Convergence in the funds industry, from mutual funds to private equity
6th Annual PortfolioConstruction ConferenceConvergence in the funds industry, from mutual funds to private equity
Patrick TuohyAsia Pacific Head
HSBC Alternative Investment GroupAugust 2007
Convergence in the funds industry, from mutual funds to private equity
““It is not It is not necessary tonecessary to change. Survival is not mandatory.change. Survival is not mandatory.””W. Edwards Deming(1900-1993)
““The more things change, the more they are the same.The more things change, the more they are the same.””Alphonse Karr (1808-1890)
3
Convergence in the funds industry, from mutual funds to private equity4
1
2
3
4
5
6
7
8
The Past – Investors drive product innovation 4
The Present – Absolute return is the measurement of choice 8
The Future – Where are we headed ? 15
Contents
1. The Past
Convergence in the funds industry, from mutual funds to private equity6
1 Growth in mutual fund
Mutual Fund Growth
$2,811
$3,526
$4,468
$5,525
$6,846 $6,965 $6,975$6,390
$7,414$8,107
$8,905
$10,414
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Years
AUM
(US
D b
n)
0
2000
4000
6000
8000
10000
12000
Num
bers of fund companies
Assets Under Management (USD bn)
Numbers of fund companies
Source: “2007 Investment Company Fact Book” by ICI
Convergence in the funds industry, from mutual funds to private equity
1
7
Growth in index funds
342 index funds managed total assets of USD749bn, as of year-end 2006.
Index Funds Growth
$28,691$33,299$58,377
$99,622
$172,971
$268,728
$392,402$388,878$374,982$331,296
$460,849
$560,146
$625,046
$748,823
$0
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
$700,000
$800,000
$900,000
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Years
AUM
(USD
MM
)
0
50
100
150
200
250
300
350
400
Numbers of Index Funds
Net Assets of Index Funds (USD MM)
Number of Index Funds
Source: “2007 Investment Company Fact Book” by ICI
Convergence in the funds industry, from mutual funds to private equity
1
8
Growth in hedge funds
Hedge Fund Growth & Number of Hedge Funds (incl FoHFs) (1990 - Q1 2007)
$39 $58$96
$168 $167 $186$257
$368 $375$456 $491
$539$626
$820
$973
$1,105
$1,465
$1,568
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Q12007Years
Ass
ets
(USD
bn)
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
Numbers of hedge funds
Assets Under Management (USD bn)
Number of hedge funds
Source: Q1 2007 HFR Industry Report
2. The Present
Convergence in the funds industry, from mutual funds to private equity10
2 Absolute return is the benchmark of choice
Hedge fund investors 2006
Convergence in the funds industry, from mutual funds to private equity
2 Private Equity the king of the jungle
Vintage Funds Yielded Returns
13.1% 14.7% 12.1%
22.1%16.0%
25.4% 21.4% 22.4%
12.0% 12.8% 9.0%5.2%
11.3% 13.0% 16.7%
27.2% 25.3% 26.4%18.4%
17.7% 18.0%14.5%
28.6%
20.0%
41.0%
25.8%33.2%
19.8% 18.6%
13.1%10.9%
16.3%17.4%
23.0%
42.2%36.8%
27.2%
25.2%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Vintage Year
Inte
rnal
Rat
e of
Ret
urn
as o
f 31
Mar
ch 2
007
Top Quart ile US PE Funds (Dollar Weight ed Net Ret urn t o LPs Based on Vint age Year)
All US PE Funds (Equal Weight ed, Dollar Weight ed Net Ret urn t o LPs Based on Vint age Year)
S&P/ ASX 200 Index
S&P 500 Index
Source: Cambridge Associates LLC U.S. Private Equity Index and Benchmark Statistics, 31 March 2007; BloombergNote1: 2005 and 2006 returns are not material as results are premature and capital continues to be deployedNote2: Based on data compiled from 630 U.S. private equity funds, including fully liquidated partnerships. Returns are net of fees, expenses and carried interest.
Convergence in the funds industry, from mutual funds to private equity
2
Hedge fund universe
Liquid Alpha focused
Index fundsETFs
Event drivenDeep valueActivist
Alpha returns vs. Liquidity
Convergence in the funds industry, from mutual funds to private equity
2 Investible indices
Source: CS/Tremont Index
CS/Tremont Investible vs. Non-investible Indices (Jun 2002 - Jun 2007)
50
100
150
200
May-02 Dec-02 Jul-03 Feb-04 Sep-04 Apr-05 Nov-05 Jun-06 Jan-07
Credit Suisse/Tremont Hedge Fund Index (Non-investible)
Credit Suisse/Tremont Investable Index
Convergence in the funds industry, from mutual funds to private equity
Hedge fund universe
Liquid Alpha focused
Index fundsETFs
Event drivenDeep valueActivist
DiversifiedLow fees
ConcentratedHigh feesLess liquid
2 Alpha returns vs. Liquidity
Convergence in the funds industry, from mutual funds to private equity15
2 130/30 Funds the investment industry intersection
3. The Future
Convergence in the funds industry, from mutual funds to private equity17
3 The future
High High LiquidityLiquidity
LowLowLiquidityLiquidity
Expected Expected AlphaAlpha
ETFs / Indexed equity
Long-only Funds
Indexed FoFs
130/30 Funds
Specialist Event Driven Hedge Funds
Private Equity
High High LiquidityLiquidity
LowLowLiquidityLiquidity
Expected Expected AlphaAlpha
ETFs / Indexed equity
Long-only Funds
Indexed FoFs
130/30 Funds
Specialist Event Driven Hedge Funds
Private Equity
Convergence in the funds industry, from mutual funds to private equity
Alternative Investment Group
(AIG)(USD 45.7bn)*
EuropeLondonGenevaZurich
AsiaHong KongSingapore
Tokyo
3 HSBC Alternative Investment Group (“AIG”)
AmericaNew YorkAustraliaAustralia
*As of 30 June 2007
Convergence in the funds industry, from mutual funds to private equity19
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This document is intended for Professional Investors only.
© Copyright. HSBC Alternative Investments Limited 2006, whose office is at 78 St. James’s Street, London, SW1A 1JB. ALL RIGHTS RESERVEDNo part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of HSBC Alternative Investments Limited.
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