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Market Study

The Hedge Fund Industry in Switzerland in a Changing Landscape

Regina Anhorn

Marko Trosic-Ivanisevic

Christopher Janik

ZHAW School of Management and Law Technoparkstrasse 2 8406 Winterthur Switzerland Department of Wealth and Asset Management www.zhaw.ch/en/sml/institutes-centres/iwa/ Author/Contact Regina Anhorn [email protected] January 2019 Copyright © 2016, ZHAW School of Management and Law All rights reserved. Nothing from this publication may be reproduced, stored in computerized systems, or published in any form or in any manner, including electronic, mechanical, reprographic, or photographic, without prior written permission from the publisher.

I

Preface

Alternative assets play an important role in the Swiss asset management industry. A third of the largest Swiss asset managers are from the alternative area (Wietlisbach, 2017, p.3). According to the latest asset management report issued by the Swiss Bankers Association and Boston Consulting Group, around 18% of assets managed in Switzerland in 2017 were allocated to alternative asset classes (SwissBanking, December 2018).

In Switzerland, allocations to hedge funds are still larger than those to private equity or commodities, or to any other asset class with an alternative character. Despite major shifts within the industry, the largest Swiss FoHFs providers – UBS, Credit Suisse, Pictet, LGT, and UBP – have been able to defend their global market share with-in the “top 20” at over 22% for the last six years.

In a major report on the future of global hedge funds, AIMA stated in April 2018 that the industry is experiencing a significant global transformation. According to AIMA, the traditional model of separating alpha from beta is being replaced by new tailor-made investment solutions for investors, reflecting shifts to “smart beta” and “alternative beta” (AIMA 2018).

In June 2008, and thus just before the breakout of the financial crisis, the ZHAW Centre for Asset Management launched its first survey on single hedge funds in Switzerland. The present report aims to provide a comprehen-sive update on the overall world of hedge funds in Switzerland, reflecting the transformation process over the past ten years. In this context, selected managers of funds of hedge funds and single hedge funds operating out of Switzerland have been asked to complement our analysis by participating in an online survey.

Winterthur, January 2019

ZHAW Zurich University of Applied Sciences School of Management and Law, Institute for Wealth & Asset Management Centre for Asset Management

II

Abbreviations

AIF Alternative investment fund

AIFM Alternative investment fund managers

AIFMD Alternative Investment Fund Managers Directive

AIMA Alternative Investment Management Association

AuM Assets under management

CAIA Chartered Alternative Investment Analyst (CAIA) Association

CISA Collective Investment Schemes Act

CISO Swiss Collective Investment Schemes Ordinance by the Federal Council

CTA Commodity trading advisor (hedge fund strategy)

EEA European Economic Area

EMIR European Market Infrastructure Regulation

ESMA European Sales and Marketing Association

ESG Environmental, Social and Governance factors

FINMA Swiss Financial Market Supervisory Authority

FoHFs Fund of hedge funds

FSA Financial Services Authority (UK)

HFR Hedge Fund Research, Inc.

KIID Key Investor Information Document

MIFID II Markets in Financial Instruments Directive II

NAV Net asset value

Q.I. Qualified investor

SFAMA Swiss Funds Association

SICAF Société d’Investissement à Capital Fixe (investment company with fixed capital)

SICAV Société d’Investissement à Capital Variable

SHFs Single hedge funds

UCITS Undertakings for Collective Investment in Transferable Securities

III

Management Summary

A third of the largest Swiss asset managers are from the alternative area. According to the latest asset man-agement report issued in December 2018 by the Swiss Bankers Association and Boston Consulting Group, about 18% of assets managed in Switzerland in 2017 were allocated to alternative asset classes.

Over the past six years, many smaller Swiss institutions have changed their business model and moved away from hedge fund management. In 2012, the ZHAW issued its most recent comparable survey on hedge funds operating out of Switzerland. Six years later, the present report/survey aims to provide a comprehensive update. It had to be taken into consideration, however, that many of our previous contacts have changed their business model and shifted away from hedge fund management. Although the survey is not as representative as our previous ones, it provides a fairly indicative picture of the hedge fund industry in Switzerland in a changing landscape. In any case, the results are mostly in line with key findings from broader European or global surveys.

Europe is the most popular destination for hedge fund investors: In 2017, Europe overtook the US and Asia to become the most popular destination for hedge fund investors. In 2008 Europe based investors had allocated a combined EUR 175 billion to hedge funds. Today there are over 1,100 institutional investors in Europe actively investing over EUR 400 billion in hedge funds (Preqin, June 2018). What is still missing, however, is a more sus-tained period of performance.

The UK continues to dominate the European FoHF market: In terms of assets under management, the UK continues to dominate the European fund of hedge funds market, with a market share of 47% compared to Swit-zerland’s 29%. Interestingly enough, if we look at the number of actual funds managers, the UK has only eight fund of hedge funds managers more than Switzerland.

Switzerland remains a key hub for hedge fund activities: Since 2007, the average staff level per survey partic-ipant has doubled. This indicates that these institutions at least have been able to defend their business model, creating new jobs. Moreover, 45% of the respondents’ investors are based in Switzerland, with Europe (excluding Switzerland) accounting for the next largest share. These results are broadly in line with our previous survey from six years ago.

The overall FoHFs market share has been maintained: The FoHFs landscape has changed markedly during the last six years. Previous key providers such as the E. de Rothschild Group have adapted their business model, setting other priorities in some cases. On the back of a declining asset base and growing net liquidations, Swiss FoHFs managers have been looking to consolidate, especially in the country’s French-speaking and Italian-speaking areas. Nevertheless, the largest Swiss FoHFs providers – namely UBS, Credit Suisse, Pictet, LGT, and UBP – were able to defend their global market share within the “top 20” at over 20%.

In Switzerland, CTAs/Managed Futures represent one of the largest exposures within the European uni-verse. This segment represents more than a quarter of the overall investment styles, a figure that has doubled since 2012. Nearly half of the respondents plan to add new investment styles to their portfolios. This indicates that newly established investment styles - including new technologies such as artificial intelligence - might grow dis-proportionately.

Individual fee arrangements are the name of the game: Over a quarter of the respondents confirmed that fee arrangements are based on the asset base of the funds. Another 21% indicated that the fee arrangement is relat-ed to the type of investor, obviously indicating that large pensions funds can negotiate their fees. Only 11% of the polled managers stated that they have no special fee arrangements. In other words, fee reductions and flexibility with respect to incentives are becoming increasingly important.

IV

Traditional single hedge funds are increasingly being replaced by UCITS: Single hedge funds, which used to dominate the industry, today represent less than 50% of active European-based hedge funds. UCITS, on the other hand, have gained in popularity due to the liquidity and transparency of these structures. Among the Swiss respondents, UCITS already represent 29% of the funds in terms of legal structure, which is slightly above the European average.

The shift from commingled products toward managed accounts has intensified: With the increasing promi-nence of institutional investors and their demand for customized solutions, managed accounts have gained in importance. The 24% allocation to managed accounts confirms that there has been an intensified shift over the last five years from commingled products toward more managed accounts.

ESG is here to stay: Some 50% of the respondents take the view that the ESG trend will also impact the Swiss hedge fund industry, responding to growing investor demand. This percentage is fully in line with a recent global AIMA survey with the promising title “From Niche to Mainstream: Responsible Investment and Hedge Funds”.

Consolidation has intensified and there is still more to come: Some 70% of the participants take the view that the consolidation trend in the industry will continue. The key argument is related to the increasing amount of regu-lation and greater compliance requirements (e.g. MiFID II). In this context, respondents mention the higher cost burden, which might become a growing issue for smaller and medium-sized firms.

Transparency remains an issue: There is no legal requirement to report performance and asset data to the general public (self-selection bias). An illustrative example of this phenomenon is the asset base for funds of hedge funds, where Barclays reports a level of USD 280 billion (Q3 2018), Eurekahedge and Preqin state a level of approx. USD 400 billion, and one of the major market providers declares in excess of USD 500 billion.

V

Table of Contents

Preface .................................................................................................................................................................... I

Abbreviations ......................................................................................................................................................... II

Management Summary ........................................................................................................................................ III

Table of Contents .................................................................................................................................................. V

Hedge Funds – Facts and Figures ............................................................................................................ 1 1.

1.1. Definitions ......................................................................................................................................... 1 1.2. GLOBAL CONTEXT .......................................................................................................................... 1

1.2.1. Performance Issues ........................................................................................................... 1 1.2.2. Asset Flow Development .................................................................................................... 2 1.2.3. Fee Structures .................................................................................................................... 3 1.2.4. Investor Base ..................................................................................................................... 3 1.2.5. Staff Development .............................................................................................................. 4 1.2.6. Funds of Hedge Funds ....................................................................................................... 5

1.3. EUROPEAN HEDGE FUND MARKET ............................................................................................. 5 1.4. HEDGE FUNDS IN SWITZERLAND ................................................................................................. 6

1.4.1. Centers of the Hedge Fund Industry in Switzerland ........................................................... 6 1.4.2. Regulatory Issues in Switzerland ....................................................................................... 9 1.4.3. Funds of Hedge Funds in Switzerland ................................................................................ 9 1.4.4. Single Hedge Funds (SHFs) in Switzerland ..................................................................... 13

Swiss Hedge Fund Survey 2018 .............................................................................................................. 14 2.

2.1. SURVEY APPROACH .................................................................................................................... 14 2.1.1. Background Information ................................................................................................... 14 2.1.2. Participants in the Survey ................................................................................................. 14

2.2. SURVEY – DISCUSSION OF RESULTS ........................................................................................ 15 2.2.1. Company Profiles ............................................................................................................. 15 2.2.2. Switzerland as a Home Base for Hedge Funds ................................................................ 15 2.2.3. Investor Profiles ................................................................................................................ 16 2.2.4. Investment Styles and Fee ............................................................................................... 17 2.2.5. Domicile Issues ................................................................................................................ 20 2.2.6. Outlook ............................................................................................................................. 21

Conclusion ................................................................................................................................................ 24 3.

Glossary ............................................................................................................................................................... 25

Bibliography ......................................................................................................................................................... 26

Tables ................................................................................................................................................................... 29

Figures ................................................................................................................................................................. 30

Authors ................................................................................................................................................................. 31

Appendix .............................................................................................................................................................. 32

1 The Hedge Fund Industry in Switzerland in a Changing Landscape

Hedge Funds – Facts and Figures 1.

1.1. DEFINITIONS

Hedge funds form one of the largest global categories of alternative investments as measured by assets under management. They tend to offer returns between those of stocks and bonds, however with less risk than long-only investments in stocks. Hedge funds represent “investment pools that offer greater flexibility than traditional pools in offering such features as long-short positions, high degrees of leverage, and rapidly changing risk expo-sures” (Chambers, 2018, p. 20).

Hedge funds do not represent a separate asset class. Instead, they are investment funds that invest across dif-ferent asset classes including equities, fixed-income securities, commodities, and currencies. Hedge funds might also utilize derivative instruments in order to increase or reduce risk. Portfolio risks are actively managed. Liquidi-ty risk premiums constitute a significant source of many hedge fund returns. Hedge funds are increasingly struc-tured as private placement funds, which are not publicly listed (Chambers, 2018, p. 20).

Nevertheless, hedge funds are unable to make money in every market environment: Major systemic events like the financial crisis in 2008 are likely to result in higher correlation or major deleveraging. The concept of “absolute return” associated with hedge funds has often led to misunderstandings in the past. The term “absolute” relates to making money regardless of the market environment, whereas “relative” measures the extent to which an invest-ment beats its benchmark (and can still be negative).

Funds of hedge funds are portfolios of hedge funds offering investors exposure to a wide range of alternative investment styles and strategies. Funds of funds generally allocate capital to between 15 and 30 hedge funds in order to achieve efficient risk diversification. Such funds of hedge funds aim to post high returns and are less concerned by manager and event risks. Conversely, a larger number of funds may be used to provide control with respect to extreme risks. Most funds of funds invest in portfolios diversified by manager and strategy, enabling them to produce consistent absolute returns with low levels of risk. As a result, funds of funds are often used as portable alpha strategies or as substitutes for cash in portfolios (EDHEC, 2018). They aim to provide hedge fund investors with access to experienced management, enhanced liquidity, and a lower risk of default. They may also provide hedge fund investors with access to closed funds. The double fee structure is the price to be paid for these potential advantages.

1.2. GLOBAL CONTEXT

1.2.1. Performance Issues According to Hedge Fund Research, global hedge funds gained 8.5% in 2017 compared to growth of 5.4% in the previous year. On an asset-weighted basis, the increase amounted to 6.5%, representing the strongest perfor-mance since 2013. Equity hedge funds, including long-short funds, growth and value funds, and sector-specific strategies, advanced 13.2%, their best result over (the past) four years. Nevertheless, other indices did consider-ably better: The S&P 500 Index returned a total of 21.8% over the same period.

However, what is still missing is a more sustained period of performance. The situation with respect to both per-formance and net new money flows became more demanding in the first half of 2018. According to the HFRI Fund Weighted Composite Index, hedge funds were up a moderate 1.2% in the first six months of the year. It was the performance of two hedge fund types, in particular, that dragged down this figure: Quantitative funds and long-short funds.

Hedge Funds – Facts and Figures 2

Source: Preqin, Q2 2018

1.2.2. Asset Flow Development As at the end of the first half of 2018, global hedge fund assets reached a new record level of USD 3,235 trillion, growing by USD 20.6 billion in the first six months of the year alone (HFR Global Hedge Fund Industry Report). However, excluding quants, the global industry suffered outflows of USD 6.6 billion in the year up to June.

According to Preqin, 2017 saw only moderate inflows (see Table 1). By contrast, European-based hedge funds experienced net inflows of USD 32.4 billion, substantially more than any other region. However, a clear trend reversal was already once again observed in the first quarter of 2018, with North American assets finally gaining 4% in the first nine months of the year compared to a decline of 3.4% in Europe over the same period of time. North America-based fund managers managed to attract inflows amounting to USD 3.0 billion in Q3 alone. Ac-companied by a strong performance over the quarter, industry assets in North America increased to USD $2.73 trillion. The region now accounts for approximately three-quarters of the entire industry’s assets. Europe recorded inflows of USD 2.0 billion over the quarter and total AuM amounted to USD 706 billion (Preqin, Q3 2018).

Performance is key to attracting further capital investment. Among funds that have generated returns of 5% or greater over a three-year period, 38% experienced inflows. This compares to 23% of funds that posted returns of less than -5% over the same period (Preqin, Q3 2018).

Source: Preqin, Q3 2018

Two large publicly traded alternative asset managers which have a strong base in Zurich as well, reported contro-versial results in 2018. Man Group enjoyed record inflows of USD 8.3 billion in H1 2018 and even managed to report a small net inflow of assets in Q3 2018 (Man Group, 2018). GAM on the other hand, which has a staff base of approximately 300 in Zurich, announced that more challenging market conditions had resulted in a significant slowdown in net inflows in the later part of the first half of 2018. Additionally, following the suspension of a unit head for the unconstrained/absolute return bond strategy, client redemptions have followed in the third and fourth quarter of 2018. Additionally, the group has announced a comprehensive restructuring program, an estimated IFRS net loss of approximately CHF 925 million for 2018, as well as a proposed suspension of the 2018 dividend (GAM Investments, 2018).

3.3%

0.1% 0.7%

7.2%

9.4%

5.9% 7.2%

6.1%

-1.2%

2.9%

12.2% 13.8%

9.6% 11.1%

-2%0%2%4%6%8%

10%12%14%16%

Q4 2017 Q1 2018 Q2 2018 12 Months 2-YearAnnualized

3-YearAnnualized

5-YearAnnualized

NET

RET

UR

N IN

%

Hedge Funds

S&P 500 Index

Figure 1: Performance of Hedge Funds vs. S&P 500 PR Index

Table 1: Asset Flows: Fund Manager Headquarters


1.2.3. Fee Structures Fee reductions and flexibility regarding incentives have become increasingly important. Some three-quarters of 350 investors surveyed by Barclays in 2017 were seeing more flexibility on fees from managers (Herbst-Bayliss, Reuters, 2017). Traditionally, hedge funds have adapted a standard fee structure of “2 and 20”, meaning a 2% management fee and a 20% performance fee. On the back of declining returns, fees have been falling toward the level of “1.5% and 15%” – this has only been for rather large institutional investors, however. According to the Credit Suisse global industry survey for the first half of 2018, the average management fee stands at 1.45%, while the average performance fee is 16.9% (Credit Suisse Prime Services, 2018). Based on the same survey, only 3% of investors pay a 2% management fee, while 16% pay a 20% performance fee.

In its 2018 survey of global hedge fund investor appetite and activity, Credit Suisse states clearly that it expects ongoing progress regarding the adjustment of fee terms for 2018. It also makes it clear that it at the same time expects more creative structures and terms. A further survey by the same provider reveals that the fee dispersion among investor types and categories is large (Credit Suisse, 2018).

Our short and Swiss-based survey (see page 18 for details) reveals a similar picture, highlighting major fee diver-gence according to investor type, the volume of AuM and entry points.

1.2.4. Investor Base As Table 2 indicates, on a European basis, institutional investors represent by far the biggest source of capital for hedge funds. The detailed breakdown as at June 2018 indicates that pension funds (private and public) repre-sented 30% of AuM, followed by FoHFs managers (17%). Following the financial crisis of 2008, their share in industry assets has increased substantially.

Investor Type Proportion of Investors

Private sector pension funds 22% Fund of HF managers 17% Wealth managers 11% Family offices 10% Asset managers 9% Public pension funds 8% Foundations 7% Insurance companies 5% Banks/investment banks 4% Others 6% Source: Preqin Q2 2018

With the increasing prominence of institutional investors and their demand for customized solutions, managed accounts have gained in importance. In this respect, managed accounts can increase transparency and give investors greater control, allowing for the better assessment of performance and liquidity (KPMG 2015, p. 10.). A survey conducted by KPMG and AIMA in 2015 confirmed that hedge fund managers are moving toward custom-ized product offerings, with almost half of all fund managers reporting that they already offer a fund-of-one or managed account solution (KPMG 2015, p. 10).

Table 2: European-based Investors in Hedge Funds by Type


As illustrated by Table 3, over the last two years, the hedge fund exposure of Swiss pension funds has been pretty stable. In terms of assets, they still represent the largest alternative investment class. A closer look at the asset allocation of Swiss pension funds (based on the same source) reveals that the exposure to alternative in-vestments at pension funds with total AuM of more than CHF 500 million is more than 50% higher than at institu-tions with less than CHF 500 million in assets. This indicates that the internal expertise in terms of manpower dedicated to alternative investments plays an important role.

Source: Credit Suisse Pension Fund Index, Q2 2018

1.2.5. Staff Development An AIMA report issued in 2017 (AIMA, 2017) estimates that there are 390,000 individuals employed in the world-wide hedge fund industry, including related service providers, which represents a 30% increase compared to 2010. An estimated 20% of this (last) figure is related to Europe and nearly 15% of the jobs are related to the UK (Fig. 2).

Source: AIMA (2017). Data as per March 2017

Q3 16 Q4 16 Q1 17 Q2 17 Q3 17 Q4 17 Q1 18 Q2 18Hedge funds 2.83% 3.01% 2.75% 2.85% 2.70% 2.34% 2.46% 2.65%

Private equity 0.93% 1.00% 1.01% 1.03% 0.99% 0.81% 0.80% 1.08%

Commodities 2.13% 2.15% 2.38% 2.28% 2.27% 2.56% 2.62% 2.30%

Total 5.88% 6.16% 6.15% 6.15% 5.96% 5.71% 5.89% 6.04%

253'000

56'000

9'000 8'000

0

50'000

100'000

150'000

200'000

250'000

300'000

USA UK Hong Kong Switzerland

NU

MB

ER O

F JO

BS

Table 3: Allocation of Swiss Pension Funds to Alternative Investments for the Last Eight Quarters

Figure 2: Markets with the Largest Concentration of Hedge Fund Jobs in the Sector


1.2.6. Funds of Hedge Funds A crucial question is whether hedge fund databases reliably represent the hedge fund universe. Obviously, an index should represent a general proxy for an industry (Pictet, 2011). However, hedge fund databases are subject to several biases, making it difficult to assess the true level of the asset base (e.g. for Swiss funds of hedge funds). There is no legal requirement to report performance and asset data to the general public. This leads to what is known as self-selection bias (Pictet, 2011). An illustrative example of this phenomenon is the reported asset base for funds of hedge funds, where Barclays reports a level of USD 280 billion (Q3 2018), Eurekahedge and Preqin state a level of USD 400 billion, and one of the major product providers declares in excess of USD 500 billion. In our report, we have opted for the middle road provided by Eurekahedge and Preqin.

According to Eurekahedge, total assets managed by funds of hedge funds managers as at mid-2018 amounted to nearly USD 400 billion. This is nearly 50% less than the peak level of USD 808 billion reached in 2007. 2017 saw two controversial developments: On the positive side, there was a performance gain of over 7% as measured by the Eurekahedge Fund of Funds Index. On the other hand, there were only 24 launches and a total of 193 clo-sures. Net redemptions therefore remained the key topic for the seventh consecutive year. As a result, unlike single hedge funds, funds of hedge funds have not been able to maintain or even grow their asset base following the financial crisis.

The fund of hedge funds landscape has changed markedly over the last few years, with the closure of smaller firms and the mergers of smaller and medium-sized firms. On the back of a declining asset base and growing net liquidations, FoHFs managers have increasingly been looking to consolidate: Between 2009 and 2017, there were 56 mergers or acquisitions compared to only 13 in the period between 2000 and 2008. In 2018, there has thus been a substantial increase in hedge fund of funds searches through Europe and North America (Pension & In-vestments, July 2018). A key example of this development is Man Group, which reports increasing demand for bespoke solutions for clients, such as building a managed account platform for investors (Man Group, 2018).

1.3. EUROPEAN HEDGE FUND MARKET

Europe is the second largest region in terms of hedge fund activity across the globe, accounting for 20% of the AuM held by the industry. The UK hedge fund industry is the largest in Europe, with USD 472 billion in AuM, and the second largest globally after the US. Over half of Europe’s hedge fund managers are based in the UK and three-quarters of European hedge fund assets are managed in the UK (Preqin, 2017, p. 3). Before the Brexit vote, most hedge funds in the UK only had a small number of staff in the rest of the EU. With EUR 36 billion in AuM, Sweden is the second largest hedge fund market in Europe, far behind the UK, and just in front of France and Switzerland (Eurekahedge, March 2018).

The European industry had a more successful 2017 than North America in terms of asset flows. Some 52% of European-based managers experienced net inflows in 2017, the highest of any region, with new investments totaling EUR 27 billion. As a result, Europe overtook the US and Asia in 2017 to become the most popular desti-nation for hedge fund investors. In 2008 Europe based investors had allocated a combined EUR 175 billion to hedge funds. Today there are over 1,100 institutional investors in Europe actively investing over EUR 400 billion in hedge funds (Preqin, June 2018). Equity strategies represented the key investment style of Europe-based hedge funds (34% of total AuM), followed by Macro and CTAs/Managed Futures, representing 14 % each (Preqin, June 2018).

Traditional single hedge funds, which used to dominate the industry, today represent less than 50% of active European-based hedge funds. UCITS, on the other hand, have gained in popularity due to their liquidity and transparency, and today represent over a quarter of funds operated by European-based fund managers. This has particularly benefitted the leading domicile for these vehicles, namely Luxembourg, representing more than 50% of the European-based UCITS (Preqin 2017, p.4).


A close look at head office locations reveals an interesting pattern for Swiss hedge funds: As expected, the UK represents the location of choice for 39% of the hedge fund managers, followed by Luxembourg (16%) and – in third place – Switzerland, with a market share of 10%. On the other hand, while representing a popular location for hedge fund domiciles, the Cayman Islands accounts for only 2% of European managers’ head office locations (Eurekahedge, March 2018).

1.4. HEDGE FUNDS IN SWITZERLAND

In September 2018, the latest version of the Global Financial Centres Index (GFCI 24) was launched, highlighting that Frankfurt, Amsterdam, and Vienna have moved up the rankings significantly. Zurich has gained 7 positions, now standing at number 9, even placing ahead of Frankfurt. Geneva defended its 27th position, ranking in the middle of the statistics. The GFCI 24 is an aggregation of five different indices, whereby each index covers one of the following areas: Business environment, financial sector development, infrastructure factors, human capital, and reputation and general factors. When it comes to stability aspects, of the top 40, Zurich not surprisingly ranks highly, but is still clearly behind Singapore and London, and well below Paris and Amsterdam. However, looking at the specific areas of competitiveness, Zurich is not looking all that convincing, neither in terms of business environment nor regarding its financial sector development or reputation. Even Geneva looks better on the “dy-namic” side (Yeandle, 2018). This indicates that Zurich has catch-up potential in this respect.

1.4.1. Centers of the Hedge Fund Industry in Switzerland Second to the UK, Switzerland is home to some of the largest hedge fund managers and investors. Fund of hedge funds managers are particularly prominent within Switzerland. In terms of AuM, the UK continues to domi-nate the European fund of hedge funds market, with a market share of 47% compared to Switzerland’s 29%. Interestingly enough, if we look at the number of actual fund managers, the UK has only eight fund of hedge funds managers more than Switzerland (Preqin, Hedge Funds in Europe, 2017, p. 4).

A quarter of all Swiss-based funds are Managed Futures/CTAs. This represents one of the largest exposures within the European universe (Preqin, 2017, p. 6). According to Preqin, CTAs experienced outflows of USD 9.2 billion in the second quarter of 2018 alone. However, this has to be seen in a historic context: In 2015, 2016, and 2017, CTAs managed to attract yearly inflows of USD 25 billion. This was followed by a plus of USD 13.2 billion in the first quarter of 2018 (Preqin, Q2 2018). No other broad strategy managed to attract a similar asset inflow over the same period.

The Swiss market is considered an attractive location for selling investment funds. As a result, of the funds au-thorized for public distribution in Switzerland, foreign funds outnumber Swiss funds by almost five to one (7,401 vs. 1,551).

Figure 3 depicts the number of hedge fund companies across Switzerland based on the Eurekahedge database as at mid-2018.

• Zurich, Pfäffikon, Zug, and surrounding areas in the German-speaking region • Geneva, Nyon, Lausanne, and surrounding areas in the French-speaking region • Lugano in the Italian-speaking region


Source: ZHAW, based on Eurekahedge data

Zurich, Pfäffikon, Zug, and Surrounding Areas in the German-speaking Region

The Zurich financial center, which covers the cantons of Zurich, Schwyz, and Zug, is a key pillar of the region. Its activities generate around one in every six Swiss francs of economic value (Zurich Banking Association, 2015). At the end of 2015, “other financial service providers”, a market segment also including hedge funds, accounted for a workforce of 19,000 in Zurich or 21% of the total headcount in the financial sector. This means that 13% of the overall nominal gross value created in the Zurich financial center, representing as much as CHF 3.4 billion, can be attributed to this market segment. By comparison, banks and insurance companies contribute over 40% each.

The Zurich financial center as a whole represents approximately 90,000 jobs, which is 10% of the entire labor industry value (Zurich Banking Association, 2015). The ZHAW estimates that the hedge fund industry alone sup-ports 5,000 jobs. Zurich is most favored by single hedge funds, with a total of 82 master funds.

As of 2018, Zurich is home to 60 hedge fund management companies. This is nearly the same figure as for Ge-neva, Lausanne, and Neuchatel (Figure 3). Before the financial crisis of 2008, an increasing number of start-ups tried to establish themselves as single hedge funds. However, about half of them had to give up their original business model. A further 16 fund management companies have established themselves in Zug/Baar.

Pfäffikon used to be the hotspot for funds of hedge funds, represented by its strong local basis of Man Group. At peak times, Man Group and Horizon 21 dominated the financial scene followed by an increasing number of smaller firms, adding hundreds more jobs. Meanwhile, Man Group cut its local workforce from 550 to 200 over about five years, and Horizon 21 shrank from 200 to just 10 employees managing the assets of its partners. Nev-ertheless, the cluster remains an innovative destination for providers, comprising 150 specialist businesses. Over the last three years, a few new names have moved from London to Pfäffikon again.

Figure 3: Overview of the Number of Fund Management Companies in Switzerland

Geneva

Lausanne/Vaud/ Neuchâtel

Ticino

Zurich/ Zollikon

Baar/Zug

Central Switzerland

Basel

Pfäffikon/ Wollerau

56

16

60

1

19

2

Schaffhausen

7

1

15

1 St. Gallen

1 Ziegelbrücke

6

1


Source: ZHAW, based on Eurekahedge data

Zurich, Pfäffikon, Zug, and Surrounding Areas in the German-speaking Region

The Zurich financial center, which covers the cantons of Zurich, Schwyz, and Zug, is a key pillar of the region. Its activities generate around one in every six Swiss francs of economic value (Zurich Banking Association, 2015). At the end of 2015, “other financial service providers”, a market segment also including hedge funds, accounted for a workforce of 19,000 in Zurich or 21% of the total headcount in the financial sector. This means that 13% of the overall nominal gross value created in the Zurich financial center, representing as much as CHF 3.4 billion, can be attributed to this market segment. By comparison, banks and insurance companies contribute over 40% each.

The Zurich financial center as a whole represents approximately 90,000 jobs, which is 10% of the entire labor industry value (Zurich Banking Association, 2015). The ZHAW estimates that the hedge fund industry alone sup-ports 5,000 jobs. Zurich is most favored by single hedge funds, with a total of 82 master funds.

As of 2018, Zurich is home to 60 hedge fund management companies. This is nearly the same figure as for Ge-neva, Lausanne, and Neuchatel (Figure 3). Before the financial crisis of 2008, an increasing number of start-ups tried to establish themselves as single hedge funds. However, about half of them had to give up their original business model. A further 16 fund management companies have established themselves in Zug/Baar.

Pfäffikon used to be the hotspot for funds of hedge funds, represented by its strong local basis of Man Group. At peak times, Man Group and Horizon 21 dominated the financial scene followed by an increasing number of smaller firms, adding hundreds more jobs. Meanwhile, Man Group cut its local workforce from 550 to 200 over about five years, and Horizon 21 shrank from 200 to just 10 employees managing the assets of its partners. Nev-ertheless, the cluster remains an innovative destination for providers, comprising 150 specialist businesses. Over the last three years, a few new names have moved from London to Pfäffikon again.

Figure 3: Overview of the Number of Fund Management Companies in Switzerland

Geneva

Lausanne/Vaud/ Neuchâtel

Ticino

Zurich/ Zollikon

Baar/Zug

Central Switzerland

Basel

Pfäffikon/ Wollerau

56

16

60

1

19

2

Schaffhausen

7

1

15

1 St. Gallen

1 Ziegelbrücke

6

1


The “Swiss Asset Management Day”, held annually in Pfäffikon, is Switzerland’s largest and most important fi-nance congress, regularly attracting some 500 finance executives from Switzerland and abroad. However, whereas some eight years ago the conference was focusing on alternative investments, the key themes are now far more diversified.

Geneva and Surrounding Areas Geneva is the second most important location for financial business in Switzerland. The value chain includes commodity trading, wealth management, hedge fund activities, and inspection companies. The Geneva financial center is home to more than 35,000 jobs, of which more than 50% are in the banking industry and 8% are ac-counted for by independent asset managers, including hedge funds. According to Table 3, Geneva is the most favored place for funds of hedge funds companies (Fondation Geneve place financiere, 2018).

Geneva still plays a key role in the area of funds of hedge funds. Pictet made its first hedge fund investment in 1991 and now manages over USD 15 billion in single hedge fund and multi-manager hedge fund strategies under both UCITS-compliant and offshore structures. The first FoHFs was launched in 1994. Today, Pictet is not only the biggest single hedge fund manager in Switzerland (table 4), but also one of the 20 largest FoHFs institutions in the world (Table 5).

However, Banque Privée Edmond de Rothschild, which for many years represented by far the largest provider for Swiss registered FoHFs (reported assets in 2012: CHF 3 billion), is no longer playing such a central role in this asset class. Indeed, according to its 2017 annual report, private equity seems to be its key priority on the alterna-tive assets side.

The French-speaking part of Switzerland has also been marked by a major merger in the hedge fund industry: in 2014, as a late reaction to the Madoff crisis, Gottex and EIM merged. The newly established company, LumX, currently reports fee-earning assets of USD 7.4 billion.

Lugano and Surrounding Areas Lugano has traditionally been more devoted to Italian clients, while the other two Swiss centers have a broader investor base. The most important regulations are the Italian “voluntary disclosure” arrangement for assets held in Switzerland and not fiscally disclosed, and the automatic exchange of information to be implemented by Switzer-land in 2018.

Ticino has also faced major M&A activities within the hedge fund industry: Only in 2018, Copernicus Holding SA, which had been established just a year earlier, announced a binding offer for the purchase of 100% of the share capital of Thalia SA, which was founded in 2004 as a center of expertise in hedge funds. Despite this consolida-tion process, there are still 19 fund management companies in Ticino (Figure 3).

Table 4 provides an overview of the number of single hedge funds (SHFs), funds of hedge funds (FoHFs), and fund management companies within the different locations in Switzerland. The numbers equal the total figures reported by Preqin in 2017.


Source: ZHAW, based on Eurekahedge data (2018)

1.4.2. Regulatory Issues in Switzerland

To date, Switzerland has not managed to develop into a major domicile for single hedge funds. However, Switzer-land is a major market for the placement of funds of offshore hedge fund products and an attractive jurisdiction for the management and distribution of foreign hedge funds. Most Swiss-managed hedge funds are incorporated in the Cayman Islands. In practice, hedge funds that are managed or marketed in Switzerland are typically incorpo-rated outside Switzerland. Any parties managing or operating local and/or foreign collective investment schemes in or from Switzerland must obtain prior authorization from the Swiss Financial Market Supervisory Authority (FINMA).

Switzerland is not part of the EU and is not subject to the AIFMD rules. The distribution of foreign funds in Swit-zerland is regulated by a specific set of rules, where the function of the Swiss representative is key. The last revi-sion of the Collective Investment Schemes Act (CISA) as at March 1, 2015, brought hedge funds under the watch of FINMA. Foreign collective investment schemes can be marketed to retail investors only if they are authorized for distribution in Switzerland by FINMA. However, in reality, in the recent past FINMA has only registered invest-ment funds which are organized as Undertakings for Collective Investments in Transferable Securities (UCITS). Due to the FINMA practice which requires that a non-UCITS fund meets equivalent criteria to those which apply to Swiss alternative investment funds, there have been no new registrations of foreign alternative investment funds in Switzerland in recent times (Lenz & Staehelin, 2017, p. 180).

1.4.3. Funds of Hedge Funds in Switzerland

Within the global top 21 FoHFs institutions, there are several key institutions which either have their headquarters or have a high portion of their business allocated to Switzerland. According to Table 5, the largest Swiss FoHFs providers – UBS, Credit Suisse, Pictet, LGT, and UBP – were able to defend their market share within the “top 20” at over 22%, which is the same level as stated in our last market report issued in September 2012 – despite major shifts within the industry over the past six years: In our previous survey presented in 2012, the E. de Rothschild Group was still among the top players. With managed assets of CHF 10 billion, the reputed group was even placed several ranking positions ahead of Pictet. A further glance at Table 5 also reveals that core institutions like UBS and Pictet were able to realize above-average AuM growth in 2017.

1 Central Switzerland = Lucerne, Sarnen 2 Ticino = Breganzona, Chiasso, Lugano, Mendrisio, Paradiso

Table 4: Locations of Swiss Hedge Funds

Location Number of FoHFs Number of SHFs Number of mgmt. companies

Basel 1 0 1 Central Switzerland1 0 2 2 Geneva 41 67 56 Lausanne/Neuchâtel 2 6 6 Pfäffikon/Wollerau/Altendorf 4 13 15 Schaffhausen 0 1 1 St. Gallen 1 3 1 Ticino2 16 15 19 Ziegelbrücke 0 5 1 Zug/Baar 2 23 16 Zurich/Zollikon 20 82 60 Total 87 217 178


Rank Firm AuM in USD billion Change from 2017

1 Blackstone Alternative Asset Management 77.4 6.8% 2 UBS Hedge Fund Solutions 40.8 12.7% 3 Goldman Sachs Asset Management 31.3 7.3% 4 Grosvenor Capital Management 27.3 5.2% 5 HSBC Alternative Investments 23.7 N/A 6 Morgan Stanley Investment Management 23.2 -0.6% 7 Blackrock Alternative Advisors 22.1 3.2% 8 EnTrustPermal 20.7 -15.3% 9 Man FRM 16.8 4.0% 10 Lighthouse Partners 16.6 -13.7% 11 Credit Suisse Alternative Funds Solutions 14.0 N/A1) 12 Rock Creek Group 13.9 7.8% 13 PAAMCO Prisma 13.7 -23.2% 14 Aberdeen Standard Life Inv. 12.0 N/A 15 J.P. Morgan Alternative Asset Manage-

11.7 -10.4%

16 K2 Advisors 11.6 12.4% 17 Aetos Alternatives Management 11.1 1.9% 18 Pictet Alternative Advisors 11.0 10.8% 19 LGT Capital Partners 10.5 N/A1) 20 UBP Alternative Investments 10.0 N/A1) Total 408.4 FoHFs strongly related to Switzerland 22% 1) Figures as at March 31, 2018

Source: Pensions & Investments, September 17, 2018, and Preqin Quarterly Update Hedge Funds, Q2 2018

As Figure 4 illustrates, there is a major gap between the top five FoHFs providers and the next five institutions. Edmond de Rothschild, in particular, has visibly changed its business model and moved away from FoHFs to some extent.

Source: Eurekahedge database, 2018

Table 5: Ranking of the 20 Biggest Global Fund of Hedge Fund Companies

40'800

14'000

10'500

11'000

10'000

2'000

1'680

980

958

817

0 10'000 20'000 30'000 40'000 50'000

UBS Fund Services SA

Credit Suisse Asset Management Ltd

LGT Capital Partners (Ireland) Ltd

Pictet Asset Management (Geneva) SA

UBP

Edmond de Rothschild Asset Management(Luxembourg)

Vontobel Asset Management AG

Trocadero Asset Management Ltd

Thalia SA

Alpinum Investment Management AG

Figure 4: AuM for the Top Ten Swiss FoHFs Providers in bn USD


Fees of the FoHFs Universe in Switzerland

Figure 5 shows the distribution of the fee structure across the number of FoHFs in Switzerland. For a clear and transparent picture, the data has been adjusted as follows: Only data that has either a positive management fee or a positive performance fee has been considered. In those cases where a fund reported no data for both fee types, the fund has been excluded. The final sample thus gave rise to a total number of 82 master FoHFs in Swit-zerland.

The actual distribution of the management fees ranges from a minimum of 0% to the highest figure of 2.5%, with the median lying at 1.25%. The right side of Figure 5 illustrates the distribution of the performance fees across the sample. Hereby, the mean across the observed performance fees stands at 11%. The performance fees ranged from 0% to 20%.


If we look at underlying fee levels per investment style, substantial gaps can be identified, with fixed-income prod-ucts in general clearly charging the lowest management and performance fees. On the other side of the spectrum, we find global macro/event-driven funds.


36

14

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ber o

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Figure 6: Avg. Management Fee/Style… and Avg. Performance Fee/Style

1.50

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0.77

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Event Driven

Macro

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Long Short Equities

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Fixed Income

0.00 0.20 0.40 0.60 0.80 1.00 1.20 1.40 1.60In %

0.00

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7.08

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Distressed Debt

Long Short Equities

Others

Arbitrage

Multi-Strategy

CTA/Managed Futures

Relative Value

Fixed Income

0.00 2.00 4.00 6.00 8.00 10.00 12.00In %

Figure 5: Management Fees… and Performance Fees across the FoHF Universe


High Watermark

Figure 7 provides an overview about the percentage of funds of hedge funds which apply a high watermark on their performance fees. Some 44% of the FoHFs of the Eurekahedge database (master funds) use a high water-mark.


Domiciles of FoHFs Managers in Switzerland

Luxembourg is still the most favored domicile, representing 50% of AuM and the total number of funds of Swiss-registered FoHFs.


Figure 7: High Watermark Used by Swiss FoHFs

1.16%

1.16%

2.33%

3.49%

3.49%

4.65%

8.14%

10.47%

15.12%

50.00%

Singapore

United Kingdom

Malta

Ireland

Liechtenstein

Guernsey

Cayman Islands

British Virgin Islands

Switzerland

Luxembourg

0.00% 10.00% 20.00% 30.00% 40.00% 50.00%

Figure 8: Domiciles of Swiss FoHF

51% 44%

5%

No

Yes

Not disclosed


1.4.4. Single Hedge Funds (SHFs) in Switzerland

Table 6 illustrates the top ten single hedge fund managers operating from Switzerland. With a market share of 38%, Pictet is the biggest player in Switzerland. Overall, Switzerland has never managed to gain more than a 4% market share in the global single hedge fund industry.

Mgmt. Company AuM (USD million) Market Share in %

Pictet Asset Management (Europe) SA 8,600 38%

Vontobel Asset Management SA 3,449 15%

GAM (Luxembourg) SA 1,817 8%

RAM Active Investments SA 1,427 6%

Cape Capital AG 796 3%

LGT Capital Partners (Ireland) Ltd 656 3%

DMS Investment Management Ltd 497 2%

Falcon Private Bank Ltd 468 2%

Dominicé & Co - Asset Management 465 2%

Lemanik Asset Management SA 369 2%

Source: Eurekahedge (2018); ZHAW estimates

Table 6: Biggest Swiss Single Hedge Fund Managers

Swiss Hedge Fund Survey 2018 14

Swiss Hedge Fund Survey 2018 2.

2.1. SURVEY APPROACH

2.1.1. Background Information Back in June 2008, the ZHAW Centre for Asset Management launched its first survey on single hedge funds in Switzerland. Ten years and a few additional updates later, the present report aims to provide an insight into the overall world of hedge funds in Switzerland. The first phase of the research project was to issue a detailed ques-tionnaire in March 2018. The ZHAW Centre for Asset Management ensured that the survey was independent and that the results of the individual questionnaires and interviews were kept strictly confidential.

The identification of contacts proved to be considerably more time-consuming than expected. When comparing our internal database created six years ago with the reality of today, it had to be taken into consideration that many of our previous contacts classified as hedge fund managers have changed their business model and moved away from hedge fund management. This was most often the case in the context of single hedge funds.

As a result, the original deadline for the completion of the survey, was extended several times, and the last ques-tionnaire was submitted in August 2018. Nevertheless, the final response rate remained disappointing, especially when compared with our previous surveys. Although this survey is not as representative as our previous ones, it provides a fairly comprehensive picture of the hedge fund industry in Switzerland in a changing landscape. In any case, the results are broadly in line with key findings from broader European or global surveys.

2.1.2. Participants in the Survey In conducting this survey, we reached out to all sizes of single hedge fund managers and funds of hedge funds. The two largest geographical hedge fund centers in Switzerland are reflected to a reasonable extent by the partic-ipants in the survey. Allocations are similar to our last survey conducted in 2012: 35% of the participants repre-sent the region of Zurich, and another 29% the French-speaking part of Switzerland. As not all participants pro-vided us with their last figure on managed assets, in some cases we had to make our own estimate. The results of the survey reflect an estimated asset base of USD 60 billion. This is only half of the AuM base in 2012 and reflects the following factors:

• The unsatisfactory response rate

• Emerging managers (those with AuMs of USD 500m or less, as defined by AIMA) represent one third of the participants.


2.2. SURVEY – DISCUSSION OF RESULTS

2.2.1. Company Profiles Inception Date and Legal Structure of the Group More than 60% of the polled institutions have been set up as independent boutiques or partnerships, while 15% represent the Swiss banking sector. Compared to our survey in 2012, momentum has slightly decreased on the banking side and moved toward boutiques/partnerships. As far as the inception dates are concerned, the 2018 survey result matches the figure achieved six years ago: Nearly two-thirds of the fund managers stated that their hedge fund management companies were established before 2005.

2.2.2. Switzerland as a Home Base for Hedge Funds Headcounts There is no mutual agreement with respect to what extent it is difficult to find qualified staff in the Swiss home base: While 50% say it is not difficult, the other half say it is. As Figure 9 illustrates, the average staff level per participant has doubled since 2007. This indicates that at least those institutions that are marked have been able to defend their business model, creating new jobs. According to AIMA, as hedge fund business grows and sur-passes the billion-dollar (AuM) level, staff size grows exponentially (AIMA, September 2018).

Source: ZHAW Hedge fund survey 2018

Client services (100%), marketing and sales and operations/risk management (more than 90%), and fund man-agement (85%) are the key functions performed in Switzerland. Again, there is no big change compared to our previous survey from six years ago.

Figure 9: What Was the Headcount in Your Swiss Hedge Fund Activities As at Year-end (Measured in FTEs)?


For 50% of the participants, legal representation and activities in the area of online publications and platforms (fund data, legal documents) are the main services being outsourced. In light of the high complexity of these activ-ities, this does not come as a surprise.

2.2.3. Investor Profiles

Based on the average scores from the survey, pension funds dominate as key investors, representing 35% of the clientele. On the other hand, private clients have become a rather small part of the business.

What role do platforms like IPE Quest play when pitching for new mandates? Two-thirds of the respondents argue that these platforms have no relevance when pitching for new mandates. This stands in rather sharp in contrast to the growing importance attributed to these platforms by Swiss pension funds.

50% 50%

30% 30%

20% 20%

0%

10%

20%

30%

40%

50%

60%

Legal representation(professional representativeservices vis-à-vis investors

and FINMA)

Online publications (funddata, legal documents,

marketing documents, legalnotices)

Use of external onlineplatforms to develop and

maintain direct contact withinvestors

Integration into existingdistribution networks

Global fund registration Other (please specify)

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35%

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Pension Funds Intermediates Family Offices Private Clients

AVE

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Figure 10: Which Services Have Been Outsourced?

Figure 11: What Is the Investor Breakdown in the Funds of Hedge Funds Business (in % of AuM)?


45%

32%

22% 18%

15% 11%

0%

5%

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20%

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45%

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Switzerland Europe (excl. Switzerland) North America Middle East UK Asia-Pacific

AVE

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OF

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Figure 12: Where Are Your Investors Based (in % of Total Investors)?

According to the average score, 45% of the respondents’ investors are based in Switzerland, with Europe (exclud-ing Switzerland) accounting for the next largest share. These results are broadly in line with our previous survey from six years ago. On the other hand, hedge fund managers have adapted their client base in North America, an area which was hardly present in our 2012 review.

2.2.4. Investment Styles and Fee

By far the most important investment style is long-short equities. CTAs/Managed Futures represent more than a quarter of the polled managers. This figure is twice as high as in 2012 and represents one of the largest expo-sures within the European universe. This confirms the result provided by the most recent Preqin report on hedge fund activities in Europe/Switzerland (Preqin 2017, p. 6). The high allocation illustrates why in a market environ-ment such as that seen in the first half of 2018 when this investment style suffered disproportionately, Swiss hedge funds are particularly affected: European assets under management for CTAs shrunk by nearly 10% in the first six months of 2018, as underlying managers posted their fifth consecutive month of investor redemptions with net outflows totaling USD 7.1 billion.

Globally, CTAs experienced outflows of USD 9.2 billion in the second quarter of 2018 alone (Preqin, Q2 2018). On the other hand, “new” investment styles such as artificial intelligence are still very much in their infancy.

49%

27% 23%

21% 19%

16%

12%

7% 6%

1%

0%

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Long/ShortEquities

CTA/ManagedFutures

Macro Equity MarketNeutral

Relative Value Multi-Strategy Event Driven Fixed Income Risk Parity ArtificialIntelligence (AI)

AVE

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Figure 13: What Are the Main Investment Styles Used for Your Hedge Fund Products (in %)?


Over a quarter of the respondents confirmed that fee arrangements are based on the asset base of the funds. Another 21% answered that the fee arrangement is related to the type of investor, obviously indicating that large pensions funds can negotiate their fees. Only 11% of the polled managers stated that they have no special fee arrangements. In other words, tailor-made arrangements, as highlighted in our introductory section on page 11 are also playing a key role among Swiss hedge fund managers.

Among the institutional investors, management fees of between 1% and 1.5% dominate. Only retail clients are being charged fees above the 1.5% level. On the other hand, there is no big gap between retail and institutional clients as far as the preferred performance fee of 20% is concerned. This is broadly in line with a survey of Credit Suisse (Credit Suisse Prime Services, August 2018).

What we described as a growing tendency for the European hedge fund industry as a whole is also being mir-rored in Switzerland: UCITS already represent 29% of the funds in terms of legal structure. This compares to 25% in Europe and confirms that Swiss hedge fund managers have also responded to the increased demand for liquid-ity and transparency (Preqin 2017, p. 4).

26%

21%

16%

16%

11%

11%

AuM of the fund: 26%

Type of investor: 21%

Age of the fund: 16%

Other: 16%

Strategy of the fund: 11%

No special arrangements: 11%

29%

24%

24%

12%

12% 0% UCITS: 29%

Managed account: 24%

Master-Feeder Funds: 24%

N/A: 12%

Other: 12%

Alternative Investment Funds(AIFs): 0%

Figure 14: Which Criteria Do You Use for Fee Arrangements with Your Clients?

Figure 15: What Is the Legal Structure of Your Single Hedge Funds?


The 24% allocation to managed accounts confirms that there has been a shift over the last six years – when we did our last survey – from commingled products toward more managed accounts, fund of ones, and increasingly more advice. Again, this is a European picture and not just a Swiss picture, as highlighted by KPMG (KPMG 2015).

Nearly half of the respondents take the view that demand for so-called “new” alternatives will increase. Indeed, one new angle to searches is to go for the incorporation of alternative risk premiums (Pensions & Investments, July 2018). And as recently as November 2018, Preqin stated that according to its latest survey alternative risk premia strategies have been offered by both hedge funds and funds of hedge funds as an alternative to traditional hedge funds. According to the same survey, investors have added new capital to these strategies in the past couple of years (Preqin, November 2018).

45%

36%

18%

Yes No N/A

Figure 16: Will Investor Demand for “Traditional” Hedge Funds Increasingly Be Replaced by “New” Alternatives?


2.2.5. Domicile Issues

More than 40% of the domiciles are based in the Cayman Islands, followed by Luxembourg and Ireland. Switzer-land does not play an important role. The Cayman Islands leads the market in a number of financial sectors. It holds a dominant position in investment funds, with around 80% of the world’s offshore hedge funds registered in the jurisdiction. Already ten years ago (ZHAW, 2008), half of the SHF were domiciled in the Cayman Islands.

According to the survey, 43% of the domiciles are based in Luxembourg, which is broadly in line with the figures reported by Eurekahedge. The other two-thirds are evenly spread between Switzerland, the Cayman Islands, the British Virgin Islands and Bermuda.

Almost one out of every ten funds sold in the world is domiciled in Luxembourg (efama, December 2018). As a major center for investment funds, Luxembourg is the leading domicile for UCITS hedge funds. Over half of Eu-rope-based UCITS funds are domiciled here. The hedge fund industry in Luxembourg is dominated by fund man-agers, which outnumber investors 1.8:1 (Preqin Special Report, 2017).

42%

25% 25%

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Cayman Islands Luxembourg Ireland Switzerland

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Figure 17: In Which Domicile is the Highest Concentration of Your Single Hedge Funds Located?

Figure 18: In Which Domicile Is the Highest Concentration of Your Funds of Hedge Funds Located?


2.2.6. Outlook

For 30% of the respondents, Switzerland is said to have the biggest potential for net new money flows over the next three years. There is no clear growth pattern for the other regions. This illustrates the importance of Switzer-land as an investor base for hedge fund solutions.

Some 45% of the respondents answered this question with “yes”. This might indicate that newly established tech-niques such as artificial intelligence might get a chance as well. In this context, we note that in Preqin’s 2018 survey regarding the future of hedge funds, nearly 90% of the polled managers predicted that artificial intelli-gence/machine learning strategies will be of greater importance within the industry by 2023, improving efficiency with respect to identifying sources of alpha. AIMA goes even one step further, stating that artificial intelligence and other cutting-edge quantitative techniques will soon become crucial to the hedge fund industry, especially in short-term trading (AIMA, April 2018).

45%

55% Yes No

Figure 20: Are You Planning to Add New Investment Styles to Your Portfolio?

30%

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Switzerland Europe Middle East North America Asia-Pacific UK Other

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Figure 19: Where Do You Expect the Biggest Net New Money Flows over the Next Three Years?


The overwhelming majority of the respondents are not planning to intensify activities abroad. As roughly one third of the polled participants represent emerging managers with USD 500 million of AuM or less, this sounds plausi-ble. What Are Your Key Plans for the Next Three Years? The pattern in the answers to this question was not as clear as we had expected. Depending on size and busi-ness model, polled managers came up with many different suggestions. Setting up new funds and adapting the fee structure are pretty high on the agenda, however. M&A activity is also seen as a potential step in future, which is in line with the expected continuation of the consolidation trend. Some fund managers take the view that they need to adapt their client structure to growth areas. Will the Increasing Demand for ESG-related Funds Also Influence the Swiss Hedge Fund Industry? Half of the respondents take the view that this trend will also influence the Swiss hedge fund industry. This per-centage is fully in line with a global AIMA survey with the promising title “From Niche to Mainstream: Responsible Investment and Hedge Funds”. In Switzerland, there is still a very long way to go, however, as in 2017 Swiss hedge funds represented only 0.8% of the various asset classes relating to ESG themes (Swiss Sustainable In-vestment Market 2018, p. 33). What Is the Likely Impact of Brexit on the Swiss Hedge Fund Industry? A broad majority of those participants answering the question take the view that the most likely result will be the creation of new investment opportunities outside the UK.

Today, a financial services provider in the UK can use a passport in order to serve clients throughout the rest of the European bloc. If this is right is to go away upon the UK’s departure, major financial businesses will have to either migrate to the European mainland or set up a subsidiaries there for their right to “passport” in order to ser-vice their clients in mainland Europe.

36%

64%

Yes No

Figure 21: Are You Considering Establishing (Additional) Activities Outside Switzerland?


Overall, Do You Expect the Consolidation Trend in the Industry to Continue? The overwhelming majority of respondents (70%) take the view that the consolidation will continue. The key ar-gument is clearly related to the increasing amount of regulation and greater compliance requirements (e.g. MiFID II). In this context, respondents mention the higher cost burden, which might become a growing issue for smaller firms. Other respondents take the view that strong long-term performers will achieve a bigger market share or that the growing investor concentration and/or declining volumes will also lead to an acceleration of the concentration process within Switzerland’s hedge fund industry.

Six years ago, more than 90% of the participants believed there would be intensified consolidation within the industry – and they have been proved to be right. Increased regulation, the penalizing of small and medium-sized managers, shrinking assets, lackluster performance, and instable financial markets were already key arguments at that stage. Preqin comes to the same conclusion in its “The Future of Hedge Funds” blog (Preqin, Q3 2018). Its latest survey even cites a 91% majority voting for this expected trend (Preqin, November 2018).

Conclusion 24

Conclusion 3.

The Swiss Hedge Fund Industry Mirrors Two Contrasting Features: • On the one hand, as already stated in our preface, allocations to hedge funds are still larger than those to

private equity or to commodities, or to any other asset class with an alternative character. And, despite major shifts within the industry, the largest Swiss FoHFs providers have been able to defend their market share with-in the “top 20” at over 22% for the last six years. UCITS have gained in popularity due to the liquidity and transparency of these structures. Among the respondents in our survey, UCITS already represent 29% of the funds in terms of legal structure, which is slightly above the European average

• On the other hand, over the past six years, many smaller Swiss institutions have changed their business mod-el and moved away from hedge fund management. At the same time, on the back of a declining asset base and growing net liquidations, Swiss FoHFs managers have been looking to consolidate, especially in the French-speaking and Italian-speaking areas of Switzerland. As a result of this process, assets under man-agement have been adjusted downwards.

Overall, Switzerland remains a key hub for hedge fund activities, both on the job and investor side. CTAs/Managed Futures represent one of the largest exposures within the European universe. This segment ac-counts for more than a quarter of the overall investment styles, a figure which is twice as high as in 2012. Nearly half of the respondents plan to add new investment styles to their portfolios. In other words, newly established technologies such as artificial intelligence, might grow disproportionally. This development also indicates that the “hub for innovation in investment management”, as described in the asset management report issued by the Swiss Bankers Association and Boston Consulting Group on December 6 (SwissBanking, December 2018), ap-plies to the Swiss hedge fund industry.

With the increasing prominence of institutional investors and their demand for customized solutions, managed accounts, and special fee arrangements have gained in importance. Responding to investor needs is vital to the success of hedge fund managers. Current searches in the FoHFs market are mostly focused on bespoke solu-tions (Pensions & Investments, July 2018).

The positive factors help to achieve bespoke investor mandates and maintain global market shares. According to AIMA, the hedge fund firms that are most likely to be successful, are those that prioritize how they are perceived by investors and the wider market (AIMA, April 2018). Improved benchmarking and (reporting) transparency might help. We therefore take the opportunity to thank those institutions and fund managers who provided us with their valuable inputs for this report.


Glossary

Correlation A measure of how closely one set of returns, such as the performance of a fund, is related to another, such as the performance of the overall market.

Funds of Hedge Funds (FoHFs) FoHFs invest in other hedge funds. This enables them to move money between the best funds in the industry to take strategic advantage of changing market conditions.

Hedge Funds Hedge funds are funds that focus on absolute return and not on performance relative to a benchmark. The term covers a broad range of funds adopting a variety of investment techniques and strategies.

High Watermark The term is used with regard to performance fees. It is the greatest NAV recorded for a particular period. Increas-es in NAV beyond the high watermark entitle the investment manager to performance fees.

Hurdle Rate The rate that a manager must exceed in order to qualify to receive an incentive fee (provided they exceed the high watermark).

Leverage The use of borrowed capital, such as margins, options, or futures, commonly deployed to increase the potential return on an investment. The use of leverage is restricted to those funds whose investment guidelines permit its use, typically hedge funds.

Managed Account An investment account that the company entrusts to a manager who decides when and where to invest the mon-ey.

Management Fee A fee charged for managing a portfolio that is a fixed percentage of the NAV.

Manager Alpha The return resulting from the value added through active management.

Master Feeder Fund Structure This structure is the way hedge funds are set up to accept assets from both foreign and domestic investors in the most tax- and trading-efficient manner possible.

Master Funds A master fund is an investment fund used for transacting securities when a master feeder fund structure is uti-lized. It builds on the concept of managing portfolios from a collective investment pool.

Performance Fee Compensation for the investment manager, also called an incentive fee, depending on the profits of a fund or vehicle (subject to high watermark and/or hurdle rate).

Single Investor Fund The single investors represent the interests of a number of final beneficiaries and are able to manage assets in the fund on their own, meaning they are not subject to FINMA supervision. It is possible to delegate the manage-ment of the fund to banks, securities dealers, or external asset managers regulated by FINMA.

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Tables

Table 1: Asset Flows: Fund Manager Headquarters ............................................................................................... 2 Table 2: European-based Investors in Hedge Funds by Type ................................................................................. 3 Table 3: Allocation of Swiss Pension Funds to Alternative Investments for the Last Eight Quarters ....................... 4 Table 4: Locations of Swiss Hedge Funds .............................................................................................................. 9 Table 5: Ranking of the 20 Biggest Global Fund of Hedge Fund Companies ....................................................... 10 Table 6: Biggest Swiss Single Hedge Fund Managers .......................................................................................... 13

Figures 30

Figures

Figure 1: Performance of Hedge Funds vs. S&P 500 PR Index .............................................................................. 2 Figure 2: Markets with the Largest Concentration of Hedge Fund Jobs in the Sector ............................................. 4 Figure 3: Overview of the Number of Fund Management Companies in Switzerland .............................................. 7 Figure 4: AuM for the Top Ten Swiss FoHFs Providers in bn USD ....................................................................... 10 Figure 5: Management Fees and Performance Fees across the FoHF Universe .................................................. 11 Figure 6: Avg. Management Fee/Style and Avg. Performance Fee/Style .............................................................. 11 Figure 7: High Watermark Used by Swiss FoHFs ................................................................................................. 12 Figure 8: Domiciles of Swiss FoHF ........................................................................................................................ 12 Figure 9: What Was the Headcount in Your Swiss Hedge Fund Activities As at Year-end (Measured in FTEs)? . 15 Figure 10: Which Services Have Been Outsourced? ............................................................................................. 16 Figure 11: What Is the Investor Breakdown in the Funds of Hedge Funds Business (in % of AuM)?.................... 16 Figure 12: Where Are Your Investors Based (in % of Total Investors)? ................................................................ 17 Figure 13: What Are the Main Investment Styles Used for Your Hedge Fund Products (in %)? ........................... 17 Figure 14: Which Criteria Do You Use for Fee Arrangements with Your Clients? ................................................. 18 Figure 15: What Is the Legal Structure of Your Single Hedge Funds? .................................................................. 18 Figure 16: Will Investor Demand Increasingly Be Replaced by “New” Alternatives? ............................................. 19 Figure 17: In Which Domicile is the Highest Concentration of Your Single Hedge Funds Located? ..................... 20 Figure 18: In Which Domicile Is the Highest Concentration of Your Funds of Hedge Funds Located? ................. 20 Figure 19: Where Do You Expect the Biggest Net New Money Flows over the Next Three Years? ..................... 21 Figure 20: Are You Planning to Add New Investment Styles to Your Portfolio? .................................................... 21 Figure 21: Are You Considering Establishing (Additional) Activities Outside Switzerland? ................................... 22


Authors

Regina Anhorn, lic .rer. publ. HSG, CAS in Financial Market Law, UZH.

Core competencies include investment management, equity research, hedge fund analysis, pension fund analy-sis, financial market law, and Swiss real estate.

Scientific and practical experience: Senior lecturer at the ZHAW, responsibility for the module “Active Investment Management” at the ZHAW (BSc Banking and Finance). Author of various ZHAW reports/surveys on the Swiss hedge fund industry and on global custody. Co-author of a survey among Swiss pension funds on the selection criteria for asset managers.

Practical experience includes positions as a senior sell-side analyst (focus: banks and airlines) at Lombard Odier in Zurich/Geneva and corporate finance and advisory activities for Lombard Odier partners in Geneva. Before joining Lombard, she was a Director for European Equity Sales in London at a major Swiss bank.

Marko Trosic-Ivanisevic is a research assistant at the Zurich University of Applied Sciences (ZHAW). After completing his bachelor’s degree in Business Administration at the University of Applied Sciences of Western Switzerland, he enrolled on the master’s degree course in Banking & Finance at the ZHAW, while also having the opportunity to apply knowledge learnt in the classroom to real cases. Before joining the ZHAW, he worked for six years in the insurance sector as a contact person for an insurance broker portfolio operating across Switzerland.

Christopher Janik, MSc., graduated in 2018 from the Zurich University of Applied Sciences (ZHAW) in Banking and Finance. During his studies, he focused on alternative investments, where he wrote his master’s thesis about performance measurement within private equity. From 2017 to 2018, he worked as a research assistant in the Institute for Wealth & Asset Management. There, he supported the analysis of the Swiss hedge fund industry.

Appendix 32

Appendix

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Appendix 42

Zurich University of Applied Sciences

School of Management and Law Technoparkstrasse 2 8406 Winterthur Switzerland Department of Wealth and Asset Management www.zhaw.ch/en/sml/institutes-centres/iwa/

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