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MANAGED FUNDS ASSOCIATION

A Perspective on the Industry Marc Charon, Executive Vice President & Managing Director, COO Managed Funds Association. MANAGED FUNDS ASSOCIATION. STRATEGIC COMMUNICATIONS PLAN COMPREHENSIVE RESEARCH FINDINGS. Most Damaging Critiques. Shorting = Destroying Companies, Hurting Workers

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MANAGED FUNDS ASSOCIATION

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  1. A Perspective on the IndustryMarc Charon, Executive Vice President & Managing Director, COOManaged Funds Association

  2. MANAGED FUNDS ASSOCIATION STRATEGIC COMMUNICATIONS PLAN COMPREHENSIVE RESEARCH FINDINGS

  3. Most Damaging Critiques • Shorting = Destroying Companies, Hurting Workers • Don’t Create Anything of Value • Manipulate the Market • Gamble with Investors’ Money • Greedy and Overpaid • Unregulated • Use of Leverage Creates Systemic Risk • Rich Getting Richer • Over-Leveraged and Really Big

  4. KEY FINDINGS • The Hedge Fund Industry Is An Unknown Quantity • DespiteLow Levels Of Awareness, People Instinctively Do Not Like Hedge Funds • Negative Views Are Driven By Misperceptions • Greed, Shorting, Market ManipulationAndRisk Primarily DriveNegative Views • Low Awareness And Misperceptions Create Opportunity • Simple, Clear Messages Can Shift Initial Perceptions And InoculateAgainst Criticism • Goal is to MoveHedge Funds From “Actor” To“Tool” • We Need To PositivelyDefineHedge Funds • Given Lack Of Knowledge, Factual Proof Points ToSupportMessaging Are Critical

  5. Knowledge Level Is Low Across Audiences Current Perceptions Of Hedge Funds

  6. CURRENT PERCEPTIONS OF HEDGE FUNDS • Misperceptions Abound - Even Among Elite Audiences • DifferentTarget Audiences Hold DifferingPerspectives • Instinct Is To Dislike Hedge Funds - Especially Among DC Elites • EnmityExists… Often For NoRealReason • Associated Attributes Frame Industry Negatively • Hedge funds are viewed comparably to Movie Stars and Professional Athletes: greedy, selfish, elitist, overpaid and only benefitting the wealthy

  7. THE OPPORTUNITY Lack of knowledge is a challenge, but also an opportunity. Simple, clear messages can educate audiences and shift perceptions. We can get target audiences to understand the value and utility of the industry.

  8. Messaging: What Doesn’t Work • Insider Language: Mentions of liquidity and capital availability either go over people’s heads or sound too slick • Less Leveraged: Drawing any type of comparison to Wall Street is dangerous, especially when discussing being less exposed financially • Pension Shortfalls: While pensions are important, this argument is too complex for most to understand • Small Industry: Another Wall Street contrast that has the potential to do more harm than good

  9. Core Messages Hedge funds are one tool of many used by pensions, colleges, non-profits and other qualified investors to build a diversified portfolio. Hedge funds help pensions, colleges, non-profits and other qualified investors manage risk and reduce the volatility of their investments Hedge funds have produced generally higher, more consistent returns than other types of investments in all market conditions

  10. Supporting Messages *Source: Hennessee Group LLC

  11. MANAGED FUNDS SSOCIATION WHO IS INVESTING IN HEDGE FUNDS?

  12. Who is Investing in Hedge Funds? Corporate Pension Funds Corporate Pensions are UNDERFUNDED Aggregate US Corporate funded status is 75% (10.31.11) In Q3 2010, Aggregate US Corporate funded status was 74% Mercer L.L.C. Analysis, October 2011

  13. Who is Investing in Hedge Funds? Public Pension Funds State and Local Pension Plans are UNDERFUNDED 85% of US State and local pensions plans’ funded status is less than 80% Those pension hold roughly $2.6 T in financial assets, but liabilities for future pension payments are $3.3T In 2010, Aggregate Public Pension funded status was 65% Congressional Budget Office, May 2011

  14. Who is Investing in Hedge Funds? Endowments – Preliminary FY 2011 Results Large endowments allocate 58% to alternatives Smallest endowments allocate 9% to alternatives July 1, 2010 – June 30, 2011 NACUBO-Commonfund Study of Endowments

  15. Who is Investing in Hedge Funds? Endowments – FY 2011 Preliminary Results Endowments averaged 19.8% for FY 2011 The highest return was 31.8% The lowest return was 3.7% Endowments returned an average of 12.6% in FY 2010 Endowments returned an average of -18.7% in FY 2009 July 1, 2010 – June 30, 2011 NACUBO-Commonfund Study of Endowments

  16. Who is Investing in Hedge Funds? High Net Worth Investors 50% of households with a net worth of $25 million or more own hedge funds in 2010 However, globally, the allocation of HNWI assets to alternatives dipped to 5% of all holdings at end of 2010 from 6% a year earlier. Spectrum Group’s “The $25 Million Plus Investor” Merrill Lynch Capgemini 2001 World Wealth Report

  17. What’s the Outlook? Recent Surveys Say 61% of hedge fund assets are held by institutional investors – pensions, endowments, foundations and others 38% of institutional investors will increase allocations to hedge funds in 2012 More than half of these investors surveyed intend to keep their allocations the same, while only 9% are considering decreasing investments Preqin Research 2011

  18. What’s the Outlook? Recent Surveys Say Investors want increased transparency and liquidity – and they are getting it Institutional investor asset under hedge fund management are approaching pre-crisis 2006 record levels The majority of investor surveyed say they will seek out new managers with whom to invest 20% of investors say they will invest solely with existing relationships “Partnership” is key to receiving direct allocation Prequin Research 2011

  19. What’s the Outlook? Recent Surveys Say Long/short equity remains the preferred strategy – with 38% of investors look at that strategy Global macro is second choice – with 26% looking at that strategy CTAs are third choice – with 15% looking at that strategy Preqin Research 2011

  20. What’s the Outlook? Recent Surveys Say 95% of mid-sized hedge fund managers ($100 to $500 million AUM) consider themselves prepared to meet demands of institutional investors However, there is a material difference in firm infrastructure among these respondents Importantly, two-thirds of funds see the informational requirements of institutional investors as more burdensome that those of high net worth individuals McGladrey and Greenwich Associates 2010 Hedge Fund Industry Survey Report

  21. What’s the Outlook? Recent Surveys Say Key issues for hedge funds seeking allocations from institutional investors: Liquidity: One-third of respondents plan to allow liquidity on a more frequent basis as a means of attracting investors Tax efficiency: Two-thirds of respondents reviewed or are reviewing partnership and operating agreements for tax implications. McGladrey and Greenwich Associates 2010 Hedge Fund Industry Survey Report

  22. What’s the Outlook? Recent Surveys Say Mid-sized hedge funds adapting to institutional demands Even as hedge funds face increasing demands on resources: - Nearly one-third of respondents allow liquidity more frequently - Almost one-third have reduced their lock-up periods - One-fourth have lowered management fees and/or incentive fees In 2010, 15% of hedge funds offered graduated fees In 2011, 33% of hedge funds offered graduated fees McGladrey and Greenwich Associates 2010 Hedge Fund Industry Survey Report

  23. What’s the Outlook? Recent Surveys Say Hedge funds and investors have different views of what is most important before an allocation is made 72% of hedge funds believe performance is most important 43% of investors believe performance is most important 50% of hedge funds believe management team is most important 71% of investors believe management team is most important 45% of hedge funds believe clarity of investment philosophy is most important 56% of investors believe clarity of investment philosophy is most important Ernst & Young , Coming of Age, Global Hedge Fund Survey 2011

  24. Questions

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