and 7% say they are stronger.

As would be expected, the larger managers i.e. those with assets over $1 billion, had the more positive responses while the smaller managers i.e. those with assets below $1 billion, had the more negative responses.

Methodology: Infovest21 conducts this survey on a quarterly basis. This quarter, 28 managers responded.

Emerging markets climbed to second place from the fifth spot last quarter with a score of 5.0.

Strategies having a higher ranking this quarter i.e. attracting more investor interest included market neutral, multi-strategy, fixed income arbitrage, distressed and convertible arbitrage.

Meanwhile, activists, energy, merger arbitrage and statistical arbitrage had lower rankings this quarter.

Short-biased remained the lowest strategy of interest as perceived by the marketers.

Strategy Score
Long/short equity 3.9
Managed futures 3.9
Emerging markets 5.0
Market neutral 6.3
Activists 7.6
Global macro 7.8
Multi-strategy 7.9
Fixed income arbitrage 7.9
Energy 8.0
Distressed 8.1
Merger arbitrage 9.0
Convertible arbitrage 9.1
Asset based lending 9.8
Statistical arbitrage 11.8
Short-biased 11.8

Prior Quarter
Strategy Score
Global macro 2.9
Long/short equity 4.0
Activists 4.3
Energy 4.7
Emerging markets 4.9
Managed futures 5.3
Multi-strategy 6.9
Merger arbitrage 6.9
Fixed income arbitrage 7.0
Market neutral 7.0
Distressed 7.1
Statistical arbitrage 9.3
Convertible arbitrage 9.4
Asset based lending 9.9
Short-biased 10.0

Investor categoryMarketers’ perception of investor sentiment remained slightly positive. In seven of the eight investor categories, the majority of marketers felt the interest was “up slightly” from the prior quarter. In rank order, they are pension plans (75%), foundations (62%), endowments (62%), consultants (62%), family offices (62%), sovereign wealth funds (50%), and funds of funds (50%).

The one category where marketers were neutral was charities (50%).

Up Significantly (%) Up Slightly (%) The Same (%) Down Slightly (%) Down Significantly (%)
Family Offices 25 62 0 12 0
Funds of Funds 25 50 25 0 0
Consultants 12 62 25 0 0
Charities 12 38 50 0 0
Endowments 25 62 12 0 0
Foundations 25 62 12 0 0
Pensions 12 75 12 0 0
Sovereign Wealth Funds 12 50 25 12 0

Regarding return expectations, marketers said family offices and sovereign wealth funds had the highest return expectations at 10.0% followed closely by endowments at 9.3% and pensions at 9.0%. Marketers felt funds of funds had the lowest return expectations at 7.0%.

Return Expectations (%)
Family Offices 10.0
Sovereign Wealth Funds 10.0
Endowments 9.3
Pensions 9.0
Foundations 8.8

Charities 8.5
Consultants 7.8
Funds of Funds 7.0

The marketers highlighted each of the investor groups’ main concerns. For all the groups, liquidity, transparency and returns were frequently mentioned. Additional responses for families were taxes and capital preservation. For funds of funds, alpha and asset flow were mentioned. Consultants’ additional concerns were keeping clients and headline risk. For charities, marketers also mentioned potential tax changes. For endowments, high costs were also cited. For foundations, generational shifts were also mentioned. For sovereign wealth funds, enterprise stability and safety were also mentioned.

Geographic differentiation
In a shift from the last quarter, the marketers highlighted the strongest investor interest in Australia where 71% of the marketers said the investor interest was “up slightly.” Last quarter, 12% of the marketers said interest in Australia was “up slightly” while 38% said it was “up significantly.”

Interest in the US, which was the marketers perceived the strongest last quarter, lessened somewhat. This quarter, 62% of the marketers said investor interest was “up slightly” compared with 89% last quarter.

Perceived interest in Europe also lessened this quarter as 50% of the marketers said interest was “up slightly” compared with 62% last quarter. A similar situation is seen with Japan where 38% of the marketers felt interest was “up slightly” and the same percentage felt interest was “the same.” Last quarter, 50% of the marketers felt interest in Japan was “up slightly.”

Marketers’ views of investor interest in UK and Asia were unchanged.

Up Significantly (%) Up Slightly (%) The Same (%) Down Slightly (%) Down Significantly (%)
United States 12 62 25 0 0
Canada 25 25 50 0 0
Latin/South America 12 62 25 0 0
United Kingdom 0 25 50 25 0
Europe 0 50 38 12 0
Middle East 0 25 50 12 12
Japan 0 38 38 25 0
Australia 14 71 14 0 0
Africa 12 38 38 12 0

The SEC is proposing that a family office be defined as a firm that:

• Provides investment advice only to family members, certain key employees, charities and trusts established by family members, charities and trusts set up by family members, and entities wholly owned and controlled by family members.

• Is wholly owned and controlled by family members

• Does not hold itself out to the public as an investment adviser.

Historically, family offices have not been required to register with the SEC under the Advisors Act because of an exemption provided to investment advisers with fewer than 15 clients. The Dodd-Frank Act removes that exemption, enabling the SEC to regulate hedge fund and other private fund advisers, but includes a new provision requiring the SEC to define family offices in order to exempt them from regulation under the Advisers Act.

Public comments on the proposed definition should be received by the SEC by November 18, 2010. The Dodd Frank Act becomes effective on July 21, 2011.

The SEC has been charged with adopting a definition that is consistent with the SEC interpretation in prior exemptive orders.

Because multi-family offices serve more than the lineal descendants of a single individual, multi- family offices with more than 15 clients are not expected to qualify for the “family office” exemption and are likely going to need to register as investment advisers with the SEC or their home state depending on the amount of assets under management. As SEC-registered investment advisers, multi-family offices will have to adhere to the same requirements as other investment managers, including, for example, the requirement to appoint a chief compliance officer and to have written compliance policies and procedures.

Industry observers estimate approximately 2500 to 3000 family offices exist in the US, managing in total over $1.2 trillion in assets. Generally, family offices have at least $100 million in investable assets.

Views on hedge funds
Family offices, which had scaled back their hedge fund investments during the financial crisis and who were angered by gates and frozen redemptions, are slowly investing again. In the aftermath of the Ponzi schemes and fraud cases, they have concerns about the safety of their assets and investment portfolios.

As a result, many family offices are reassessing their portfolio construction, asset allocation and risk management policies.

Based on the family office interviews in the current issue of Infovest21‘s Investor Focus, we see families are allocating a higher percentage of their portfolio to liquid assets and are accepting lower returns.  Some are investing a higher percentage in gold.

Families are also spending more time doing thorough due diligence on topics such as liquidity, lock-ups, side pockets, fees and terms. Due diligence has become more sophisticated. Some conduct identity, background and reputational due diligence as well as operational due diligence. Manager’s controls, procedures and counterparty relationships are assessed.  Some family offices have instituted on-site compliance efforts where they test and independently verify practices. Monitoring is occurring at regular intervals.

Some family offices are reexamining portfolio construction and emphasizing risk management. In particular, some are examining tail risk hedging.

The issues contains interviews with:
*RIJO Investments
*Consolidated Investment Group
*Nine Thirty Capital

Other features include:
*Family office and tail risk hedging
*Family office regulatory update
*Sampling of Who’s WHo in Family Offices
*Quarterly Sentiment Indicator: Managers